Daily Wrap

In what is going to become the new normal or at least the new dynamic as the F_E_D put is pulled from under the market (the only thing that has held the market up the last several years) it will be replaced with the equal and opposite, Rate Normalization.

I often say the market is like a pendulum, swinging too far one way and then too far the other way. For the last several years all we have seen is it swing too far one way in a nearly stupefying lack of common sense as traders who have come in to the market over the last 5 years think this "Is the Norm", it is anything but.

The market's unprecedented advance on one of the worst economic disasters and failed Keynesian experiments in economic history, likely only outdone by the Bank of Japan's incredible train-wreck (The F_E_D has never put out so much and got so little in the way of results, normally the economy would have turned back to growth within the 2nd or 3rd year, we are well past the 5th and just printed the worst quarterly GDP in 5 years despite a 4 trillion dollar F_E_D balance sheet expansion). The F_E_D has intentionally created the "Reach for Yield" or "Wealth Effect" ans thus the current market bubble by keeping rates so low for so long (ZIRP-Zero Interest Rate Policy) the F_E_D itself has created a whole new class of trader that has never seen anything else than the F_E_D's manipulated market and they think this is the norm, "It's different this time" are the famous last words that have sent many in to economic obliteration. Even the Bank for International Settlements, BIS which is known as the Central Banks' central bank, has said the path "Leading central banks" have taken has been akin to a band-aide with no results at the end and warns then not to raise rates too slowly or too late, this is what traders (retail) don't get because few have been around long enough to see a F_E_D tightening cycle, just look at the market around 2000 and 2007 and what comes next, except this time add an economy that never healed, huge unemployment, a global economic crisis and as the BIS warned, Central banks that are stretched so thin, it's questionable whether they have the ability to respond to even a normal recession.


Just today CYNK Technologies hit a valuation of $5.9 billion dollars trading on less than 100k shares a day, the problem, the social media development company has one employee, no website, no revenue, no product, and no assets. However, that won't stop retail traders in their "Reach for Yield" which is entirely created by the F_E_D's ZIRP interest rate policy which was suppose to spur capital spending, instead companies have elected to forgo spending and many have choose the short term sugar rush of share buybacks on borrowed (yes borrowed) money, nothing that creates growth, just more debt.

Make no mistake, the pendulum will swing way too far in the opposite direction. The ONLY thing that pushed the market higher was the  F_E_D's accommodative policy which we will be out of in October as the QE taper will wind down according to the June Minutes with a 15 billion final taper in October, after that it is the direct opposite of accommodative policy, Policy normalization in which rates will move from ZIRP back toward 4%, yet the economy never recovered. The jobless rate is a sham that is magically created by manipulating the labor force participation rate, once you fall off unemployment benefits, you are no longer part of the labor force and no longer counted as unemployed thus the unemployment rate drops even though 3 million Americans who otherwise would like a job will fall off extended benefits (as Congress did not renew them in this year's budget) and out of the labor force in 2014 joining some 91 million already not counted and not working regardless of whether they'd like to be or not.

What the average trader does not get is exactly what The St. Louis F_E_D president, Jim Bullard recently said on Fox Business News, "The market is wrong", the market has no idea how close the F_E_D is to its tightening cycle, even throwing out a date as early as Q1 2015, 3 quarters ahead of market consensus even as JP Morgan just "For the first time in recent memory" (their words) revised the rate hike expectations pulling it forward two quarters, still 1 behind Bullard's Q1 2015. This as we see more GDP downgrades even today. Remember, 2 consecutive quarters of negative growth=recession and Q1 was a disaster at almost -3% negative growth, and that's all weather? If so, the economy is in worse trouble than thought.

Here's the most current 2014 GDP downgrade...

From 2.9% to 1.7%

This morning after Portugal's largest bank missed a bond payment and that contagion spread like wildfire through sovereign bonds and US Index futures, it became very clear that Europe is far from fixed, especially the financial system. April's last trading day of the month which saw the second highest utilization of the F_E_D's reverse 1-day repo so banks could make their balance sheet look good (if only for a day, but the only day that counts) highlighted the US banking sector problems until the end of Q2 just a few weeks ago when the F_E_D's 1-day reverse repo on the last day of the quarter set a new record with an apparent bank shortfall of nearly 1/3 of a trillion in assets as they were borrowed from the Reverse repo facility only to be returned the next day (end of the quarter) to fool clients. investors and get this, regulators who happen to be the same people who lent them the assets, the F_E_D!

So we have a tightening cycle coming, a probable recession, inflation, stag-flation and stocks with no assets, no employees and no revenue with a valuation of over $5 billion dollars as moronic traders are willing to buy nearly anything put in front of them as most were forced in to the market due to the F_E_D's reach for yield and most have no idea what a tightening cycle looks like. All of this and 3C already looks worse now than it did in 1929! Yes, there's huge opportunity here, you just need to think outside of the box and react quickly to changing markets.

Today the initial move down was accumulated and apparently sold in to as the day wore on, not what I expected, but may have something to do with a pin for tomorrow's max-pain options expiration (weeklies). I was surprised as well by numerous momentum stocks that had clean positive divegrences for a bounce, they saw some significant damage today, most are still strong enough to bounce and thus be able to be shorted in to, but I'll be watching tomorrow to see if more damage is done which would raise the possibility of scenario number 2, that the positive divergences were just enough to keep the market from sliding down even further so options expiration max pain could be capitalized on as most options are written by Wall St. and most will expire worthless with their op-ex pin.

Gold made a new 4 week high, but as I showed earlier, I doubt it holds as GDX has a close correlation to gold.

USO closed up for the first time in 9 sessions, we may have a trade here,

Distribution at recent highs is clear, as is 30 min positive divergence recently, it's just the reversal process/base is a little tight so I'll be watching for a wider base in USO for a nice long trade opportunity, maybe a little leverage.

The USD/JPY was ramped right before the open and ES seemed to stick pretty close most of the day, but remember the BOJ has a line in the sand at $102 which they have and will defend.

USD/JPY vs ES (purple) today as the carry cross bounced off 101 around 9 a.m. before the open.

The Most Shorted Index saw a lot of shorting on the open,

However the MSI (red) didn't see much of a squeeze and remains negatively dislocated from the market (Russell 3000 shown in green).

The distribution at the end of the day in the major averages was surprising, there was some minimal accumulation in to the close, but I suspect we aren't going to know much until tomorrow's op-ex pin is lifted around 2 p.m., otherwise I suspect we probably won't see too much other than steering currents.

The Leading Indicators post today is exceptionally important, if you haven't seen it, make sure to take a look, you have to know where you are to know where you are going... Big Picture Charts / Market Map

The CBOE SKEW hasn't been updated yet so I'm not sure where it came in, but as you know the recent trend has been up and quickly meaning smart money has been buying out of the money, low strike puts expecting a Black Swan or worried enough to try to hedge any long exposure they have with these deep out of the money puts.

There was no Dominant Price/Volume relationship among the component stocks of the major averages, but interestingly among the 9 S&P sectors, Tuesday 8 of 9 closed red with only Utilities (the Flight to Safety trade) closing green, yesterday it was the exact opposite with 8 of 9 closing green and utilities being the worst performer, today it is flipped again with 8 of 9 sectors closing in the red with the only one in the green, Utilities up +0.68%.

If anything develops overnight in futures, I'll let you know.

GDX / NUGT /GLD Update

It was almost three weeks ago that we took our NUGT long off the table for a +40 and +50% gain, it turns out if we were willing to risk that 45/50% gain and sit through 3 trading weeks of chop up and down, we could have gained another 8%, but considering we made that +50% gain in 3 weeks, I don't feel too bad about having locked in the gain to wait for better weather to re-enter what I think will be one of the strongest trending long positions over the next year or longer.

Pre-F_E_D market intervention, gold miners use to lead gold, after F_E_D market intervention gold miners lagged gold terribly, but now that the F_E_D is moving out of accommodative policy and back toward policy normalization which means the exact opposite of accommodative policy and should have the exact opposite effect on the market as they hike interest rates from their ZIRP (Zero Interest Rate Policy) back toward their longer run average of 4% and end all QE as the taper (according to yesterday's minutes) is set to go out with a bang and final taper of not $10 billion a month, but $15 billion a month until QE ends and interest rate hikes start. As this is happening, many correlations that have been the norm over the last 5 years are starting to change which is something I predicted years ago in a 5-part video series in late 2007, "The economy is not going to get better until it takes its medicine. Sure we can put off the inevitable, but only make it worse. If you have food poisoning and feel nauseous you can fight it as long as possible, but until you take your medicine and get the ugly stuff out of the way, there can be no reset". My other prediction was that we face the opportunity of a lifetime, in fact probably an opportunity that no one alive has ever seen and it will be "Those who figure out the new market dynamics first who will win this opportunity".

Along those lines, we are already seeing changes like the return of gold which we called a top in back in 2011 and predicted at least an intermediate downtrend if not a primary downtrend in gold, and this at a time when everyone was a goldbug and it was very unpopular to say anything negative about the future of gold if it wasn't all roses.

Our 2011 gold top call was correct as was our trend forecast, however in 2013 we noticed a change and we've been tracking it since.

While gold miners may not actually lead gold in terms of price divergences, they are leading gold by a 2:1 margin industry group gains vs gold which is something that was missing under the F_E_D driven gold rush.

Just Tuesday of this week I saw major improvement on short term charts in GDX and NUGT which led to this post Tuesday, Trade Idea: GDX / NUGT however I said I would wait until it looked like NUGT was in a less risky area before I entered ending the day with this post, No long Entry for NUGT/GDX yet.

When you have mixed or inconclusive signals, it's amazing how quickly things can change, by the A.M. Update Wednesday morning I had said,

"The Minutes are released at 2 p.m. if they weren't already leaked, judging by yesterday's trade activity, I'd guess they were leaked, which may have me reconsidering some positions I was considering such as NUGT, I'm thinking it may see a head fake move through resistance and then a pullback, but I'll wait to see if that happens and what underlying trade looks like if it does."

It turns out, so far that paragraph was accurate right too the details. Here's Wednesday's close for GDX/NUGT...

 Yesterday , the same day I wrote the above paragraph before the open, NUGT / GDX broke out above resistance,  I'm thinking it may see a head fake move through resistance and then a pullback

Then during the day I followed up that analysis with these posts, GDX/NUGT Update and GDX / NUGT. 

While the intermediate charts suggested the strong probability of a pullback, the short term charts lacked confirmation or clear signals and it seems the rapid improvement on short term charts the day before was about nothing more than yesterday's breakout above resistance, something I suspected would be a failed (head fake) move.

So far when counting today's close, it looks like that analysis was right on.

Today's close down created a bearish engulfing downside reversal candle on heavy volume meaning the breakout above resistance as suspected was more than likely a false or failed head fake move as I wrote early Wednesday morning before the open.

The charts in Junior miners seem to be clearer. While I'd love to make some extra money by trading DUST (3x short gold miners) while GDX pulls back, make no mistake, the large base in GDX and NUGT suggests these two haven't even broken out of the stage 1 base area, much less stage 2 where 80% of the gains are made in the trending phase. the take-away is , "If we can make extra money in DUST while we wait for the pullback in GDX/NUGT to end where I'll be a buyer of NUGT again, then great, but I would not risk the +40 & +50% profits already booked in NUGT if the DUST trade signals are not strong and clear.

GLD which is closely correlated to GDX/NUGT...

 GLD's long term 60 min chart has a strong, large base able to support a multi-year trend, however near term...

The 30 min chart has been in a negative divegrence for nearly 3 weeks as well as a choppy range that is a portfolio/position meat grinder.

And since the end of window dressing starting on July 1st, there has been a clear 5 min leading negative divegrence making the moves in GLD above the range look like confirmed head fake moves that will likely see quick moves to the downside capturing bulls in a trap.

This is what I didn't want to get caught in with GDX/NUGT.

 GDX and NUGT have had a strong 15 min (intermediate) negative divegrence which has held them in a range not worth trading so the exit of NUGT to protect gains up to +50% makes sense, The recent strengthening in GDX that I thought may mean the consolidation is about to end seems to have been for nothing more than a head fake move above resistance.

For an Inverse H&S price base, the most important volume confirmation is the breakout which should see huge volume, if you look at the daily charts above of yesterday's breakout, you can clearly see without any help from 3C the breakout is very suspect on average volume.

This is a 5 min chart with some of the recent strengthening mentioned at the white positive divegrence, but it seems that was only for a head fake breakout as the next day (today) it's leading negative.

I have no problem trading DUST until GDX/NUGT are ready to buy long again after they take a rest and much needed pullback, however I won't trade DUST just because NUGT and GDX are expected to pullback, DUST MUST have its own set of strong and clear signals which at this time,  it does not have.

Perhaps something changes tomorrow, but the larger trade here has always been GDX/NUGT long, DUST is a bonus if it works out, but it's not worth the risk without clean. clear and confirmed signals just like any other trade.


I'll of course let you know when I'm looking at re-entering NUGT long and /or GLD.

MCP nearly 18% intraday reversal

As you know I have high standards for options trades, the signals have to be very strong, the discount on premium has to be there (for instance MCP was down at least 6% when the call position was opened today, a significant discount on the call premium, Trade Idea (Options): MCP) and the charts need to stand out or jump off the screen as I would normally say, MCP Charts. Remember, our last options trade in MCP (although there were several areas we considered between now and then) was June 3rd.

MCP was down almost 13% intraday and closed up nearly 5%, this put our call position opened today at a significant gain on the first day (half day actually)...

So far a gain of nearly +50%

 The daily chart ended with a nice looking candlestick on heavy volume. As you probably saw earlier, some indicators I usually don't use were giving strong signals, but among the 3C charts this is probably the most significant near term for an options trade...

 The 5 min chart never lost its leading positive divegrence despite price action that was driven by Seeking Alpha articles posted after the close with losses coming the next day, that wreaks of retail selling, not institutional.

I think there's something  big in the pipeline like there was for RIMM which has kept the long term charts looking so good, I suspect Goldman is involved and it has to do with a financing deal, likely one that won't dilute shares or not as badly as perception.

For now, congratulations if you grabbed some of those calls and I hope we keep moving in the right direction. Today's reversal was something else.

Big Picture Charts / Market Map

When you watch the market every day like most of us do, even every minute like I and many of you do, it's easy to get lost in the lines, to miss the big picture. It's easy to see a certain market behavior day in and day out and assume that this behavior will continue indefinitely, but it doesn't. The bubble buying crowd's mantra is, "It's different this time" and just as Alan Greenspan said housing prices would never decline or Ben Bernanke said "Subprime is contained", Janet Yellen's recent observations that the market is not a cause for concern (the press conference on 6/18 after the F_O_M_C policy statement) is either clearly wrong as her predecessors were and she herself says she was blind-sided by subprime while many had warned (including myself) that housing was an unsustainable bubble. In fact I had noted that many of my neighbors and friends who were stay at home moms or home-schoolers had become real-estate speculators and when that happens, you know the party is about to end.

The case for the equity market bubble is easy, the F_E_D printed trillions over the last 5 years, expanding their balance sheet to $4 trillion dollars, much of the newly printed money was forced in to the market by the F_E_D's ZIRP (Zero Interest Rate Policy) as people searched for some way to generate a return greater than virtually zero, this is a bubble (as most have been since 1929) of the F_E_D's making. the rationale for the bursting of the bubble is simple, without the F_E_D's easy money which is ending, there's nothing there to support the market, no economic recovery, no cap-ex spending, no consumer discretionary spending, a deceptive unemployment rate which is likely at least double the official estimate, a growing inflationary trend and quite likely a recession as we get the GDP print for Q2, a second negative print like Q1 puts the US in technical recession.

However you don't need to come here for that information, here's what I wanted to show you, largely taken from our Leading Indicators.

 This is High Yield Corp. Credit intraday vs the SPX (green) which was clearly signaling the market would come down intraday as it has. It has been a long time that we've been using HYG as an intraday or very short term leading indicator as it is an effective one. Credit markets are much better informed than equity markets, thus the saying, "Credit leads, stocks follow", which is why it is surprising to see a signal that is more than intraday or short term.

 HY Corp. Credit first gave ground in May, however it is now at a leading negative divergence vs the SPX that we haven't seen for quite some time, it is by far the largest dislocation in well over a year.

 Intraday high yielding Junk Credit was also signaling an intraday turn lower in the market averages, but beyond that...

It too is signaling a larger market decline.

High Yield Credit is falling apart a well

Professional sentiment has been selling off, interestingly since the end of Q2 and window dressing, this should tell you a lot about the need for window dressing, but even more about the state of the equity market if it sells off so hard at the first possible chance after window dressing is over, July 1st.

Our second or back-up indicator for the same is showing the same.

However, this is the one leading indicator that has not been wrong yet, 10 year yields...

Here we see a long term view of them, to the far left they fell on the first initial mention of ending QE when the F_O_M_C was very hawkish last year and had said they envisioned it would be wrapped up before the end of 2013, which sent the bond market in to a tail-spin and rates dropped so fast it scared the F_E_D in to not talking about a QE taper for another 4 meetings.

It's the bigger, more recent signal that is really telling us something.

 Here we have 10-year rates vs the SPX (green), note that at the February rally/short squeeze "A" yields fail to make a higher high as they had been doing at "B" which is the 3 month range in the SPX that we expected to see a head fake move above before the market would turn down. At "C" we got that move above and the signals to tell us it has been a head fake move, but just as if not more importantly, look how 10 year yields diverge even worse.

Just for some perspective...

 Here we have the SPX (green) vs 10-year yields as they make a small divergence at "A" and send the SPX on a correction down in late March 2007. At "B" we have a higher high in both as we should, but at "C" we have another divergence in yields sending the SPX down again, at "D" yields fail to make a higher high which  happens to be the very top of the bull market, everything after that was  leading to the 2009 lows. The point is, 10-year yields have called several market tops as well as the 2009 bottom and have not given a false signal yet.

Now, take a look once again at the SPX at the 2007 top above vs 10-year rates and...

The SPX and 10-year rates right now, I'd say the divergence is every bit as bad if not worse and the 2007 top did not end well.

Market Update

This update is the exact reason I keep saying I want to wait, let price come down and see how everything reacts, for a healthy bounce which would make sense here, we should see accumulation of lower prices as we did on the gap down open this morning, but so far what we have as price has reversed just a bit ago not too long after the last update expecting a downturn, actually almost exactly after the last update, is the look of a market that accumulated this morning on the open, not part of a bigger base as was expected, but to fill the gap as there seems to be a decent bit of distribution in to filling or attempting to fill today's gap. 

There's still time for accumulation of lower prices to show up, but thus far let me just say I'm glad I didn't make any additional moves in preparation for a bounce and if the market just happens to bounce tomorrow I won't have a problem with having missed a piggy-back long trade, you have to make decisions with the best information you have at the time and at this time, I cannot justify entering any piggy back longs based on the chats this afternoon.

I also wanted to show you this post before I show you the next which is a bigger picture, Leading Indicators post which will probably open your eyes as to where we really are in the market right now.

 DIA intraday is seeing way more intraday distribution than is necessary for a intraday reversal to the downside, I was a little concerned with this in Market Update 2 today with the IWM. 3C is at a new leading negative low for this chart.

DIA 3 min with accumulation on the 8th, however today's action is distributive as well as migrating across timeframes indicating a stronger negative divegrence.

 There's no reason the DIA 5 min chart should have to go negative for an intraday reversal, note  the DIA missed the gap fill and of course the Dow missed 17k again.

 IWM 1 min was the chart I was a little concerned with earlier today, it has just gotten worse with a new leading negative low on the day.

 There's migration to the 2 min chart which is not just a relative negative divegrence which is all that was needed for a downside intraday reversal, but leading negative and approaching a low below the 8th.

The stronger 3 min chart looks as if the gap down this morning was accumulated only to be sold/distributed in to higher prices today, there would be no reason to do this to sell long positions (you already have the if you are trying to sell them so you wouldn't accumulate the gap down), however if you were trying to sell short in to any price strength, you'd likely accumulate the lows to form support and a lift to short in to higher prices.

Again, another leading negative low approaching the positives from July 8th.

 The IWM 5 min is still in shape which is interesting.

QQQ 1 min filled the gap and distribution became very strong, leading negative after the gap was filled.

 The same happened with the 2 min chart

We can even see it migrating to a 5 min chart which there's no need for.

 SPY 1 min leading negative as the reversal kicks in

2 min seeing migration from the 1 min chart as it too is leading negative

As is the 3 min chart so that's a lot of confirmation, a lot of deterioration and very quickly.

And the 5 min chart is now involved as well.

We will see soon enough if lower prices are accumulated for a bounce, right now though I'm happy to have been patient.

MCP Position Management

Today's earlier MCP call position, Trade Idea (Options): MCP, is now in the green double digits as MCP was down -13% earlier today and is now at break-even with a 0% loss for today.

One of the more interesting developments other than the money-flow charts, MCP Charts , is probably the way it appears the daily chart is going to end.

Yesterday's volume looked like a selling climax/capitulation, today's looked like stops were intentionally hit down around $1.60 which just so happens to be the valuation Seeking Alpha put on MCP without a capital raise. Today's candlestick, thus far, is a bullish Hammer (upside) reversal candle and as we see 90% of the time, heavy volume on such candles makes them more effective by a margin of about 2:1.

Market Update

So far it still looks like the most probable scenario described yesterday and last night, Daily Warp is still the most likely scenario.

We have essentially completed what I was expecting conceptually, although it doesn't look exactly like last night's drawing of what I expected which was this...

You can see where we ended yesterday and what I drew in for today as they are arrows . I expected price to come back down to recent lows/support and break below that (yellow arrows) which is a stop run, the reason is it opens up a lot of supply at low levels which can be accumulated easily, something that's important when you are trading in institutional quantity, not so much when you are trading 100-200 lots.

Thus far that's what we got today...

Price came down on an opening gap as Europe has proven "Nothing is fixed", we broke under recent lows/support (yellow) and volume popped up as stops were hit because technical traders are as predictable as the day is long which is exactly why I knew last night that we'd see a head fake move to run the stops last night before it happened today, Wall St. knows retail traders are predictable even better than we do so if you know what Wall St. knows about retail behavior, you can in many ways, predict Wall St.'s behavior.

The end result should still be what we were looking for the very first day of accumulation on Tuesday the 8th, a wider base. The market can only bounce so far and that depends on the base supporting it, even though the bounce ultimately is irrelevant, there are trades that can be made, there's a lot of useful information as well.

The next bit of useful information would come on an intraday move down. We wanted to see a move down today to see if it was accumulated, as far as I can tell it was, another intraday move down would help solidify that as this market is very weak so I don't want to enter trades or change positions without darn good reasons/charts to back up that decision.

Thus far here's what I have in Index Futures and the averages.

 ES/SPX Futures intraday have a small negative intraday divegrence, volume has fallen off significantly.

 NQ/NASDAQ 100 futures show the same thing, accumulation of the gap lower as we were expecting and intraday negative divergences that should turn intraday price down, which I'd expect to be accumulated and this is where we might get off some short term piggy back trades like call options or maybe leveraged longs, but I'd really like that confirmation of another leg down that is accumulated.

We have to keep in mid as well that we have an op-ex Friday tomorrow as well so we may be around a max-pain pin area.

Again volume has fallen off significantly.

 And the same for TF/Russell 2000 futures.

As for the averages...

 SPY accumulation of the lows/stop run and recent intraday distribution, very small, but I would have thought it would have turned prices lower intraday by now.

 SPY 2 min isn't showing anything out of the ordinary or unexpected I should say as this morning's gap down maintained a leading positive divegrence as 3C never followed price lower, The negative divegrence late yesterday suggesting a lower start to the day yesterday is clear at the red arrow.

 SPY 5 min maintains the overall positive divegrence from 6/8 lows and today's, the "W" or double bottom base I was talking about yesterday. Intraday inside the white box, there's a relative negative divegrence, this is a much weaker overall divergence than the leading positive (white box), but does suggest there's small distribution as we move higher intraday and prices "should" turn down, if they don't, I'm not comfortable chasing them (opening a long without prices pulling back and also confirming again they are being accumulated in to lower price moves.

 QQQ 1 min shows the exact same

As does the 2 min

IWM 5 min actually look interestingly strong as it is leading positive meaning strong accumulation on today's move lower on the open as stops would have created a lot of supply.

I might consider moving positions like SRTY ((3x short IWM) in favor of a short term URTY (3x long IWM) for a short term bounce, but to trade against the main underlying trend, I need more evidence and a less risky entry.

The TICK chart is suggesting these intraday negatives are about to turn prices lower which is where we can gather some good information. However, this isn't the first time today the TICK suggested a turn lower.

I'm going to check leading indicators as well as the momentum stocks and see what they are doing.