Daily Wrap

It's good to be back, especially compared to yesterday's fun, although today's not a whole lot better. My eye is so swollen It's kind of difficult to focus on one object, but that will get better.

I've been looking around the market quite a bit just to catch up on any things I may have missed from yesterday. I'm not going to pretend that we aren't on that slippery right side (of a top) slope, we are, but the market has done exactly what we saw hints of Friday, had excellent confirmation of Sunday and every day since then has done what we expected, turned from a down trend to a more lateral rectangle or "U" shaped trend which is to say, creating a small base from which we can bounce. You know where we are and how volatile it can be. You know what I've said about the market putting together a move for a good reason and that there aren't many coincidences in the market.

I can go through the normal Daily Wrap looking at each piece of the puzzle, but right now I think there are only a few things that really matter, the same things we have been paying attention to for a few months and those things that have brought us this far in correctly calling the market stage we are in now.

Here are the things I think are most important at least for the near term, the most important charts we have seen plenty of, I don't think I need to make that case as the market has been making it for me.

The Yen drives everything, it's the start and the end of the carry trades and as such, tells us what smart money is doing. The USD/JPY (or other carry crosses) really move the market, but it starts with the Yen.

Last night we saw a positive divegrence in the Yen, said it would go up, taking down the USD/JPY and market with it, that's what it did, so where are we now?

 The 1 min Yen chart is going negative so we should expect Yen weakness and likely USD/JPY and market strength if only briefly, but still an important move

 Remember that range we predicted Friday afternoon, saw more evidence of Sunday night? Well here it is, the Yen downside confirmed by 3C sending the market up to the upper part of the lateral range, the positive divegrence in the middle (from last night) sending the market down to the lower end of the range and that head fake move just below that we see 80% of the time and now, the 5 min chart is seeing the Yen weakness overflow from the 1 min chart above, this should produce market strength.

 the 15 min Yen chart with last night's positive at the white arrow and a relative negative at the red arrow, longer term weakness that we see above on the 1 and 5 min charts.

 And the 60 min chart, even though the Yen has been strong throughout 2014, causing market weakness, we have a clear relative negative divergence now, this would suggest a counter-trend 92014) bounce in the market, exactly what Friday's prediction of a lateral range was most likely to produce.

The $USDX is the other half of the USD/JPY pair and it's strength usually wouldn't be a market positive except in a carry cross environment.

 After a choppy sideway trend, we are getting a clear 5 min positive divegrence, confirming the Yen's 5 min negative.

The $USDX 30 min has the biggest positive divegrence of 2014, therefore, likely to produce the biggest bounce of 2014.

After the Yen's positive last night, the USD/JPY fell apart overnight taking Index futures with it (as Emerging Markets fall apart telling us something about the primary trend beyond a bounce). The trend today in the carry cross was lateral so last night's weakness has stabilized and the Yen's charts show us why.

As mentioned last night, the 1 min 3C chart is about all we get for FX pair divergences and we have a clearly positive one through the market's regular hours today as the lateral trend held all day. Think about the market's lateral trend as well since we predicted it Friday, they should produce the same thing, a move higher.

This is the 2014 USD/JPY 60 min chart/trend with a series of lower highs and lower lows, however we tested today and did not make a lower low, meaning the orange area I drew in Sunday night for a USD/JPY (and market) bounce is looking more probable.

 ES/SPX futures 5 min chart with that wide/choppy lateral trend, we were at the top of it and needed to come down toward the bottom and maybe even make a head fake move (stop run) just below this week's lows, the lateral trend is in yellow and the slight stop move was effected today as the FX charts all told us last night we'd be heading down toward the bottom of the range.

 The TF/Russell 2000 futures 5 min chart shows the same range, a positive off the lows Monday and a negative off yesterday's highs last night bringing us to the bottom of the sideways trend we expected, even a small head fake move was effected today.

TF 60 mins shows the negative divegrence that sent the market lower and we see the positive divegrence that halted that move lower and created our sloppy, volatile, lateral chop or range (a small base really, but probably the largest of 2014).

ES 60 min with the negative that took us lower and a leading positive at the predicted range, the range was also predicted to likely see accumulation, thus making it a small base, but still probably the largest of 2014.

It's hard to see a 60 min positive divegrence, rather a pair of them in Index futures right at a lateral range we expected and say, "This won't produce a bounce", it has all the hallmarks of a bounce, not a true change in trend or bearish character, but a bounce and as I said, the market doesn't put these together unless it has a reason and those reasons generally require that the move be believable.

The Nikkei 225 futures , similar to the Dow in size and points, we have a 5 min negative which is the same move off the highs that we saw in the Yen last night bringing us "close" to the bottom of the range (yellow box).

The NKD 15 min 3C chart and the same range as the Index futures/market, a positive forming the lower support of the range and a negative from last night forming the upper boundary of the range. All in all, even though we have a negative divegrence at resistance of the range, the overall picture of 3C here is a leading positive position again suggesting a bounce higher and above the range.

Ironically the NKD 60 min chart has the same negative sending the market lower and a leading positive in the area of this week's  range. As I said above, "It's hard to see a 60 min positive and a range and not expect a bounce."

As mentioned last night, gold (YG gold futures) moves opposite the market so the 5 min chart's negative divegrence suggests a move lower in gold (thus the gold put call), by correlation this is just more confirmation of a market bounce.


All of these charts confirm each other and confirm our expectations for this week starting Friday afternoon.

As for other charts (even though I think this makes as strong of a case as we can make)...

 Last week I mentioned Spot VIX's Bollinger Band Squeeze (not as developed as the previous one). Following the candlesticks we have a confirmed bearish (for VIX) reversal pattern, a confirmed Harami (in red). Yesterday's confirmation of the candlestick pattern allowed the market to move to the top of the range, today's candlestick (red arrow) isn't what you'd expect after a confirmed top in the VIX, but it did allow for the market to make the run to the bottom of our range (red arrow). All in all, the definitive chart feature is still the VIX candlestick top, remember the VIX trades opposite the market for the most part.

Here's the NDX, recall I said we'd likely see a "U" shaped bottom? The candles of the last 3 days form that "U" shape".

a 60 min chart focussing on the last 3-days allows us to see the "U" shaped pattern better (typically a reversal process as downward momentum gives way to lateral indecision and then a trend reversal).

The big picture shows the SPX stopped out at my award winning Trend Channel, the first stop in the trend. However as I have posted numerous times, after the initial stop you are usually better off just exiting the market (long positions), but there is typically choppy volatility and you may see a move higher, in fact you usually do, but it's not a move typically worth chasing (on this timeframe) as it's very volatile, choppy and rarely is anything more than open market risk or opportunity cost. However we are looking at trading a shorter trend than a 5-day chart.

 This stop out tells us something about the major trend, (bearish) and the above character of a stop also tells us something about the short term trend (the one I've been preparing short term trading positions for).

As for Leading Indicators on a near term basis, tonight we have a Dominant Price/Volume Relationship, in most averages it is (by average components), Price Down and Volume Up which is a short term "oversold" condition and we usually close higher the next day.

 While not a huge signal, our sentiment indicator (blue) vs. the SPX (green) is slightly bullish, not nearly enough to change the primary underlying trend, but enough to cause a short term corrective bounce.

Here you can see the SPX trend of the last 3-days (this week) predicted (yellow), also High Yield Credit is not leading lower so the near term signal in credit is at least neutral and considering the environment, that is slightly bullish, along the lines of the bounce move I'm looking for.

The model for Context's ES model has recently swung bullish.

CONTEXT ES model vs ES, is now bullish.

We have plenty of charts showing the market is clearly done...(these aren't even the worst..)

 DIA 2 hour clear distribution on an epic scale.

IWM 2 hour, also major distribution, the recent top was the worst.

QQQ 4 hour

 SPY 60 min

However, between now and then, we have plenty of short term bounce signals, not at all on the same scale, but enough.

 DIA 5 min

IWM 5 min leading positive, note the range in yellow

QQQ 30 min leading positive

And SPY positive.

For me, it's just a matter of continuing to monitor the market and add trading positions for now and shortly primary trend positions.

P/L : SQQQ, SPXU, FAZ

I closed out these 3 trading positions from the trading portfolio. FAZ was not one I had planned on closing even though most of the time the market moves together like the tide (even with increasing dispersion throughout the averages), however seeing the market pull back to the bottom of the range, basically exactly what we were looking for and of course a slight move below sets up a timing flag (the head fake move) as stops are taken out just before a new move starts and in almost every iteration of that event, there were positive divergences or accumulation of that stop run, this just gave me an overall strong feeling that this was probably going to be as good as it gets for those shorts for the immediate future.

I did not go long Financials, just took the short position off, I'd need a bit more objective evidence to go long Financials. AAPL I liked for several reasons, at least for a call position, just about every move to the downside on volume in AAPL saw some kind of positive divergence suggesting those lows were being accumulated.

I also did not go long the SPY after closing the 3x leveraged short (SPXU), I felt I had enough broad market coverage via TQQQ (3x long QQQ) and URTY (3x long IWM) and both of those looked better to me than SPY (UPRO). Considering this is a trading portfolio and I prefer to keep positions around 6 or so, it just didn't make sense to add in a 3rd broad market asset such as UPRO.

As for the P/L for these short positions, they never got the stronger move I had hoped for, but we'll get there.

The P/L for SQQQ which is down in after-hours, not that I think AH is a great indication, came out to +3.2% or $679

The P/L for SPXU came out to +7.92% or $1718

The P/L for FAZ came to +5.8% or $1161.00

FX Looks To Be Setting Up Again

It was interesting that last night we could see clearly that we'd be heading down to the bottom of the major averages' range from this week based on the Yen's chart alone (15 min positive). Now these same charts we have really been watching since before the New year and have been so predictive are now moving again.

 The intraday 1 min Yen futures (Yen down and USD up makes the USD/JPY rise and takes Index futures with it). The Yen is clearly negative at today's high on volume and has deteriorates since as it looks to be a sloppy range, but it seems like there's more to appearances here.

Yen 5 min (remember the divergences will move from short to long here) went from the down trend that allowed some strength in the market to the positive divegrence last night that allowed it to pullback toward the lows of this week's range as was predicted last night. Now there's a clear negative divergence on this chart as the highs were hit and that same congestion area is seeing a continued negative divegrence.

 This is the 15 min Yen from last night, the white positive divergence is from last night and it did what it was suggesting and sent the Yen higher, thus the market lower today, but has made a slight new high (common head fake) in to a relative negative divegrence. I suspect the 1 and 5 min charts will continue to create more deterioration on the Yen 15 min chart.

The $USD being the other half of the pair...

 The 1 min chart sees a leading positive at the open on some volume and then again around the Yen's highs this afternoon.

The 5 min chart has a clear positive trend which is confirmation of the Yen's signals

These alone are of not much use, it's the two moving that move the USD/JPY Carry Cross and that's what moves Index futures.

The USD/JPY 1 min chart (typically we can only get 3C signals on a 1 min chart with the pairs) shows a clear negative divergence from last night as the Yen went positive 3C and then positive trend, sending the USD/JPY lower.

Note the flat range ALL DAY today in the pair and then in to the lows caused by the Yen making an intraday high, we have a 3C positive divegrence and it's leading as well, the flat range is an important part of the overall signal as is the congestion.

AAPL Charts

There have been quite a few developments on AAPL's charts recently, it all started with 15 min negatives in early and late December, but the longer charts had not gone negative until recently, when the 30 min went clearly negative in to the late December divergence near the price highs. I'm still not convinced for a new long term core short position, perhaps a bounce from here would clear things up a bit, but for now, this is what we have,

 Since the gap down (Also considering the QQQ has been giving some better short term positive signals than most of the averages and it would have a hard time making good on those without AAPL's cooperation) AAPL has gone from a small positive divergence to a leading positive intraday.

Also note the nice flat range, I often compare this to, "The kids being too quiet in the room next door, you know they're up to something". A run on stops at $500 where we have a clear range would be fairly high probability, especially as the range is more defined. I didn't want to take a chance waiting on that considering what I might save in premium.



 The divergence usually gets stronger as it moves along and migrates to longer charts, this 5 min is leading positive as well.

The 10 min chart goes negative just before the gap down and positive since.

This daily chart shows there's some clear trouble brewing in AAPL, we saw charts like this when it was +$700 and warned plenty of times before it lost -45%.

The same trend version of 3C is showing a clean leading positive on a 10 min chart, even timeframes  longer actually, but this should be enough for the trade I'm looking for.

Opening AAPL March $500 Call Position

A move below $499.01 or $499 would also make for an interesting entry.

I think this could be traded as an equity long as well, I just prefer a bit more leverage considering I'm not looking at this as a swing trade or anything longer.

                

Trade Idea: AAPL March Calls

AAPL is starting to look very interesting for at least a short term long trade.

I'll get some charts up in a few minutes.

Trade Position: Filling Out TQQQ Long TRADING POSITION

All of the major averages have now made what I'd consider a "Head fake move" which is something I was waiting on and had mentioned earlier in a number of assets "Consider going long on a head fake under..." and the level was the range lows.

I'm seeing intraday improvement now, thus the reason I closed some of the leveraged shorts and am moving in to the leveraged longs.

Also I'm seeing much worse signals in VIX futures than you'd expect given the market's movement, however that is still on an intraday chart.

CLOSING FAZ (TRADING POSITION) LONG

F_O_M_C Mostly at Consensus, except...

The $10bn taper was expected, as I've maintained, the F_E_D wants out. The last "minutes" from the previous meeting were very interesting as I have (as well as others) pointed out that the F_E_D is a quasi governmental/corporation. There are ccertainly more government elements about the F_E_D than most corporations, but the name alone, "Federal Reserve" is very misleading as to just how much government vs. Corporation, it's kind of like a bank names "First Federal". In many ways, the F_E_D is no different than say Bank of America in being a FOR PROFIT corporation with shareholders, with the additonal edge of having the sole monopoly on printing US legel tender and controlling monetary policy, but at the EOD, they are still a corp. and are looking to make a profit.

The last minutes was one of the few times in which the F_E_D has addressed this issue in the open at a policy meeting. You may recall there was an inter-meeting questionnaire given to voting members and some of their concerns were with the F_E_D, "Taking losses".

In any case, the taper is not surprising to anyone.

What the market (Smart money and the bond market) IS more concerned with now than the taper is the question, "When will the F_E_D start hiking interest rates?".

The initial guidance on this was at 6.5% unemployment, the F_E_D saw that as a reasonable area to start hiking rates, the bond market did not respond well to the initial taper talk last summer because in the initial guidance, the F_E_D expected to start hiking interest rates and forgoing the ZIRP policy at 6.5% unemployment and "about 6 months after QE3 ends" so the talk of starting to taper QE last summer with what was a very hawkish policy meeting with more than half of voting members saying they foresaw QE3 being fully wrapped up by the end of 2013 and others saying they thought that meeting was the time to start spooked the bond market as there was no talk of new interest rate ploiicy guidance and 10-year bench mark Yields popped over 3%.

Remember us asking, "What is the F_E_D so afraid of?" when the next few meetings almost totally ignored tapering altogether?, It was the bond market's reaction.

So what is notable about today's meeting is the additional guidance that they reiterated that they will not hike rates until the unemployment rate is "well past 6.5%" which is important because the last non-farm payrolls saw the Unemployment rate suddenly drop from 7% to 6.6%, a mere .1% from the F_E_D's threshold" and this largely because of the sinking labor participation rate which has a lot to do with the new Federal budget having cut out extended unemployment benefits, so over 3 million Americans were expected to drop off the extended benefits roll this year. We had something like 300k drop off at the last Non-Farm Payrolls and that sent the U.E. rate down nearly half a percent so what happens with 3 million dropping off? An unemployment rate of 5%? That scares the bond market because interest rates (according to past F_E_D guidance) would see us well in to a tightening cycle.

That was about the only thing of note in today's policy decision, NOTE THAT NO SPECIFIC GUIDANCE WAS GIVEN, ONLY, "WELL PAST 6.5%".

Closing SPXU (long) Trading Position

Trade Idea: GLD PUTS

I'm getting some GLD March $122-$124 or thereabouts PUT Tickers ready in case we get an opening. I'll likely do the same with HYG except they'd be in the money March Calls as they'd be likely to move up if gold moves down.

Here's why I'm waiting and why I'm leaning toward Gold puts. Remember gold has been trading opposite the market so if we get a market bounce, gold should see downside and thus puts would be my tool of choice, although a gold short or a leveraged ETF would work as well.

 YG (gold futures) 5 min are negative on this gold bounce, this leads me to believe it will see near term downside, for a quick trade I'd prefer leverage so that's why I lean toward puts.

YG 15 min shows a negative divegrence in 3C at the highs and a pullback and another negative (relative) that is causing congestion, but if the 5 min gets worse, so should this one.

GLD charts...

 The 1 min was positive EOD yesterday, then negative on the open today, it pulled back and has since seen an intraday positive and a move up in price, this is ideal for entering a put position so long as we have the signals.

The 3 min is leading negative.

GLD was in line and then you see two relative negatives, not the strongest, but enough for a pullback/put trade.

However long term the 4 hour chart is leading positive in what looks like a large base area, prices are sent lower when they move too far above the accumulation zone, so a short term trade down (puts) would just bring GLD lower and in to the longer term base accumulation area for a primary uptrend.

I'll wait for the signals.