QUICK MARKET UPDATE

I obviously have TONS of data to pour over, my first impression of Yellen as the F_E_D chair was, "Greenspeak", remember Alan Greenspan could go on for hours and at the end you had no clue as to what he was saying after 2 hours than you did at the start, she definitely has taken something from Greenspan in the form of "Greenspeak". I think the policy announcement was a clear reflection of that ambiguity and the market got its first taste of the new F_E_D chair and I think did not like the way hard data points like "6.5% unemployment threshold will lead to rate hikes" to a very ambiguous new forward guidance which essentially is almost none, kind of "See how it goes", but added just enough dovish tone to keep the market from falling off a cliff down 2% on the statement if it were only the change in rate guidance.

I saw a lot DURING the press conference the Bond market did NOT like, I'll have to put the words and prices together.

As for the market, yesterday we saw distribution in HYG which is important. Multiple times today I noted the increased pace of negative divergences leading in HYG and each time they were getting worse which is not good news for the market as HYG is the principal lever of manipulation that got the market as far as it has on the upside this week.

Taking a quick look around, I'd say the most notable 3C indication today was the increased leading negative divergences in HYG. This is important because as I mentioned when we saw them, algos are not the smartest things, but dominate the market , they are meant to do one or two things, for instance when they see HYG which is an institutional risk asset that expresses a smart money risk on position, they buy, when HYG sells off they see it as smart money selling, this is why HYG has been such a prominent market manipulation lever the last  year or so. Algos do not have the capability of doing a lot more than that in this scenario.

Thus when we see HYG being distributed it's telling us smart money is no longer willing to hold the risk that they used to lift the market, this is important because HYG "can" be an incredible leading indicator like all credit, also recall yesterday we saw High Yield Credit unwilling to hang with the market, it sold off.


Take a look at HYG today and the increasing leading negative divergences, remember the positive divegrence that launched the market only went out to the 10 min chart and as such, we needed to see the 10 min chart start to go negative, we saw a small relative negative divegrence earlier, this too grew worse as the day went on even BEFORE the F_O_M_C.

This relationship is not coincidental...

 This is HYG in blue vs the SPY/SPX in green on a 3 min chart that is backed up to 9:30 this morning, the almost tick for tick relationship is the result of algos following HYG, yet at the same time High Yield Credit was selling off yesterday and we got the first set of negative divergences in HYG yesterday implying this mini-cycle (this week) was coming to an end.

 This is today's 1 min chart of the same 2 assets, HYG led a little as it moved lower near the SPX's intraday highs (red arrow) after having traded in line or tick for tick earlier in the day, the increased leading negative divergences today lead me to wonder if there may have been a leak of F_O_M_C policy, it's nowhere near as obvious as the others we have found (about 3 or 4 in the past)...

This is the Jan/Feb cycle. At #1 you may recall the accumulation in the market starting Jan 27th , then a head fake move that was further accumulated in to a small "W" bottom. On February 4th I had issued a post saying that this was going to be one very strong move up, but it was being done to change what was extremely bearish sentiment at the time to bullish as institutional money's positions are so large (whether selling or shorting) that they NEED demand and higher prices to sell or short in to and that was the REAL reason for the move which was supported by HYG and more specifically a short squeeze.

My note you may recall warned of a move that had to be incredibly strong, it had to change sentiment for it to work as Wall St. never runs a cycle without a reason. If you follow that to it's logical conclusion and what we already had in great abundance, objective data showing a trend of massive institutional distribution, this move up in February was a large head fake move meant to set up bearish positions as we look at positioning through our own experience and filter, it's hard to imagine a situation in which your position can move the market against you, thus the Feb rally and we knew that long before it started, in fact it was the first trend expectation with a much worse downtrend to follow.

At #2 we have the short squeeze, but still HYG support, at #3 we have HYG breaking off as a leading negative indication for this larger cycle.

As for today, you know last Friday we anticipated a mini cycle up, we closed a number of puts, some at triple digit gains and opened a few long options like QQQ and IWM calls in preparation for the move expected this week which we have seen, at least part of it, maybe all of it at this point, I need to do the analysis.

 To the left at the red arrow we see the first distribution of the week in HYG, it was mentioned several times yesterday, now look at the leading negative divegrence/distribution in HYG as it is in a flat range (one of the places underlying trade is often heaviest), that leading negative divegrence led to a large decline in HYG.

As you may recall, several times today I noted the divergence is getting stronger and stronger.

 The HYG 2 min chart's leading negative divegrence today and yesterday's relative negative (at least compared to today's intense distribution).

Right now 3C and HYG are in line.

As you know divergences migrate to longer timeframes as they get stronger, here's today's 3 min leading negative, again in the same flat trading range intraday.

Yesterday I noted a negative in the 5 min HYG chart which is important because migration of the divegrence would lead it to the 10 min chart and that is where HYG's positive divegrence ends, it doesn't go any further than 10 min. When the 10 min is starting to go negative we know we are close to a pivot and we want to start taking on new positions, wrapping up older ones like calls or longs that were entered last Friday for this week's move which was NEVER (in my view) about the typical market price/head fake, but about pushing VIX futures lower to accumulate protection, which means smart money is expecting something nasty on the downside.

 Here we see the positive divegrence or accumulation in HYG to the left that launched it and the market, the 5 min negative I mentioned yesterday took on a stronger negative tone today which was a major change, but one we have been anticipating for market timing purposes. Now the 5 min is leading negative almost below the start of the accumulation area.

Ultimately it's about the 10 min chart turning as that is where the accumulation reached for this week's market move to the upside.

 This is what that accumulation looked like in HYG as of yesterday's close, still leading positive meaning we'd still expect the market is not ready to turn down quite yet, but I warned today, "These can change fast" and it did.

This is today's 10 min chart, at #1 we have a small (weaker) relative negative divergence that I mentioned earlier today, before the F_O_M_C, this had already turned to a leading negative divegrence and you see where it is now.

More importantly, it will be very interesting to see how the algos handle this as all correlations were smashed today, for instance the rise in USD/JPY did not lift the market, now HYG's price is sitting below the original accumulation area, algos should be reading that as risk off on an institutional level.

Like I said, I have a LOT of work to do in sorting things out, but this is how we closed in one of the most important assets for this particular cycle , at least from a timing/pivot point of view.

As for other indications in to the close...Sentiment (professional) which had been in line yesterday went negative today and did so before the policy announcement, treasuries underperformed the SPX correlation as a flight to safety, but this is not unusual given the policy statement and its impact on treasuries. Of course as a result, Yields which are one of my favorite leading indicators gained, however one thing I'll be busy doing is trying to figure out whether to take that as a leading near term positive or as an anomaly as part of the F_E_D statement, any other day it would be a market positive, but today I'd have to give it a pass considering the F_O_M_C, but I do want to double check.

Sentiment vs the SPX which was in line yesterday, no leading indication, but went negative today well before the policy statement, either this is a pivot/top for this week's mini cycle and/or there was a leak of the policy statement which is not hard considering financial news outlets have the statement and know the outcome hours before we do (it is embargoed), how else do you think they have instant analysis, charts and graphs, this isn't a guess, this is well known.

I do find it interesting as well that yesterday's Dominant Price/Volume Relationship  (which is an excellent very short term predictive indication) was overwhelmingly Dominant in all the major averages and as I put it in last night's post....

"As for Dominant Price Volume Relationships, we had one across the board and DOMINANT, Price Up/ Volume Down despite today having higher volume than yesterday's pathetic volume (remember these are the component stocks of an average being measured).

This is the most bearish of the 4 relations and it was over half in most of the averages, typically it acts as a 1 day overbought condition and we have a close lower the next day, it will be interesting with the F_O_M_C at 2 p.m. and the knee jerk reaction."
From a quick overview of the averages, I'm glad I took the gains from the IWM put opened yesterday.

The SPY handled itself better than the Q's or IWM and VXX continued to accumulate, I just think we have a minor oversold status which is nothing big, but I wouldn't be surprised to see it relieve, perhaps tomorrow's options expiration max pain pin will do that.

From VXX's point of view, this is the asset that is most important for me this week as far as signals, HYG is a means, VIX futures are the end.

Since the first day VXX moved down off the negative divegrence at the top which was small (I think they only needed enough distribution to get the move down and maybe get off some hitch-hiking trades, but the intent is to accumulate protection), there has been accumulation. This is the 5 min chart of VXX and you see the divergence is at a new leading positive high, this is exactly what we expected BEFORE the market move started so I'm always happy to see expectations which come from objective data, pan out.

I don't like the reversal process, this is the oversold/overbought condition from today, I'd think VXX would have to come down and form a more symmetrical rounding base or a "W" base, but they won't accumulate by chasing prices, that was the point in the first place.

OK, I have a LOT of analysis to do, I'll try to get to emails, but I first have to get a handle on how today effected the market both near term and long term.

Overall, especially because of HYG before the statement, this was a good day for our trend expectations and trade positioning.

IWM April Put Follow Up

Here's the P/L for the April Puts opened yesterday @ 3:41 p.m.

At the fill of $3.44 the P/L for this position opened yesterday as a short term position, comes to a gain of +27% for a day's exposure.

I did not close this position for any other reason than the short term gains and what I mentioned...

 The 10 year Treasuries started showing a relative positive divegrence, this was the first thing that got my attention as small as it is, but you know I always like to buy puts in to strength and sell them in to weakness.

I noticed higher volume as well as some "Hammer" bullish reversal candlesticks across the averages, when I see a larger spike of volume, it's usually a short term capitulation moment. With the candlestick and the increased volume that makes the reversal candle many times more probable to work.

If the IWM even went sideways those gains would start to dissipate and it was meant as a short term position so plan your trade, trade your plan unless there's something that trumps that. I also took the op-ex Friday max pain pin in to consideration.

As for Carry trades, because the $USD Dollar Index flew on the policy announcement, the USD/JPY flew higher, NOTE the market DID not follow as is typical.

Other carry trades like EUR/JPY and AUD/JPY didn't look as good, but still strong. I also noticed it looked like there may be a turn in the carry trade USD/JPY and took that in to consideration although that would normally push the market down further, the bond market was really what first alerted me.

I DID NOT CLOSE THE POSITION BECAUSE OF ANY MASSIVE OR EVEN MINOR POSITIVE DIVERGENCES, IT WAS STRICTLY AN ABUNDANCE OF CAUTION IN PROTECTING A 27% 1-DAY GAIN AS I HAVE A FULL HOUSE OF SHORTS, IT REALLY DIDN'T ALTER MY EXPOSURE AT ALL.

Taking April IWM $120 Puts off the table

I opened this position yesterday, all of my option trades are meant to be short term.

This is more of a gut feeling, but with some hammer candlesticks and increasing volume as well as op ex tomorrow, I'm going to take these profits.

There's no harm in taking these gains.

Quick Market Update

The SPY has a couple of intraday positive divergences in the 1-3 min timeframes, the Q's and IWM, none, in fact the IWM looks pretty bad.

Yellen Presser @ 2:30

You might remember when QE3 was announced, there was a knee jerk reaction to the upside, then during Helicopter Ben's presser at exactly 2:24 p.m. he said something the market didn't like, the question had to do with commodity and general inflation and for the first time since QE started, he said that they would adjust, this was something new, it was our FIRST hint that the F_E_D was going to be looking for an exit strategy, it was also the VERY high of the day at that exact minute.

After that the market faded -8% over the next few months from the September QE3 statement and didn't see those levels again until January.

My point? Listen to the press conference, listen to the questions, because this was a VERY ambiguous statement, why else would the $USD be flying, that's a negative take on a dovish statement, treasuries are doing the opposite of what you'd think as well for such a dovish statement, but it is the ambiguity so she may offer some clarity and that's what you want to watch, not just what she says, but EXACTLY how the market reacts to what she says.

I find it very interesting that HYG saw increasing distribution today as we got closer to the statement, I would not be surprised if SOMEONE knew something in advance, obviously not the entire street, but someone was selling down or distributing HYG at an increased pace beyond the normal nervousness.

First Knee Jerk

This was a DOVISH statement, so why did the market dump immediately? I think because the guidance on rates (the 6.5% unemployment) is VERY vague, as dovish as it is...

THE MARKET HATES UNCERTAINTY and even though this was dovish, it gives the market no way to have certainty as to when rates will move, they moved guidance language from a solid number to  arbitrary guidance, there were a number of measures, but none had a solid number, it was more, "We'll see as we go".

I think the guidance being so arbitrary is why they added dovish language to make up for it as they know the market would rather have specific guidance and by dovish I mean the language talking about keeping rates lower than normal for an extended period once they've reached their employment and inflation mandate, a very tricky, very ambiguous statement from Yellen, the presser may offer more color.

HYG CONTINUES TO MOVE FAST (NEGATIVE DIVERGENCES)

By now you probably know why High Yield Corporate Credit (HYG) is so important for us to monitor, it's essentially the market.

I said earlier I was still looking for the 10 min to go negative, but I'm shocked at how fast the divergences are advancing, negative, here's 1 chart, but there are many others (time constraints)...



There are 10 min signs of negative divergences as well.

F_O_M_C Countdown

I'm sure you are tired of hearing it as I always put this out on any F_E_D or F_O_M_C event, but as ALWAYS, beware the knee jerk move, they tend to be strong and wrong, usually within a day or a few days, the Ukraine situation as well as max pain options expiration pin tomorrow are a bit of a wild card, but it depends on how strong Yell comes on.

In other words, be patient, don't overreact to price movement.

Here's what I expect we'll likely see....

FOMC policy meeting is expected to leave policy rates unchanged. The big issues will be changes in the characterization of the economy, changes in guidance, and if there are any hints at slowing taper. Also, the Fed will release its quarterly forecasts at the same time as the statement.

The 6.5% unemployment threshold that still stands as official guidance is scaring the bond market as we hit 6.6% just a couple of months ago and rate hikes are market killers, this is why the bond market freaked out and the 10 year yield hit 3+% when they had that June 2013 meeting in which they were very hawkish in talking about ending QE3 by the end of the year, the bond market doesn't care about that, it was the guidance that 6 months after QE3 ends, there's likely to be a rate hike, after the F_E_D saw that you might remember we were asking, "Why is the F_E_D so scared ?" re: QE3 as they backed off, IT WAS THE BOND MARKET'S REACTION.

There's also the issue of foreign Treasury holdings in the F_E_D's custodial account seeing their largest ever selling spree last week, Russia and China seem to be teaming up (although Russian holdings are only about 200 bn). We'll have to see if there's talk of slowing the taper, that would almost certainly be in response to the recent foreign selling.

AS ALWAYS, I'LL BE OUT OF RADIO CONTACT DURING THE ANNOUNCEMENT AND LIKELY JUST AFTER, THIS IS WHERE YOU CAN LEARN THE MOST ABOUT THE MARKET BY PAYING ATTENTION TO REACTIONS TO DETAILS SO I'LL BE BACK, BUT DURING THE POLICY STATEMENT, I'LL BE OUT AS USUAL.

WENT WITH GDX APRIL (monthly) $26 Calls

I also went with just over a 50% normal position size so it's speculative in position size.

Trade Idea: GDX / NUGT Long (SHORT TERM TRADE)

I'm actually going to use some in the money April call options because of the duration of the trade looks to be very small, I will leave the longer term trend DUST (3x short GDX/Gold miners) in place as it is a different trade/trend).

I see this as a very short duration position and that's why I'm using the leverage, if it were longer in duration (probabilities), I wouldn't need the leverage to make the profit potential worthwhile. That being said, I think you could easily get away with NUGT (3x long GDX/Gold miners) if you prefer an equity position over an option position.

I think this is more of a relief type/oversold bounce, but it looks good enough to play. It could also be a reaction to the F_O_M_C if there is a leak already out, in that case a knee jerk reaction to the upside would make sense as the GDX (which is not as good as gold for this purpose, but the GLD signals aren't as strong) chart looks like the move would be short in duration, JUST LIKE A KNEE JERK MOVE.

Here are the charts for GDX, I included a confirmation of NUGT (long)

 GDX 1 MIN Leading positive today in a flat, reversal-like area.

3 min chart is positive as well and we have positive signals on the 5 min in addition, which is enough for me for a quick options position, It will be speculative in size, likely half size.

 The main trend however in GDX on a 30 min chart has a leading negative divegrence, it trumps anything above by a mile and this is why I have no problem leaving the longer term DUST position in place.


This is the 3x long gold miners/GDX, NUGT, it would make a decent long if you didn't want the options exposure or that much leverage.

THE ONLY ISSUE I DO HAVE AND THAT IS WHY I'M TREATING POSITION SIZE AND RISK MANAGEMENT AS SPECULATIVE (other than the shorter duration of the trade signals) IS THAT DUST IS NOT CONFIRMING, HOWEVER GDX AND NUGT ARE ENOUGH FOR ME ON A SPEC. POSITION.

PRE-F_O_M_C UPDATE

You'll have to excuse the charts, my drawing tools are reloading.

There's a distinct feel of some nervousness that's easily apparent in Index futures, we'll start there, but this is by no means the biggest development so far today.

 ES (SPX E-Mini Futures) and 1 min 3C intraday show some weakness, most likely a little nervousness before the F_O_M_C announcement.

What is interesting though (I wish I could notate the charts, but the software crashed and is reloading) , the 5 min ES shows there to be significant damage already, there was a time when our very short swing trades were based on 5 min divergences alone not so long ago.

 The 15 min is where the market is in line since the bounce we saw coming last week in which we made major preparations for last Friday as we closed out puts and opened a few hedging calls as this was a transitional pivot, this is where we got the best pricing and least risk, that's why we are in holding pattern for this move to move to the transitional stage which is timing, it's not about the move itself as it is not very strong as far as underlying trade.

Whenever you need to bring in levers like the SPY Arbitrage or HYG or even carry trades, the market doesn't have enough strength to do it on its own.

Just like the 10 min HYG chart we are looking for a break in (as it is the driver of the market this week), this 15 min ES chart should also see a break and turn quite negative on 3C, that's where I'll add a lot more than just 1 IWM put which is doing well today so far considering.

 Beyond the 15 min, the 60 min is where the real flow and large transactions are, clearly distributive even on the new contract, this is the probability that tells us the shorter term charts/timeframes below that bounced will almost certainly fail, they are paper, this is scissors.

VIX Futures, not spot, not even short term VXX VIX futures, but real VIX futures...

 Note to the right where 3C diverges positively from the futures, this has been what we have expected since Friday the 7th of March in the late afternoon, we expected this move lower in VIX futures to begin last week, it started this week; which is (in my view) only a ploy to be able to accumulate protection at better prices... this is the exact same thought you'll see at the Friday March 7th EOD post.

The point is, we are seeing what we expected to see, therefore this will almost certainly be the timing trigger we expected it to be. They are accumulating protection short term as the longer term position (very large) is already in place, we see this quite often right before a move from a stage 1 base to a stage 2 breakout to mark up.

 The NYSE intraday TICK has been FLAT and dead all day, look at the 4 p.m. area just to the right of the middle and all the way to the right, that's today. The readings are in the (approx) ZERO to -750, this is very flat as the TICK is all NYSE advancers per bar minus decliners so the action today has been on the negative side, but not horribly so, more like a holding pattern before the F_E_D with some trepidation.

However, this is where we are seeing some big changes today. 

In my last Market Update today I said,

"my problem with this is the HYG 10 min chart, if it were breaking down, then I'd feel better about being near a pivot, but that can happen fast."...  and fast was the right word, look at what has happened today in HYG which is the asset that has moved the market this week and held it up thus far...

 The intraday 1 min HYG / 3C chart is seeing a major distribution/negative divegrence since about  11 a.m. this morning, that's the stronger form, "Leading Negative".

I know a 1 min chart isn't a huge deal, but these divergences always start on the earliest charts and migrate to longer timeframes the stronger they are and we already had distribution from 1-3 min yesterday adding a weaker relative 5 min negative today which is continued migration or strengthening of the negative divegrence in HYG, thus the market's strength or legs are being slowly or I should say increasingly knocked out from under them as HYG fails, the market fails unless they find another lever, but I don't think that is what this episode was about (moving the market to a head fake), I think it was about accumulating VIX on the cheap and since the market trades opposite the VIX, of course it will rise, but I don't think (unlike the past), the market was the target, protection in VIX was/is.

 Look at the migration to the 2 min HYG chart leading negative, concentrate on today the 19th, that's an immense change in character even though we already had distribution here yesterday.

Now the 3 min chart is nearly insane in how negative it is today, as I said earlier, "It can happen fast" and it is.

It seems someone "might" know something about the F_O_M_C , a leak.

Meanwhile the other asset that is key for us this week, the reason for the season so to speak, VXX is seeing an increased 5 min leading positive as we expected, again try to focus in on the 19th and the fact this is a 5 min chart.

There's also a large rounding process that seems to be in place as VXX was accumulated on the first day down which is unusual, almost as if they were in a hurry.

I RARELY enter a position before a wild card event like earnings or the F_E_D, however we've seen leaks in both, If I find more evidence that this is accelerating, I may do just that or look for a knee jerk reaction to the policy announcement as there is almost always one and they are almost always wrong, to use in order to get a better entry.

THE POINT IS, THINGS ARE MOVING A LOT FASTER IN UNDERLYING TRADE THAN THE PRICE ACTION LETS ON, OF COURSE MY OTHER SAYING YOU HEAR OFTEN IS,

"PRICE IS ABOVE ALL, DECEPTIVE".

P/L on Hedging Calls

I forgot to post this yesterday, I haven't had time to check the fills, but they're usually very close.

Remember I had a QQQ March hedging Call that I added to using April calls and counted that as 1 position as far as position sizing/risk management, and then I had the IWM call as a hedging call.

Remember the April Q's calls position size was much smaller as it was combined with March for 1 position as far as risk management.

Market Update-No Real Movement Pre-F_O_M_C

First I want to express one thought beyond the F_O_M_C, Yellen is a wild card that we will have to learn as we go, I doubt she'll make any serious moves to QE except possibly to continue cutting back at the $10 billion rate per meeting. I do think she'll provide guidance on the rate hike/6.5% unemployment rate, I think Bernie purposefully left that open for her to introduce herself.

However what I think is different about this weekend than last (as you recall we closed most puts for substantial profits last Friday expecting the market to rally this week or bounce), the reason was, the referendum was a done deal, Ukraine wasn't going to do anything, it had all been discounted, however with Russia looking to take the real prize, the Eastern portion of Ukraine east of  the Dnijpro river may be a stretch (that entire region), but certainly the Donetsk region where there's a higher concentration of ethnic Russians / Compatriots as Putin calls them and that's where a lot of protests and taking over or storming government buildings by pro-Moscow protestors have taken place, it's also where a protestor died and Putin threatened he'd protect Russians after the event, even though the protestor (unknown at the time) was anti-Moscow, this is clearly the prize and the unscheduled Air force drills on the eastern border heighten tensions with over 60,000 Russian troops 15 km off the eastern border.

The market may not feel as calm about the weekend as last weekend which was a fait accompli and I don't think any resistance was expected.

Right now the Ukrainian government is making plans to evacuate citizens out of Crimea, the press seems to think this is because the area has been ceded to Russia, however NO MENTION was made of Ukrainian military being evacuated out of the area, although I will say appearances are they have given up Crimea and probably wisely to concentrate forces on the eastern border as this is what Putin is really looking to do, chip away at the east and make inroads, I'd think right up to the Dnijpro river that Kiev borders.

The point is, be careful about F_E_D knee jerk reactions, Yellen has to make an impression, however events in Ukraine this weekend are far less certain than last.

As for a snapshot of the market pre-F_O_M_C, quiet and mostly in line. The main assets we are concerned about are VIX futures being accumulated and the manipulation lever that hiked the market, HYG being distributed, there hasn't been much change since yesterday's distribution in the averages, accumulation in the VIX futures and distribution in HYG.

On a side note, I don't feel so bad today having closed the hedging calls in QQQ and IWM that were opened last Friday as well as the IWM put entered yesterday which is already green, however until we have a pivot, I don't want to get too aggressive, the pivots are where we take action, not chasing the market.

 SPY 1 min intraday is nearly perfectly in line, there was some slight intraday accumulation near the open on some downdraft, it seems they have the market pinned for the F_O_M_C.

This is some of the 2 min SPY distribution taking place yesterday for more context.

And of course the 5 min which never joined, we usually don't get a bounce without at least a 5 min positive, but that issue was settled last week as we knew as they used HYG which is much cheaper to do to bounce the market, especially if you intend to distribute the averages, why put money in to them to bounce them if it can be done with HYG? 

 QQQ this morning mostly in line, the same positive early on, but very small just to stop the downdraft of early trade.

The larger view of the same chart w/ yesterday's distribution which is why I went ahead with 1 position, the IWM April put which I see as a win win whatever happens near term.

 The Q's 5 min was the only one with a positive divegrence at the lows, but it gave it up quickly, there does seem to be a proportionate reversal process forming, my problem with this is the HYG 10 min chart, if it were breaking down, then I'd feel better about being near a pivot, but that can happen fast.

IWM this morning in line intraday 1 min

The IWM 1 min distribution from yesterday using a longer zoom.

This is interesting, a leading negative 5 min divergence in the IWM, this is why I picked the IWM puts over the Q's or any others.

Remember there were no positives except the Q's past the 5 min mark, so this wasn't a strong set up on the bounce, all the strength came from HYG.

VXX intraday is also in line.

But look at this 5 min leading positive, this is what we are looking for, it's not quite there, but accumulated much faster than anticipated.

This is the key to our short term pivot to move in to new positions, it's the key to the primary trend in my opinion as well moving to the downside on real volatility, we've only had two real volatile moves, Feb rally was the second, before that it was a move down and volatility continues to increase so a downside move would likely be significantly stronger than the Feb rally.

 HYG 1 min kept in line with a small negative this morning.

The 2 min distribution is impressive, but it's not enough, it's a start though that has moved all the way to 5 min now.

 5 min now seeing migration of the negative divegrence with a relative negative, that's how it starts, this is key to watch over the next day or two (Friday).

And the accumulation (white) of HYG was seen long before the market was ready to bounce, this is how we knew it was coming, once the 5 min goes seriously negative this chart should finally cave, then we should be near a pivot.

The F_O_M_C can change a lot very short term unless Yellen pulls a real surprise to introduce herself with a bang, I think she'll be looking to come off as moderate though, we did have that largest ever foreign treasury sale last week in the F_E_D's custodial account, I do wonder if the nF_E_D will pick up the slack by holding on a QE reduction this meeting?

Ways to Play China

Some of the longer term members may remember when we first spotted trouble in China back in 2011, we spotted it through commodity prices and a few weeks later we saw the first recessionary print in manufacturing.

There are quite a few problems in China from real estate to credit, but the recent default of Chaori Solar on a very reasonably easy to handle interest payment showed that China who has been bailing these companies out to avoid the first ever default, has changed tactics, as a result the banks aren't lending, new deals are being cancelled left and right and it's not that the banks don't have the money, SHIBOR shows they do, they simply aren't lending which is similar to the US credit freeze/liquidity lock up of 2008, albeit for different reasons, that was a problem of trust between party and counter-party as to how much exposure one had to subprime.

The effect however is the same, that's why I specifically refer to this moment as China's "Bear Stearns Moment". Worse yet, China's economy has transitioned to a credit creation driven economy (they look at economics over a much longer span than we do, say 20 years vs a couple). In any case, the commodity (collateral) for cash that has been the norm in the shadow banking system in China has hit a brick wall and cash calls have been coming in since before the first ever default of Chaori, the cash calls have been rolling in and one of the chief commodities put up for cash has been copper as well as iron ore, but this is going to hit all throughout the commodity sector.

Look at Copper today, it just broke MAJOR support...

You know we don't chase assets, but try to let the trade come to us so right now copper is a no go play on China, however, the same volatility shakeout that is applied to H&S tops is VERY likely going to be seen in copper in which a massive short squeeze will send copper back above former support (now resistance) and that's where we can take a look at copper short as the trade would be coming to us.

However I'd rather get out in front of this a bit further, you know I've been looking at FXP for a good long time, but haven't found a decent way or place to enter, I doubt that changes.

So I figure we have a couple of options that look interesting, one would be a global commodity tracking ETF/ETN, DBC is a possibility, most others have volume that's too thin.

More specifically I think we can target aluminum directly as it was on a recovery, but as I said last night, the market is dynamic.  A few names I'm looking at this morning would include AA of course because of their global reach and volume, ACH would be my preferred asset to target, but it doesn't have the upside momentum I'd like to short in to, it's still on the list though, imagine catching them in default!

CENX is another, I need to look a bit more in to their operations, they don't need to be China specific, I think this hits commodities globally, but I would prefer some Asian exposure. CSTM is another, but volume is a bit low.

So as I have time between what we normally do, I think this is a really interesting area if we can find the next area to start seeing trouble, Aluminum seems like a good start, it's just copper and iron ore were the major collateral and thus they got hit first and the hardest.

Of course if you have ideas on another front, I'm all ears, but AA does have a bullish ascending triangle, I'm not sure if retail will bite, I doubt they understand the situation in China so it's a possibility that we can hit a possible head fake move in AA, assuming there's enough distribution and we can see smart money is moving out because of the exposure, I'll be looking much more closely at that.

I just wanted to put the idea out there because we have a lot of very smart people in the group from all over the world with different perspectives and information so I want to tap that and see what we come up with as this looks to be a major 2008 type play , except China.

A.M. Observations

Good morning,

Futures were lifted slowly a bit overnight, but it hasn't translated in to anything significant just before the open, ES looks like this, it will of course look very different at the open as always.

There has been a small negative divergence at this week's highs in premarket.

Today's main event of course is the F_O_M_C, as always, "Beware the F_O_M_C Knee Jerk Effect",  we've seen it too many times, we know that it usually lasts a day or two (but with a monthly op-ex pin tomorrow who knows) and then it tends to reverse.

Also remember the asset in control of the market and has been since last week (thus the reason we cleaned house and took profits on Puts Friday and entered a couple of hedging calls) is HYG, there was deterioration yesterday, but until the 5 min chart shows distribution I'm not getting aggressive on anything timing wise.

Look for Yellen to try to make her stamp, I think guidance on the F_E_D funds rate (presently 6.5% unemployment for a rate hike) will be the main event. The F_E_D may have to make the economy look worse than it is, although that's a feat, but they'll likely be looking to push off rate hikes , I would think , however the last minutes did reveal that rate hikes were being considered as early as mid 2014 which is almost here, this is what the market is worried about more than anything, rate hikes are market killers. I'll be out of radio contact at 2 pm on the announcement.


OTHER THAN THAT, I'D URGE YOU TO STAY PATIENT, WE KNOW THAT VIX FUTURES NEED TO BE ACCUMULATED AS THEY HAVE BEEN SINCE MONDAY AND PUT IN A REVERSAL PROCESS, JUST AS IMPORTANTLY THE MANIPULATION LEVER OF HYG NEEDS TO SEE THAT 10 MIN POSITIVE DIVEGRENCE UNWIND, UNTIL THEN I'D TRY TO BE AS PATIENT AS POSSIBLE, UNDERSTAND THIS TOO SHALL PASS AS WE JUST CLOSED PUTS FRIDAY WITH TRIPLE DIGIT GAINS. 

It never feels the same though when you're in the eye of the storm.

One other thing, besides the Ukraine which is seeing more tension with Russia planning air strike exercises on the border, Chine is in big trouble, WATCH COMMODITY PRICES, commods are what have been used to secure bank loans through mining companies and the likes, an unwind as we have been seeing in copper and iron ore hitting other commodities proves there are cash calls on these loans, expect more defaults and commodity prices will reflect how bad the situation in China is, I have called it "China's Bear Stearns circa 2008 moment", I still think that so we really need to find a play that's set up on China (short).

Now, off to work! Have a great day.