Daily Wrap

So it probably is pretty well known as to what caused the Yen to drop overnight, the carry crosses to pop and Index futures to rock, the PBoC injecting 75bn CNY in 7-day reverse repos and $180bn in 21-day reverse repos which expire right around the time some trusts and thus the shadow banking system are expected to FAIL.

As noted last night, I suspected the initial knee jerk to all that extra money sloshing around courtesy of the PBoC would give way to the question "Why" as they have been surgical in trying to manage real estate inflation, but apparently there are bigger fish to fry at the moment and we have been covering the interbank liquidity problems for a couple of months.

John Hilsenrath has conducted some interviews, presumably with F_E_D voting (F_O_M_C) members and has been sent out to warn the market that another $10bn will be tapered at the end of the month F_O_M_C meeting despite the absolute FARCE that is the unemployment rate. The excuse is they see the economy recovering, I don't know what their looking at, I suspect it has a lot more to do with the odd, (first time I ever heard of it) inter-meeting questionaire for voting members in which one of the concerns was capital losses at the F_E_D which is essentially what I've been saying for almost a year now, they are a strange corporation, but they are a for profit corporation with shareholders.  My gut feel is they'll taper no matter what happens and as long as Congress leaves the extended UE benefits out of the budget,, than the unemployment rate should fall well below the F_E_D's target of 6.5% (it's at 6.6% down from 7% as of the last month's Non-Farm Payrolls), the more people who drop off (somewhere around 3 million expected), the smaller the work force and lower the u.e. rate.

As far as what I'm watching for, it's more or less timing signals.

Here are a few examples.

 I've suspected since April when the BOJ embarked on their massive QE that the Yen would rise as the market falls, this is partly or initially due to the closing of carry trades, but I also think the BOJ's QE has gotten away from them, it was too large, too ambitious, time will tell, but the positive divegrence in the Yen 4 hour chart is plain to see.

Even on a daily chart it's leading positive.

Thus the continued downtrend in the carry crosses like USD/JPY and continued move up i the Yen will be important markers for the market's state (I do expect a lot of volatility at USD/JPY $100 as I think that is the line in the sand the BOJ cannot tolerate  being broken to the downside).

As noted many times though, because of the leverage used in carry trades, slight losses become huge losses and panic takes over as we saw Monday, Jan. 13th.

XLF/Financials are choppy in the 1-2 min timeframe, I'm looking for some clarity there as we move out to more important timeframes as early as 3 minutes, the 3C trends are clear.

 XLF 15 min and it gets worse.

Index futures have their own problems which are more detailed using the market averages, but we don't often see 1 hour divergences with futures (Index), the first one led to the drop at New Years as we had the worst start to January in 6+ years. The next one at the second "D" from the left led to that panicked Monday and now we have a new leading negative low and largest negative of the year. It's really a matter of the short term charts connecting with the intermediate and long term that gives us good timing flags as well as some market behavior like head fake moves.

 The 60 min Russell 2000 Futures don't look any better, you can see the negative in to the new year and a large leading negative currently with new 3C lows for the year and then some.

So the charts in the 5 -15 min range are important. I'll note that the Yen's 5, 15, 30 min positives saw no damage from last night.

 Charts/Trends like these Short Term VIX futures are impressive, like this 15 min.

 Or this 30 min.

We've always had very strong signals in VXX / UVXY before they are ready to make a move.

With the 5 min chart moving from confirmation to leading positive, we only need 1-3 min charts to fly and we have an excellent signal that should trigger the larger divergences above, remember the VIX trades opposite the market.

It seems there was an effort to bang the close today that I mentioned, it didn't work out too well, but they tried.

 In blue is HYG Credit (an arbitrage asset used for short term manipulation), it was pushed up in to the close, for the Arbitrage to work, VIX futures, VXX need to be knocked down.

It was obvious in the 1 min actual VIX futures that they were working on that in the afternoon.

This is the VXX vs the SPX (green) and while there was some weakness as VXX failed to make a higher high around noon and as the close saw it knocked lower, the SPZ didn't get that closing punch they were trying to create.

In fact there were some ominous signs today, Credit was not in a mood to take any risk today as it has been disconnected for some time.

Both HY and IG Credit were sharply lower in to the market's afternoon bounce we spotted earlier today.

Yields are also growing problematic as they tend to act like a magnet for equity/index prices.

Yields  (red) vs the SPX, there are a number of smaller divergences that are eclipsed and appear to be in line when this large divegrence to the right is scaled in, Yields haven't recovered since that panic Monday and Equities should revert to the mean as they have to the left.

As you probably know I've been following 20+ year treasuries (TLT) and 30 year T futures (ZB) for almost a year, there's something I see there that I don't in the 10 year and it looks like a long term trending trade, thus I've been looking for a pullback to look for a decent entry, I mentioned today that TLT has a 5 min negative divergence suggesting a constructive pullback. Take a look at the 30-year Treasury futures though.

 You've seen the long term TLT charts, here's the 30 year Treasury futures long term daily chart with a huge leading positive divegrence, I'd probably take it here if I had no other choice, but I think we can get a better entry. As I mentioned with the TLT signal today...

The 5 min 30 year futures have the same pullback signal, not big enough to be damaging, but large enough to create a pullback which I suspect will be accumulated as it has been for the better part of 2013.

Today ES tracked the AUD/JPY carry cross,

 AUD/JPY (for obvious reasons with AUD being up on the PBoC action and the Yen being down), the FX pair are the candlesticks, ES is the purple line, a near perfect track, however like the other 2 crosses, since the new year, it has been a consistent downtrend.

AUD/JPY. I showed USD/JPY and EUR/JPY last night, all in downtrends with the Yen gaining off the New Year's low.

So, it's really watching for the timing indications, and where we can slip in particular trades at the right moment. MCP which is one of my favorite long term longs that isn't correlated to the market offered what looked like a decent option/call entry as I prefer to enter them on downside momentum with positive divergences as the premium tends to be cheaper. As for filling out the equity long trading position, I'd just like to see a little more of a reversal process in place as "V" reversals are not common.

Finally, after months of waiting, PCLN broke the $1200 mark which is what we've been waiting for.

It took 7 trading weeks to finally get there when PCLN has been a fraction of a percent away, only $1.50 at one point in December...

I wouldn't short PCLN yet, this is just the psychological level it was bound to break as well as a clear resistance level, it makes for the perfect head fake.

As far as why I'm interested in shorting PCLN...

 PCLN 4 hour

PCLN 1 hour

From the long term (very strong) 3C signals that move from perfectly in line or trend confirmation, I think the leading negative divegrence above on these two important charts are more than obvious.

 While there was accumulation of lows on this 5 min chart, it was never the divergences that had us expecting for MONTHS a move above $1200 where it would make for an excellent short, it was the concepts of the head fake and centennial numbers, clear resistance and other mass psychology concepts we use to set up trades in advance.

Here's the 1 min chart with decent confirmation today. Now it's just a matter of letting retail step in as smart money hands off their shares as they have been engaged in distribution for some time now. The candlestick and volume today suggest PCLN will see some more upside before it's ready, but we should start seeing clear distribution in to that upside and somewhere in the area we should find our ideal entry at the best price with the lowest risk. If the 60 min and 4 hour charts weren't there, I wouldn't even be thinking of shorting PCLN, but something was obviously drawing me toward it timing wise as I opened a half size put position Friday in anticipation of adding to it on a break above $1200.

It's the head fake at this point or the failed breakout that creates the steep downside momentum as $1200 has just been so obvious for months upon months.

As for less exciting, but still important indications, breadth indications today weren't bad, but the trend since the start of 2013 has been horrible.

There were no dominant Price / Volume relationships among the component stocks of each average so no short term 1-day oversold/overbought signals.

SKEW(the Black Swan Indicator)  is once again rising.

The 140 range historically according to the CBOE (they also put out VIX) has been where Black Swan market crashes have been noted, it's really the rate of change in price that has caught my attention even more so than the levels, "CHANGES IN CHARACTER LEAD TO CHANGES IN TRENDS".

Finally, as mentioned earlier, I like the 5 min Index futures to be clear as a timing indication for trades, they are only as clear as the confirmation between the 3 or 4 futures. Right now ES is leading positive a bit, NQ is almost perfectly in line and TF is leading negative a bit, it's not at all the quality of signal that stands out for me, but it is what it is and as such I want to be a bit patient until things like these charts all go clearly negative and others like VIX futures (VXX ) confirm by giving strong intraday leading positive signals as the more important longer term ones are already in place.

The Yen is obviously a big one to watch as well as the carry pairs in general, I'd like to see them maintain the downtrend started at the first of the year, although USD/JPY did break its uptrend in a more serious way when it took out the May 2013 highs. These are all hints of what smart money is doing and when they are in panic mode as we saw that Monday (Jan 13th), that's when you get gaps down that take out 3 or 4 months of longs in a single morning.

I'll check futures again later tonight to see if anything interesting has developed, but I think two things that are going to start weighing on the market are 1) the Chinese liquidity situation/inflation (watch for them to strike out with saber rattling toward Japan, they always do when they need to focus the population's discontent somewhere besides the government). 2) the probability that traders front run the F_E_D as it "seems" obvious they are unwinding QE, but that's not what the pros are really worried about, it's the initial guidance of rate hikes 6 months after QE is unwound and the 6.5% unemployment goal with the labor pool falling so fast and the unemployment rate dropping so quickly. 

Those are the conditions in which the F_E_D said they'd remove accommodative policy or actually they said they'd leave it in place until those targets are hit. For retail accommodative policy is QE, for smart money it's ZIRP, interest rate hikes and the fear of them are what has driven the 10 year yield above 3%, it happened once last year as the summer QE Tapering was very hawkish in the minutes and the time before wa late July 2011 followed by an almost instant -20% drop. We've been popping above and below the 3% mark for weeks now.

Interesting Activity

I was just getting my charts together for the "Daily Wrap" post and noticed something interesting, I had just picked up my Yen intraday chart and came back and something had changed substantially.


The Original Chart... Yen 1 min intraday

 This chart shows the action in 3C/Yen since 1 a.m. to almost present.

I was going to point out this chart in a series of Yen charts that are very strong. We have the positive divergences in the Yen as it comes out on the right side of the overnight reversal/rounding process, the Yen moves up with 3C confirmation (green arrow) and then goes negative when I warned the market was going to retrace some of it's losses from the overnight highs to the regular hour lows (remember the Yen and market trade opposite each other). 

By the time I got back from my Doctor's appointment around 2 pm the Yen was in a new positive divegrence and starting a new reversal/rounding process as can be seen far right.

Minutes later I come back to the same chart and...

 To the far right there's a new, but very fast, sharp leading positive divegrence, you can see it as a nearly vertical line (3C) moving up. There's a very sudden change of character from a positive divergence forming at a predictable rate to a suddenly sharp leading positive which could be a large cover of the Yen from a carry position.

I also noticed the Russell 2000 futures showing the morning negative divegrence as the US markets opened for normal hours, the afternoon positive divegrence I warned of and retracement of some of the a.m. losses and there are some negatives in to the close, but just after and around the same time as the Yen, TF goes sharply negatively divergent which is confirmation as the two trade opposite and should have opposite signals. This signal is even deeper now since just capturing the chart minutes ago, it's now at the deepest leading negative position on the chart.

I'm not sure what's causing this, but this may substantially alter my EOD analysis so I'm going to give it some time and see what builds or sticks and see what I can find in FX land.

TLT

A lot of you know that I've been following TLT and have seen something big going on there for a good 6 months, it's not so with the 10 year, at least not to the same degree.

I've been getting a lot of questions over the weekend if I would enter TLT and I do love what I see long term, something's going on there, but I don't want to chase it and this one chart is one example of why I think it will come to us, again, patience.

TLT only a 2 min negative, but enough for a pullback.

Quick Update

That 5 min ES chart is still a little bothersome, but the averages all continue to move in to deeper negative intraday divergences.

In addition, VXX/UVXY are moving toward stronger leading position divergences.

I'd say things are moving the right way, I'd  also say a little more patience is probably prudent.

The Yen's intraday 1 min is repairing itself, but it's still not at a mature reversal process and it needs to lead more, the 5 min chart and 15 min chart suggest it will get there, again I think it's a matter of some patience.

While VXX is generally looking much better, intraday it looks like they'll try to bang the close, you can see it in the quick slide in VXX 1 min.

I'm going to check on leading indicators.

By the way, PCLN finally did it, it's not ready for a trade yet, but it's finally made it to the area we've been looking for.

Trade Idea: MCP Calls

I decided to go with half and half... Half MCP February $5 Calls and half MCP March $5 calls, I prefer 6 weeks until expiration, even on a quick trade, February is a bit tight, if I HAD to pick one, I'd probably go with February, but I'll split them.

MCP Update

It looks like MCP just hit another cluster of stops and it looks like again they were accumulated. MCP is looking very interesting, there's only a couple things missing that I'd like to see, one is a few more leading positive divergences and the second is some kind of reversal process because a "V" reversal is not likely.

 Here's what triggered the stops, as usual technical traders are extremely predictable as to where they put their orders, but the pros have the full depth of the book so if you put in an order with your broker, they see it, why would you show your cards when playing poker? Worse yet, why do something so predictable. In any case, you should be able to see the small "W" base to the far right just before there was a breakout, it's support of that base that triggered the next round of stops and they appear to have been accumulated.

 This is a 5 min chart showing the break of that exact support and the stops getting nailed, someone is on the other side of that trade.

 The 2 min 3C chart shows a leading positive divegrence (coming out of a relative positive divegrence to the left) right at the spot where those stops were run, which is a kind of head fake move.

The 3 min chart shows this more clearly plus gives us confirmation that there is migration of the divergence (a stronger building divergence or underlying trade/accumulation).

Overall, the 10 min chart has shown the probabilities are very good we have been looking at a constructive pullback, it appears someone wants to load up on MCP on the cheap and they are using stop runs to accumulate which leads me to believe they may be pressed for time as they aren't taking the normal route of a range.

This is the 60 min chart, the distinction between distribution and accumulation is very clear, it's also the same time Goldman came out with a negative hit piece so guess who is accumulating MCP? I''d bet Goldman's fingerprints are all over this one.

 There are some support-like candlesticks popping up.

The 2-3 min charts are also leading positive even more.

This doesn't have the reversal process I'd like to see yet to fill out the long trading position, but this is the kind of downside momentum with accumulation that I love to use to enter options, I'm thinking February $5 calls, maybe March,. I'm going to check out what they look like and of course if a position is going to be started, I'll let you know first.

Market Update

It looks like I got back at the perfect time, the retracement I expected before I left took place, it was pretty much a non-event thus far, but there's some detective work to do now.

It looks like we are just about at the end of this intraday move, the USD/JPY is safe, the Yen looks safe, but there are some signals I've been looking for that are where the high probabilities are and thus far today has been more or less a bookmaker, a volatile one, but a book marker nonetheless.

 The NYSE TICK data alone shows the retracement channel starting to fade, it looks like soon it will break the channel, in fact it just did,

 ES / SPX Futures intraday 1 min went from the negative signal around the open to the slight positive I mentioned before I left for an intraday bounce and now is negative again. The one thing I want to look in to a bit more is the 5 min ES chart just in case this may be a wider range area.

 5 min ES, clearly negative at the highs and at the open this morning of regular hours, the positive divegrence I mentioned before I left for an oversold bounce and as of now, it's still slightly leading. It takes the 5 min chart a little longer for a brand new intraday signal to develop as it has on one minute charts, but this is one thing I'll be watching as it could and probably will go negative or it could stay in confirmation and we'd get more volatile lateral chop which is not usually the best place to be entering new positions.

 The 1 min Yen and the negative divegrence in it which led to the market oversold intraday bounce over the last 2 hours or so and a positive signal developing now.

As I suspected, thus far there's no damage at all to the overall positive 5 min Yen signal so there's no real surprises, what we expected to happen, happened thus far.

As for the averages, the Q's are now giving an intraday negative signal, it's still a bit young, but I think valid considering all of the other confirmation above.

 The IWM with Friday's closing negative signal, as I said, we usually pick up where we left off the next trading day (even over a 3-day weekend) and that negative signal knocked the gap up on the open, down. You can see the intraday positive I mentioned for a bounce/retracement intraday and how that has been sold in to once again, going negative.

The exact same can be seen on the SPY.

VXX / UVXY is one of the assets I look to for timing of new positions as it gives excellent , unmistakable signals and that's one thing I'm looking for. VIX / VIX futures trade opposite the market for the most part so the inverse signals and price action above confirm all of the charts above this one, we have a leading positive divegrence in to the pullback here (matches the bounce in the market the last two-ish hours) and that's a good sign, there's a reach for protection, some fear and when this leads positive in a big way, we know we have a big trade coming.

So that's what's happening right now, I'm going to look at some assets that may be in position for a trade and also keep looking to see what the market is up to and when might be a good time overall to look at trades, YOU DON'T WANT TO WASTE YOUR TIME IN VOLATILE CHOP, AT BEST ITS OPPORTUNITY COST, AT WORST IT'S UNNECESSARY OPEN MARKET RISK.

Market Update

For the most part, this is just noise and there's not a lot that's very exciting as far as positioning right now, we are kind of going through the movements, however we are pretty much on track. As we approach some better timing there are a number of positions that can be opened.

First the immediate market update.

We've had solid downside on Friday's negative divegrence that has continued on the open today as is normal to see with 3C divergences . ES (SPX E-mini futures) has lost a whopping 17 points since the open this morning, that's an impressive FAIL, although it looked like it was heading that way last night from the early action in the Yen as of last night's post.

Here's what we have now, you could call it a bit of an oversold condition, but it's more about tactics, movement and opportunities.

 First, the NYSE TICK (intraday) data from today shows the typical "Retail Chasing" +1300 reading on the open, this is a great example as to why we don't chase things, but let them come to us.

Since then, TICK has seen a solid downside extreme just shy of -1500, this is where we are getting a bit oversold on an intraday basis. I don't believe in true oversold/overbought in the way they are described in main stream analysis, it's just the market can't be predictable and too much movement in one direction has too many traders on the same side of the boat and that doesn't work in a zero sum game.

 The intraday 1 min 3C signals for ES this morning are near perfect, distribution at the highs and we have what looks like a bear flag that traders would expect to break to the next leg down, which in this case would be close to another 15 points or so when accounting for the flag, but I suspect this will flatten out and create a small intraday reversal process and we should see a bump on the upside retracing some of the sizable loss this morning in ES.

 No need to go to the carry trades which the market is tightly correlated, just go directly to the Yen. This 1 min chart of the Yen futures shows good upside confirmation, but recently you can see an intraday negative divegrence in red, it's actually leading negative. I don't think this will be a serious or threatening pullback because of the following chart/s...

The 5 min Yen chart was barely leading positive last night, but migration of the divergence occurred overnight as it travelled laterally in a range, as I said this is where the most activity in underlying trade is often seen, right where price looks to be the most boring.

There's no damage at all to the 5 min chart and it's leading positive in a big way so a 1 min negative is a signal that should move the market, but it likely won't overcome what has been built here. We could get in to the fundamentals, the initial knee jerk last night on the added Central Bank liquidity and as I said last night, as that knee jerk fails, the serious questions regarding why this injection was so big and some concerns that fade the knee jerk and maybe a lot worse.

For now, even without ES, the Yen alone suggests it pulls back, the Yen carry crosses move up and drag the Index futures with them (on an intraday basis). THIS IS WHERE WE CAN GET SOME SOLID INFORMATION SUCH AS WHETHER THERE'S DISTRIBUTION IN TO ANY RETRACEMENT/UPSIDE MOVE.

 As far as the USD/JPY carry, it has been in a downtrend since the start of the year, lower highs/lower lows.

I have the same short term concern as last night, a move in the pair above the last reaction high around $104.91 would cause technical buying as the downtrend would be interrupted. I don't view this as anything more than a delay or hassle, but there is a silver lining if it occurs and that's in letting shorts come to you if you need them and having a strong entry at better prices with lower risk, but for now it's just an area to watch for and more of a nuisance than anything as I'd rather we just got on with it. I KIND OF DOUBT THE 5 MIN YEN POSITIVES WILL ALOW THAT KIND OF A MOVE ANYWAY..

We do want to see the next lower low made soon.

 As for the Crazy Ivan around a bear flag on a daily chart of almost any market average (A) is the bear flag, (B) is the expected technical break below the flag, (C) is the upside shakeout of shorts following the break below the bear flag and the Crazy Ivan shakeout and (D) should be the resolution of this area.

As for some charts...

 Intraday the IWM (nor any of the averages) did not confirm the gap so it was destined to fail, there's a VERY slight divergence, this is likely to grow, I'd think the market / IWM will have to put in a little more lateral work to get a foothold that can get any upside traction, I'm not talking about a new high, I'm talking about a retracement of some of this morning's losses.

 So far there's no positive at all on the 2 min chart, it is/was leading negative since Friday and further back so this morning's price action shouldn't be a surprise.

If this stays leading negative at 2 mins (which I doubt, but if it does), then there's very little strength for even an intraday bounce. I doubt very much we'll see anything of significance here.

The  you have the institutional 5 min timeframe leading negative, I really don't think any bounce is going to change anything here and the probabilities remain very negative. This is not even in true scale, it's much worse, I'm just trying to show recent action only.

So I think over the next few hours there's just going to be some jiggling about, after we get a retracement (assuming we do), then there may be some interesting positions worthwhile.

Keep your eye on PCLN, we are looking for +>1200 to look at starting or adding to a core short and/or put options.

I have that Dr's appointment soon, I won't be gone long and I don't think I'll miss much beyond what I laid out above.

The VIX/VXX divergences aren't quite where they need to be yet for a really serious signal that we want to move on quickly.