EOD Market Update

As I said in the last post, this wasn't quite the knee-jerk reaction a F_E_D event normally inspires, but the general consensus seems to be that the minutes offered nothing new.

As far as late day action with Index futures going negative, I suspect it's because of this...

Yen intraday is regaining some underlying strength, a rising yen means a falling USD/JPY and after breaking down (USD/JPY), it seems it's doing what assets normally do when they break important support, loiter near it for a short time before making the next leg lower.

After the 2 pm release, the $USD also fell, not helping the situation for USD/JPY.

 1 min USD/JPY saw some deterioration near the close...

The 5 min chart shows the break of USD/JPY yesterday and loitering near support today, but the 3C signal for today is no where near the previous days as the pair was still holding support, thus this looks like classic loitering and should resolve to the downside for the pair.

This is a 60 min chart of the USD/JPY trend and how it has broken support , loitered in the area and broke the next level and loitered in the area as you can see today.

Really, this isn't much more than lower lows/lower highs when you call it as it is plainly.

As for the ES/SPX futures rejoining the USD/JPY correlation, as we've seen numerous times the past few weeks, ES, ran above the correlation that it had stuck to nearly perfectly all day, even at the 2 p.m. release and that little volatility spike. Our experience has been, ES reverts back to the USD/JPY and if the Yen signals forming now as well as USD/JPY tell us anything, that's lower.

More or less, today basically gave back what yesterday took away, more chop, however some things look the same and some things clearly are not the same.

 Two of the more noticeable things are two of my favorite leading indicators, Yields which dislocated with the SPX today, you can see how past divergences and dislocations have resolved and that's why I like it so much as a leading indicator, but  more significantly, the market ramping lever of choice, HYG...

Is showing definitive movement in underlying trade. Again you can see what the last divergences , both positive and negative did to HYG and the market that follows it. The signal of the last two days is quite strong, we haven't seen underlying movement like that in HYG for a long time.


Of course while HYG may not have been very helpful in ramping the market as is usual, VIX was and I almost can't get past the irony that the F_O_M_C minutes show a concern for investor complacency while the spot VIX closes at the lowest level since last August! Perhaps the F_E_D actually has it right?

VIX (green) vs SPY (red) intraday, note the last two hours, something had to be used, did you get a look at volume today?

However the take-away is still Yields dislocated from the SPX, the Yen is gaining strength again and there are signs of negative divergences already in USD/JPY which the Yen charts won't help. Then... there's credit...

Besides HYG, High Yield Credit (as seen earlier in the thinner DHY) dislocated again...

Monday dislocation, Tuesday moving close to in line, Wednesday dislocation...


There was a Dominant Price/Volume Relationship among all the major averages today, I'm sure you can guess, but it was Close Up / Volume Down which is the most bearish of the 4 possible combinations and it was quite dominant. This usually results in a close lower the next day.

I took a look at NUGT and GDX, improvement continues there, you can almost get a feel for timing by simply looking at the rounding reversal process. I'm very much looking forward to bringing NUGT (long) up to a full position.

As I said earlier, I'm interested in how the 5 min Index future charts move as yesterday's decline brought them close to in line with the negative divegrence that had been forecasting a decline in the market.

I have a board meeting at 7 pm, I'll check on futures when I get back.

Market Update

This isn't the most impressive knee-jerk reaction, but  it does appear to be one, especially with the HYG charts.

Right about now all of the Index futures are turning negative, the NYSE TICK data is turning negative and my custom NYSE TICK indicator is turning negative, intraday breadth is falling off here.

 Intraday NYSE TICK went positive right to 2 p.m. and then turned down, intraday breadth is declining here.

The Index futures intraday are also declining.

What I'm most interested to see is how the 5 min charts react.

There were very strong negative divergences in the 5 min charts as you can see, but they moved as 3C was forecasting down and are close to in line.

I suspect with HYG looking the way it does and other leading indicators, that this is not going to end well, but after the drubbing the market took yesterday, some backing and filling is not surprising.

Leading Indicators and HYG Update

We did discuss the possibility of a head fake move above the range before a move lower, that's a concept more than something we have clear signals for and of course the F_E_D event inspired "Knee-jerk" reaction. However, looking at some of the Leading Indicators and especially Credit/HYG, I wouldn't want to be long the market right now.

 HYG disconnecting from the SPX today, remember the 15 min negative appeared yesterday suggesting it wasn't a process, but a wholesale dump of HYG right before the minutes.

You can see how HYG is used to move the market as a lever, yesterday was the start of deterioration, today it has fallen out of bed with the normal correlation.

Credit markets are much better informed than equity markets.

And this shows a strong positive in HYG at its lows that sent it higher and a VERY strong leading negative 15 min, all of this damage is from 2-days only.

High Yield Credit which was in line with the SPX has also fallen out of sync with the SPX today.

Sentiment has fallen out...

And as mentioned yesterday, the USD/JPY vs SPX correlation fell apart and Yields took over, that is falling apart today as well.

Yields are one of my favorite Leading Indicators as they tend to pull equity prices toward them so a dislocation like this, EXACTLY at 2 pm, would be bothersome for me if I had long market exposure.

This shows Yields specifically today falling out right at the release of the minutes at 2 p.m.

HYG's 3C chart though continues to be one of the most disturbingly bearish signals right now.

NFLX Follow up

While were waiting for the market to digest the minutes, play a few games that typically happen after the minutes have been digested to set up positions in reaction to them, there's one asset that I have put a lot of faith in, that's credit and the HYG 15 min negative divegrence shown earlier is even worse now. I consider Credit and HYG in particular to be excellent leading indicators so as the market flops from exuberant to , "Hold on a second", HYG continues to deteriorate on a very serious time frame. I think I have time to get the NFLX follow up out real quick.

You may remember during April, NFLX was one of the most talked about long ideas here, a position was entered in both calls and long equity in the trading portfolio on April 1 Went with NFLX April (monthly) $355 & Equity long for Trading Portfolio however, there were numerous "Reiteration (Long)" posts, I'm guessing somewhere above 6.

I've been holding NFLX as a trading long position, probably far too long considering that particular portfolio is meant for trading, but today as I considered the atmosphere, the signals coming in on NFLX (I'm not ready to put out a short call here, but that is the end game), it made sense to clean this position up, take the small gain and create some dry powder for new positions.

First the P/L

At the fill of $383.50 with P/L came to + 6.26%

The charts...

 This shows where the call and trading portfolio long were entered April 1, during the rest of the month of April there were at least 6 long call reiterations (30 min).

You can probably see why I liked the chart so much in early to mid-April with leading positive divergences.

 This daily chart is a great example of the 4 stages and the look of each one, where the easy trending money is and where the trading gets much more dangerous.

Through 2012 NFLX was in a large, rounding stage 1 base with a leading positive divegrence, this doesn't look any different than some intraday bases that are several days long that we are watching now like GDX/NUGT as they too are in a rounding base. The take-away is that these positions are huge and they take a significant amount of time to put together. 

I recently listed a few positions from Appaloosa's Q1 10-F filing that included a $1.1bn SPY long position (this filing is over 45 days old when it was released so the positions back then are very likely not the same now), there was a "moderate" half a billion dollar long in GOOG. The point is, this is just 1 fund's holdings, the position sizes are huge and that's why a reversal , whether from a base or a top, is a process and not an event.

At #2 we have mark-up, this is the trending or easy money phase, there's very little chop. I created the Trend Channel which has won awards, specifically for the purpose of keeping you in the trend and taking you out before you reach stage 3 where trade can still be profitable, but it is much more dangerous as the market turns more lateral and volatility increases.

Stage 3 is "Distribution/top" and this is where trading is tougher compared to the ease of stage 2 or even stage 4 decline. If you didn't know the timeframe of 1-day on this chart or the time-scale below, you probably recognize these patterns as fractal, we see them on 15 min charts, 1 min intraday charts, etc. so the concept works in multiple timeframes and multiple asset types.

THE MAIN POINT IS THE LEADING NEGATIVE DAILY DIVEGRENCE IN PLACE RIGHT NOW, THAT MAKES NFLX A POSITION I WANT TO BE SHORT WHEN THE WALLS COME DOWN.

 Intraday 1 min, there were positive signals for the broad market Friday, therefore it shouldn't be surprising since the market is responsible for about 2/3rd the movement of any given stock that NFLX has a positive divegrence Friday, that has obviously changed a bit since. This is one of the reasons for closing NFLX long and creating some dry powder for new positions.

Since the positive divegrence was Friday, it's like a mini-cycle, the migration of the negative divegrence from the 1 min to the 2 min in leading negative position is something I take seriously, especially the further it migrates and with the highest probabilities being on the daily chart above.

The 5 min chart is seeing the same migration of the negative divergence from a small cycle that started last Friday.

And the 10 min chart is also in tow.

I don't have too many good reasons to stay long NFLX at this point as probabilities continue to build.

A short set up is a set up unto its own, just having negatives or probabilities is not enough, but I will be watching NFLX for the next entry.

Here Come the Minutes

I'll be "Radio Silent" during the minutes, but I'll be back with you shortly after.

Closing NFLX (long) Trading Position

There are divergences (negative) there and you probably have read my market scenario by now.

Potential Market Scenario, High Yield Credit and Momo Stocks (TWTR)

I realize this is an odd combination for a post, but in looking at numerous charts and keeping in mind the concepts that we see so often they have become our concepts, I see a potential market scenario that could begin with the minutes today.

Last week I talked about how beat up momentum stocks were over the last few months and showed it in a breadth chart. Since I've seen short term signals lending some support to a bounce in some of them, but those signals in many cases are degrading. The actual scenario I had in mind is more easily seen in a stock like TWTR so I'll use that as my example.

First let me get to the market aspect...

 First this is a 2-day chart of the SPY, the Tweezer bottom (white trendline) is the accumulation lows of the February cycle and since then we've been in a large, multi-month, sloppy range which I believe is a significant top.

However, when we have a fairly well defined range one concept we see quite often is a head fake move (in this case above the range) before a reversal to the downside. This range has been so wide and sloppy that I don't know if it really needs one or not, but a knee-jerk reaction from the F_E_D minutes "could" provide one.

This isn't crucial to this scenario, it would however open some interesting opportunities.

The second concept is that of  a top breaking support and moving to stage 4. There's a reason there are 3 places I'll short a H&S top, because we see this so often and those 3 places are at the top of the head, the top of the right shoulder and after the initial break below the neckline I will not short a H&S, but most technical traders wait exactly for that, thus we more often than not see a shakeout of the new shorts (Volatility Shakeout) in which prices move back above the neckline or in this case the range's support forcing new shorts to cover, THIS IS THE 3RD AND LAST PLACE I'LL SHORT A H&S AND MOST OTHER TOPS.

I drew what the scenario would look like in red and yellow arrows.

The 3C charts are very clear on this area, this 4 hour chart (which is actually much worse scaled out) shows a leading negative divegrence through the multi-month top/range, this is the direction of highest probabilities and generally the direction in which I want most of my positions.

 This isn't a textbook H&S top, but it does have all of the psychological makings of one including volume confirmation. The actual H&S could be drawn larger, but I think this is sufficient for our purposes.

And this is the 60 min 3C chart through that same area, we have  a lot of confirmation for this area to be a top.

I have drawn a larger sloping H&S here (white trendline=neckline)

Interestingly as noted yesterday, HYG (High Yield Corp. Credit has been deteriorating, but as you probably know it has been one of the most useful levers to manipulate the market either higher or to support it and keep it from falling.

I find it VERY interesting that the day before and the day of the F_O_M_C minutes release, there's a huge 15 min leading negative divegrence, this was not the usual process of migration, this was a lot of distribution all at once as if there was a mass exodus out of HYG as no one wants to be there when the hammer comes down, but it was necessary to be there until now to hold the market up.

You can see HYG in red vs the SPY diverging negatively and this is exactly what I've been hoping to see among Leading Indicators.

 This is HYG's leading negative 15 min divergence, it's quite spectacular.

As for TWTR...

Last week when I mentioned momentum stocks being a reasonable place to see a bounce, I was thinking they'd base a bit before such a move, this would allow us to look at entering some on short term trades.

If there's a volatility shakeout after a break below the top range, what better class of stocks to do it with than the popular momentum stocks? The point of the move is to convince traders the market has not rolled over and to get shorts to cover as someone has to lose money for someone to make money in a zero sum game so Wall St. and main street can't both be short and make money, someone has to lose, this is why I believe we see these shakeouts as retail traders tend to only enter the trade on price confirmation or put another way, the actual break below support, Wall St. knows and sees this, thus they know how easy it is to squeeze them out as well, just move prices back above the neckline where their stops are.

Using TWTR to consider this scenario...

 The intraday and near term charts are not positive, but mostly in line like this TWTR 2 min, even the ones that have seen upside are seeing negative divergences in these timeframes.

 However, looking at a 60 min chart, we not only see how badly TWTR has been beat up, but we see a positive divegrence forming on a long term chart, 60 mins.

Taking a closer look...

 The 15 min chart for TWTR is leading positive, but it looks like a pullback to the lows and forming a "W" base would make for a much more solid base and divergence, the pullback in TWTR to that base area could occur on a general market move below the range.

This is TWTR's 15 min positive divegrence which is leading.

Assume the market break under support to stage 4 also causes stocks like TWTR to move down to the recent lows forming a larger base, this would also allow momentum stocks to lead the shakeout of market shorts as they see the high flying names rally, psychologically that's very strong and as price moves above former support, their stops are hit, they are shaken out. We'd also get our rally in the momentum stocks, of course this would be the last area like the 3rd place of a H&S top, where shorts are worthwhile, but it all fits together rather well.

TWTR 5 min.

If you are interested in possibly trading some momentum stocks, I'll be looking for set ups like this and setting price alerts for a move to or below the recent lows (white trendline) and seeing or making sure there's 3C confirmation for a counter trend rally or that volatility shakeout (1929 had the exact same thing after the initial break).

The whole scenario fits together rather well, this wouldn't change the market's bearish tone or direction of highest probabilities, it would not rescue the momentum stocks either, but give them a brief reprieve in which they could be sold or sold short on the shakeout move.

Something to keep in mind, I'm going to book mark this post and see where we are in a month.

TLT / TBT Update

Right now in the trading portfolio we have an open TBT long position, that's an UltraShort 20+ year Treasury, the opposite of TLT.

Basically I have liked TLT as a longer term long position, but at an entry of around $102 which means it needs to pullback. Recent signals have shown a very high probability move in TLT to the downside (our pullback likely), thus the TBT long position as it moves opposite TLT.

However, VERY recently I have had some concerns about treasuries longer term which is fine, it doesn't change anything right now. If TLT pulls back toward its base around $102 and shows positive divergences (accumulation in to the pullback), then the TLT long term long position is still on the table and it can be picked up there on the cheap. If there is no accumulation in to the pullback, then my very recent concerns have validity and we can simply stick with TBT long or decide what to do at that point.

As pointed out earlier today in intraday market analysis, the intraday positive divergences in TLT were likely to put a roof on this morning's advance and as the market was following bond yields, so far that has been the case.

The reason for this update is two-fold, one if divergences were to keep moving in treasuries before the release of the minutes (as we know, the F_E_D has leaked them a day and a half in advance to Wall St. firms before via email) at 2 p.m., then we might have some evidence for a leak, although my gut feeling is that this is not a leak. 

Second, if you are interested in a TBT long, we may just get a little walk back and allow you to enter TBT at better prices with much lower risk. As far as TLT's longer term scenario, I'll cover it just so we can keep in mind what the trade set up would look like there and what we need to see, I'll cover the intraday as well.

 This is TLT within a channel. There is a distribution or churning bar at the yellow arrows just above the channel, since it's a 60 min chart it's not exactly what I'd call a channel buster, but it does appear the volume/price action was depicting churning at the recent highs.

The intraday signals (positive) that are starting to form in TLT "may" lead to a bounce and thus a better TBT entry for new or add-to positions, there's a slight chance it's a leak, but as I said I doubt that, however the most probable reason we are seeing some slight positives forming this morning would be some support in the form of a gap which price is sitting right in the middle of.

 This is TLT's long term 4 hour chart depicting the base as well as a negative divergence that gave me some hope that TLT would pullback to support, offering a long term (long) entry. This is also the scenario I'm a little concerned about , thus what 3C does on the pullback should tell us everything we need to know.

 TLT 60 min negative for a deeper pullback than just a typical correction (I'm thinking the $102 level).

The intermediate 15 min charts also negative, giving us a pretty decent entry signal for a TLT short or TBT long which is still an open position.

This is TLT's 1 min chart, positive this morning, the reason I suspected early strength would have a roof on it as bonds started to find support from the overnight selling.

The 2 min TLT intraday positive and these match the TBT intraday negatives, CONFIRMATION.

TBT 1 min negative

TBT 2 min negative. And just like earlier (this is why I'm doubting it's a leak, because it hasn't continued to accelerate the new divergence) the divergences stop around the 3 min chart.

This may offer us a chance at a pullback in TBT, especially if there's a knee jerk move on the release of the minutes. If there's a good opening, I'll post it as I think TBT is one of the few trades (right now) that has more than just a bounce inside the range, I think it has at least a sub-intermdiate swing move.

Correlations

As mentioned in yesterday's Daily Wrap... Index futures fell out of sync with USD/JPY yesterday although we've been seeing minor dislocations that seem to always come right back to the USD/JPY correlation, at least 5 significant events last week and we are already seeing a significant one this week.

"For instance, today ES/the market didn't track the USD/JPY as it held around its 200-day moving average, instead bond yields (one of our leading indicators) led the way for the market much of the day, as faithful as the carry trade correlation has been, it couldn't be counted on today."

Overnight once again, Index futures tracked bond yields rather than USD/JPY as the BOJ sent the carry pair lower.

Here are some example charts...

 This is USD/JPY (red/green candlesticks) vs ES (purple SPX futures), at #1 (far left / white box), this is the break of the correlation mentioned yesterday as USD/JPY held support around its 200-day moving average while ES plummeted, at #2 the correlation was still inverted overnight, at #3 we have the return or reversion to the correlation as the Yen seems to have seen some sort of intervention, pushing the USD/JPY higher after the overnight decline and at #4 the correlation is reestablished.

 This is a 1 min chart of overnight to present of USD/JPY vs ES and the reversion back to the correlation that broke pretty badly yesterday.

Overnight however as well as yesterday afternoon when the USD/JPY correlation broke, the market locked on to yields...

 This is the SPY in green from yesterday and today vs 5 year yields (remember yields move opposite bond prices).

This is the larger picture for Yields vs the SPX as a leading indicator, the market has some significant catching down to do to yields.

The two yellow boxes are what appears to be a small Crazy Ivan shakeout on both sides of the bear flag pattern.

This is what happened to Treasury futures last night across the curve (10 year benchmark) , the 5, 10 and 30 year all sold off in front of the F_O_M_C minutes release this afternoon and that sent Yields higher, the Index futures latched on to yields like yesterday.

I mentioned that Yields may drop off soon, at least near term, but it remains to be seen whether Yields or the USD/JPY will be the dominant correlation, right now it seems as if both are.

This is TBT, the UltraShort of TLT (20+ year treasuries), in effect it would be similar to TLT's yield movement as TBT is the opposite of TLT with 2x leverage. There's an intraday 1 min negative divegrence and that's why I said TLT and Treasuries look like they'll find some support and that may put a roof on the market's early move higher.

The 2 min TBT is also in a negative divegrence, not as large as there seems to be a very early form of migration.

At the 3 min chart TBT is in line so this would be VERY early in the process if Treasuries were getting ready to make an about face reversal.

 Really I'm not at all ready to say that, just that this near term action should have some effect on the market.

As far as the ES vs USD/JPY correlation that has now reconnected since this morning after reversion to the carry pair, it looks like a negative divegrence in the USD/JPY as well, you can see the negative just before the BOJ policy announcement overnight and a positive at the lows in early a.m. hours. The current negative along with action in Yields suggests that the market may have topped out for the moment which would not be surprising at all so close to the release of the minutes.

SPY is still in line intraday, QQQ is negative right now...

QQQ intraday

And the IWM has already lost ground to its early negative divegrence.

As mentioned last night, there's a lot of dispersion between the averages, I'm going to look closer at Industry groups and see if I can figure out which ones may be worth a look .