MCP Update

I was looking at MCP as a possible sell to raise dry powder as I think we'll be extremely busy next week, likely right off the bat Tuesday afternoon, but after looking at the charts and the bigger picture, MCP is at the point where I'd call it, "A chart that I don't ignore".

I think it's much more likely that MCP is added to early next week as I think we get a little downside, see yesterday's post, and that's likely about all we get.

This is the little bit of downside I think we may get early next week as this is a 1 min chart and 3C charts tend to pick up where they left off, even over a holiday weekend. This would bring MCP back to the area where it has been seeing prior accumulation, the reason I don't think we get much more?

First there is the large base and the reason we exited MCP on a nearly +6% breakout day, MCP HAD NOT YET SEEN A HEAD FAKE MOVE ON A VERY LARGE BASE WITH CONSISTENT AND VERY VISIBLE SUPPORT AT THE $4.50 AREA.

 As you may recall, even after the bad earnings reaction, the MCP charts stayed strong, just like the RIMM scenario when we were long in to bad earnings and took some double digit draw down, HOWEVER THE CHARTS STAYED STRONG IN RIMM GIVING ME NO REASON TO CLOSE THE POSITION. 

It was only several weeks later that we found out the real reason for the strong 3C charts, it wasn't earnings, it was a massive shakeup in management in which the twin CEO's stepped down and RIMM was going to be completely restructured which the market liked as did we as it sent a double digit decline in to a double digit gain in short order, SO LONG AS THE CHARTS STAY STRONG  and in MCP's case, they are strengthening, PLUS, we have our head fake move...

 Here's the base with VERY consistent support or a range, this is the reason we exited (correctly) a nearly +6% breakout day, the concept of a head fake move below a very obvious range had not been met, thus I didn't trust the breakout from a descending triangle, we were right not to as we only gave up 1% gained the next day before MCP's breakout was revealed as a false breakout or head fake, which 3C confirmed the day of the breakout.

The move below support now is proportional to the base and the reversal process...

Is proportional to the head fake move.

Why do I call it a head fake move when it hasn't proven it yet by breaking back above former support (now resistance)?

Charts like this 30 min that continue to lead.

Or a 60 min like this that never confirmed the break lower just as the break higher was never confirmed and ended up being a head fake move.

Thus, no extra dry powder here, I'll likely be looking to raise more so I can add to MCP , I suspect early next week.

A Few Broken Levers

I still need to take a look at USD/JPY, but I don't feel it's that pressing because of the earlier charts with $USDX negative out to 60 mins, that's where the probabilities are and all shorter term charts almost always resolve toward the probabilities, in short, the USD/JPY lever is about done and it was all that was left yesterday.

$1900 is now in the rear-view mirror, it's just too much of a psychological magnet for the market not to hit it with all the little goodies as price passes $1900, however this is more about the broken levers and the probability of a 3-day candlestick pattern (today being the first) like I posted here, $1899.61 and Counting.

The SPX has to move, what +0.44% to hit $1900, not even.

In any case, the candlestick pattern (and I'm forecasting this based on the condition of the charts and levers available) would look like the chart posted already,

That's a common candlestick reversal pattern.

As for the levers, they'd be HYG, TLT and VXX.

 HYG's longer term 15 min chart already has seen some pretty intense leading negatives very quick (2-days). Not too surprisingly, the intraday HYG went very negative just as the SPX was pulling in to $1900, I'm sure they figured it was a done deal and they don't want to be caught without a seat holding HYG when the music stops.

TLT, which went positive yesterday and forced me to close TBT, Closing TBT (long) For now, looks like it will fill the gap early Tuesday, that would give us the shooting star, the second candle of the 3-day formation on Tuesday as TLT moves (generally) opposite the market.

The 5 min positive in TLT is also a higher probability for more upside there (downside in the market), but has a relative negative (weaker form of divegrence) which also suggests a gap fill and some kind of star, doji, hanging man or shooting star in the SPX Tuesday.

Wednesday would be the confirmation (downside reversal) candle with a move lower below Tuesday's close and in to Friday's body (range) or even below it with an engulfing pattern.

This is a pretty specific forecast, but it's just based on what I see in Futures and charts.

TLT's 10 min is leading positive, the gap fill on Tuesday would round out the "U" shaped reversal pattern nicely.

And as for VIX short term futures, this is leading like mad, there seems to definitely be real demand that is holding price together here.

More confirmation and note it hasn't broken under yesterday's low where it found support and spot VIX actually closed up after more than 8% down the previous day.

There's also a nice reversal pattern in place there.

I'm really looking at raising cash where I can for Dry powder early next week, TBT was part of that.

And VXX /UVXY 15 min leading positive, I'm not sure if there's a head fake move already in place here or not, I don't think it matters much with signals like this.

For more information on all of these assets (except HYG), see the earlier Futures update as it confirms the VIX and Treasuries.

Futures Update

FXI / FXP update

FXI is a current June $36 Put position, I still like it a lot and would consider adding here if I didn't already have the size position I want. Another way to play FXI short would be FXP which is the UltraShort (2x leveraged China 25).

here are the charts, why I like FXI short or FXP long and why FXP long (even though volume is significantly lighter), may be a better choice.

 FXI 3 min has not only not confirmed the move to the upside this week, but it is now leading negative to a new low today in a very flat trading range where distribution is often found.

This 10 min leading negative of FXI is one reason I think FXP might be a better choice as the options position (as I use them), may not be the best tool to catch the duration of this trade/position.

The 60 min FXI chart shows the same, this looks like a short of some significance as far as trade duration and a leveraged ETF may offer a better solution (as far as time decay and draw down go).

FXP.. signals are not as good here because of the significantly lower volume.

 However there's confirmation in the leading positive divegrence (negative in FXI).

We see the same and confirmation on a 10 min chart making FXP a tempting long at 2x leverage.

And the 30 min chart with a very strong leading divegrence.

The divergence goes all the way out to a 60 min chart, this is the trade duration I was talking about and if I had to choose again, I might just take FXP here over FXI puts.

I doubt FXP calls have the volume to be worthwhile.

$1899.61 and Counting

$1900 is a definitive psychological magnet, I find it hard to believe we could be so close on the SPX and not tag it, but I also see lots of weakness there so I don't expect much, maybe something similar to the last break above resistance with a candlestick reversal pattern like this...

That's a clear reversal pattern with the strong breakout candle the first day, the loss of momentum with a Shooting Star (bearish reversal candle) and a confirmation candle the 3rd day.

The thing is, there's lots of little goodies above $1900, increased volume means more volume rebates, but more than that, it means more in the way of the pennies that =a lot of money on the bid/ask spread, it also sets up some nice trades.

As for the charts, more damage today (although the market is showing a lot of rotation, I suspect it's not as much as we'd see in a healthy market, but after years of QE and EVERYTHING moving together, it seems to be more significant).

I suspect by the lack of TICK breadth negativity that we are seeing a lot of short squeeze activity, just look at NFLX.

Charts...

 DIA 1 min

More importantly, especially given VXX data, DIA 2 min

IWM 1 min and again more importantly...

IWM 3 min, this is the most these averages have lost in a 1 or 2 day period since last Friday when this theory was put forth.

 QQQ 1 min intraday like the rest, but beyond that...

Lots of damage-5 min

SPY 2 min, lots of downside today alone

SPY 3 min.

I'm thinking something similar to the first chart of this post is a likely resolution, which is nice as volume will be back up as most traders are already in the Hamptons, remember the US is closed Monday, so Tuesday would be the day we'd be looking for that star, also the best entry area.

Futures Update

I use to think the market was as easy as knowing what the averages were likely to do, knowing what the Industry groups and sub-industry groups were likely to do and then making decisions about which way I wanted to trade based on market direction, which Industry group looked like it had the most potential and then the sub-industry group, finally the stock.

Many traders start this process backwards and choose a stock to trade and then hope the market cooperates or just have no idea how much the market influences the movement of individual stocks.

Then I started to understand what things like a "Carry Trade" were and why spotting the formation of a new one or the decline of an existing one was important information, although it wasn't stocks/equities, but currencies. For example, a fund has something called "AUM" or "Assets Under Management", essentially the dollar amount invested with the fund. However if a fund sees a big opportunity in the market, they want to leverage up their AUM as a 10% return on an AUM of $100 million is much smaller than a 10% return on leveraged AUM of say $500 million, but for the clients who still have a total of $100 million invested, the performance or outperformance is stellar and that's the key to a fund manager keeping their multi-million dollar job and clients. Consider this, the top 25 hedge fund managers make more money than the top 500 CEOs altogether! In fact, about 4 times more than all of the CEOs of the S&P 500 companies combined! The average has moved around over the last 10 years, but the average for these top 25 managers is $500 million to $1 Bn a YEAR, depending on the year. That's a job they want to keep!

The point is, knowing when they are leveraging up with currency carry trades tells you something about their expectations, those carry trades can increase their leverage from 10x to 100x, some even more. Conversely, when things aren't looking too bright, a 1 pip move against an open carry trade can mean millions of dollars lost and you tend to see them closed.

Take a look at one of the larger Carry Trades...

Weekly USD/JPY chart...

It's pretty obvious where funds were leveraging up and where they are trying to get out without taking a loss or trying to keep gains.

The next extension of that is to understand the individual currencies in the pair to understand where it's likely to go and how managers will react being leverage cuts both ways and can destroy a fund faster than anything we've seen, read about Long Term Capital Management, the smartest guys in the room created a super fund, this included two Nobel Prize winners for economics. The fund returned (on an annualized basis) 21%, 41% and 43% the first 3 years and then in 1998 lost $4.6 BILLION Dollars in 4 months! The F_E_D had to step in as the failure of LTCM jeopardized the entire US economy.

Back to the "Leverage cuts both ways"... LTCM was known for their excessive use of leverage to generate these returns, but as I said, it cuts both ways...  In the first three weeks of September, LTCM's equity tumbled from $2.3 billion at the start of the month to just $400 million by September 25. With liabilities still over $100 billion, this translated to an effective leverage ratio of more than 250-to-1 !!!!

Here's how bad things got...

Goldman Sachs, AIG and Berkshire Hathaway offered to buy out the fund's partners for $250 million, to inject $3.75 billion and to operate LTCM within Goldman's own trading division. The offer was stunningly low to LTCM's partners because at the start of the year their firm had been worth $4.7 billion. Warren Buffett gave LTCM less than one hour to accept the deal; the time period lapsed before a deal could be worked out.

So obviously there's a few lessons there about leverage and about how the Carry Trade works and what you can learn from it.

I realized Bonds/Treasuries meant a lot, even though they weremn't equities, money was either flowing in to bonds from equities as the "Flight to Safety" or from bonds to equities as the "Risk On" trade. What bonds/Treasuries are doing give us a lot of data, this is why Yields are one of my favorite leading indicators.

Credit traders are some of the smartest guys in the room and I'm not talking about anything to do with credit cards, but typically corporate offerings, junk credit, High Yield, Investment grade, the flow of credit from HY to IG tells you a lot about the market, in fact so much so, the Wall St. maxim is "CREDIT LEADS, EQUITIES FOLLOW".

IN ANY CASE, THE POINT IS, THERE'S SO MUCH MORE INFORMATION OUT THERE BEYOND STOCKS AND MARKET AVERAGES, I could go on and on about $USD correlations, what it means to commodities, gold, silver, and stocks and how that has changed because of QE and how it's changing again now. NOTHING IS STATIC IN THE MARKET, IT'S LIKE A LIVING , BREATHING ANIMAL OR PARASITE (depending on your perspective) FED BY HUMAN EMOTION (no wonder it's so extreme).

So lets take a look at what some of the Futures charts are telling us...

The easiest feel for the market is right here in Index future 3C charts.

 You know I was interested in what would happen to the 5 min SPX futures (ES) as they reverted down to the 3C negative divegrence on the decline earlier this week, this is what happened, it has gone leading negative, but this is just one part...

 The 15 min chart is leading negative

The 30 min chart is leading negative and a lot of this is right in the area we expected distribution, on a move ABOVE the bear flag formed last week, and we suspected that move was exactly for this reason...DISTRIBUTION.

When you think about a $1 bn salary for a hedge fund manager, you can just imagine how large their positions are, things don't move as quickly as we'd expect until there's real trouble and then we can see several months of gains taken out in 1 morning (look at the 2008 market or the 2000).

 ES 60 min is in line, but these divergences are fairly new as prices reached above the bear flag where distribution would take place, the fact they even showed up this quickly tells us there's a high level of urgency and that was evident in VIX futures yesterday as well as TLT.

 The NASDAQ 100 60 min chart however is negative, I suspect ES will be there within a day or so.

Treasuries...For now I have to assume these are still being treated as a flight to safety trade, we saw TLT accumulating yesterday suggesting a move out of equities on this week's move and in to the safety of Treasuries, this is why I closed the TBT position yesterday, Closing TBT (long) For now

TBT is down -.86% today so thus far it was the right call, it's the continued movement in Treasuries that would be interesting to us.

 30 year Treasury futures on a 30 min chart are leading positive and just over the last couple of days suggesting distribution in equities is seeing the funds move to treasuries.

The 60 min 30 year T chart has a negative divegrence, I did say I expect to be back in TBT long (TLT short) soon and I still have an expectation of a TLT pullback near the $102 level, this chart would tend to suggest that we are on the right track, but first there's some upside and it looks to be the Flight to Safety Trade.

10-year benchmark Treasury Futures (these set interest rates from car loans to credit cards to mortgage rates...

 The 5 min 10 year is seeing accumulation like TLT was, REMEMBER , YIELDS MOVE OPPOSITE TREASURY PRICES AND YIELDS TEND TO PULL EQUITIES TOWARD THEM LIKE A MAGNET SO THIS CHART IS BEARISH FOR EQUITIES.

 30 min 10-year is also showing a recent and strong leading positive divergence.

 The longer term 60 min chart is similar to the 30 year, I think there may be a changing dynamic with the F_E_D backing out of bond purchases and with no China to buy, we don't have evidence of this yet, but it's something we're looking for.

USD/JPY and loitering...

 As I have said in regard to several assets this last week, when support is broken, they tend to test former support (now resistance) and "loiter" in the area for a few days before breaking to a lower low, you can see the USD/JPY did break support this week and then moved up to loiter back in the area.

Yen indications, a rising Yen means downward pressure on the USD/JPY and thus the market as well as the carry trade which means market positions have to be closed to close out the carry trade.

 Yen 15 min leading positive divergence.

Yen 30 min leading positive divegrence.

As I said yesterday, just about all of the market ramping levers have been exhausted, the last was the USD/JPY and it failed overnight to ramp Index futures, moreover, it looks like the pair itself is ready to fail based on Yen building positives in strong timeframes.

The $USD, the other half of the pair...A rising $USD usually is bad for the market, for oil, precious metals, commodities in general, but because of the Carry Trade, it is actually good for now, so a falling $USD puts downward pressure on the USD/JPY and thus the Index Futures. 

 This is the 5 min $USDX leading negative..

 Note the similarity in the $USD divergence above this chart and the ES 5 min negative directly above, this is what I mean about all of these seemingly unrelated correlations giving us very valuable information that few others look at.

To make money you have to see what the crowd missed.

 $USDX 15 min leading negative and note how strong and how fast it developed.

And most ominous for USD/JPY, $USDX leading negative 60 min chart.

VIX Futures... 

 Yesterday I showed you the increased positive activity in VXX/UVXYY, well here it is in the actual VIX Futures with a 15 min leading positive.

 Look at the size and how fast the VIX 30 min went positive.

And most importantly, the 60 min. The amount of movement on timeframes this large, this fast suggests we are at or very near a pivot point.

YG... Gold futures...  While they don't have the same level of market correlation/inverse correlation, they often move opposite the market on smaller swing type moves.

In any case, the correlation with GDX/NUGT is strong and we are interested, this is a 30 min leading positive in Gold Futures.

We'll also take a look at gold and silver themselves, but becareful not to have too much exposure to any one highly correlated group.