Daily Wrap, F_O_M_C Knee Jerk Style...

Watching the market intraday today you might have had the impression it was a strong day, after all AAPL did make an all time new high, but then perspective comes in to play such as AAPL's all time new high on a gain of +0.04%!

The averages themselves were all over the place with the Dow-30 leading at +0.35%, the NDX with a gain of +0.01% which is as close as you can get to flat and still color the candle green and the market leading Russell 2000 at a loss of 0-0.44%, the biggest move of the day in the major averages.

 That's the R2K in yellow on the day.

The big mover today and this week (on track for the best week in 9 months and just shy of 1-year highs), the $USD...

This is a daily chart of the $USDX, note the last 3 days (this week).

I warned about the F_E_D inspired knee jerk reaction as I always do and we got it just after an initial drop in stocks as the VIX was hammered lower, the market knee jerked higher, although I showed you the distribution and TICK index in to the move, thus it's easy to see why these knee jerk moves are almost always wrong and faded which started to happen in to the close.

High Yield Credit wasn't buying the knee jerk, there's smarter money at work in the credit markets.

HY Credit selling just as stocks knee jerk higher after the release of the minutes,  price action is rarely what it seems, not to say price isn't king, but if your not careful about reading it a king can quickly become a pauper.

Speaking of Credit, you've heard me say that HYG has been leading the market since the base started forming for this bounce on 8/1, I probably showed it a few times as well as I have shown the deterioration in HYG. Today was the end of the leading for HYG.

HYG, a main-stay of market manipulation leads the SPX the entire time since Aug 1, but reverts to the SPX today.

As the minutes were released a lot of assets moved, the $USD popped significantly higher, around 1% now on the week, Treasury Yields popped 3-4 basis points higher as T's fell, but that story looks like it may just be getting started as TLT put in a positive divegrence (shown earlier today after the minutes), HY credit seen above hit the worst levels of the day, Crude (WTI) jumped 1%, gold fell modestly, but don't forget about this post...GDX , NUGT & GLD Charts. And interestingly as we have been watching for several days, one of the most important metrics of the bounce...

 Index futures broke below VWAP on the release of the minutes, but you can't distribute below VWAP and expect to keep clients as a market maker/specialist.

So back above and back to distribution...

There was no single Dominant P/V relationship, the Dow saw Close Up/Volume Down with 15 stocks, this is the most bearish of the 4 relationships, the NDX saw the same with 42 stocks, the R2K was mixed with Close Down/Volume Down and Close Down/Volume up, the latter may create a 1-day oversold condition, although it wasn't dominant (co-cominant).

6 of 9 S&P sectors closed green with Industrials leading as you might have guessed and 133 of 239 Morningstar Industry/Sub-Industry groups closed green.

Today for the first time in a week or so, Pro Sentiment was down.

Pro sentiment takes its first dive since, well I believe since the bounce started.

As for market breadth, there was virtually NO CHANGE from yesterday either way.

I suspect we'll see the Knee jerk dust settle and I don't think the end result will be a pretty one. I think the performance of the averages today even with the knee jerk (and the Russell dislocated from the pack) show we are running out of gas.

The very short term intraday indicators may reset a bit, but the 5-15 mi charts should start showing some real acceleration in divergences, along the lines of intraday trends for the week...

SPY intraday trend accelerating leading negative divegrence should be appearing on the base divergence charts as it started on the SPY 10 min today,the QQQ 10 min (relative negative with the 15 min in a nose dive)...

 QQQ 15 min with the base 10 min negative today while...

The IWM's 15 min base positive also taking a leading negative role lower.

What the F_E_D Really Said & Has Been Saying

In the F_O_M_C minutes released at 2 p.m. today one of the bullet points was voting members were uncomfortable with forward guidance, this is nothing new, they were uncomfortable with it nearly a year ago when they changed guidance from quantitative to qualitative, which is like going from the old guidance of "Rates will be kept at ZIRP until at least Q1 2016", whereas Quantitative Guidance (which seems reasonable) allows the F_E_D to make it up as they go along. No one can count on guidance from the F_E_D as it's now "data dependent" which again seems reasonable, but the F_E_D has always forecasted based on the data,  this neat little trick allowed them to up-end guidance completely on an arbitrary basis as we all should know by now that the unemployment target of 6.5% which was suppose to end accommodative policy is easily manipulated by cutting extended unemployment benefits as was done earlier this year in the Congressional budget, 99 weeks was no longer funded and in Florida anyway, it's back to a measly 16 weeks, half of what it was before extended benefits (use to be 32 weeks). As the unemployed falL off unemployment benefits, THEY ARE NO LONGER COUNTED AS PPART OF THE WORKFORCE, (some 3.1 million this year alone).

In other words, lower unemployment now is largely a function of the unemployed no longer being counted as they are considered to no longer be a part of the work force and thus, "NOT UNEMPLOYED"!

The same tricks can be used to just about any data series whether through revisions or seasonal adjustments that are totally arbitrary, the F_E_D and government can create virtually any set of numbers they want with a little finesse.

The old guidance of 6.5% unemployment rate also considered their dual mandate of price stability which is around 2% inflation, however the inflation trend has been hot which seems to be one of the reasons the minutes were more hawkish today as inflation is just about at the F_E_D's mandate.

"participants generally agreed that labor market conditions and inflation had moved closer to the Committee’s longer-run objectives in recent months, and most anticipated that progress toward those goals would continue. Moreover, many participants noted that if convergence toward the Committee’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated. "

The F_E_D speakers and meetings have continuously been warning the market to expect rate hikes a lot sooner than later, take Bullard's "The Market is Wrong" interview on Fox Business in which he said the market doesn't realize how close the F_E_D is to attaining their mandate,  which means, the market doesn't realize how much sooner than formerly expected rate hikes will begin.

Today was another reiteration of the same that's been heard at least a dozen times, even from Yellen herself, if you missed it, you haven't been listening to what the F_E_D has been saying.

"Indeed, some participants viewed the actual and expected progress  toward the Committee’s goals as sufficient to call for a relatively prompt move toward reducing policy accommodation to avoid overshooting the Committee’s unemployment and inflation objectives over the medium term."

Put another way, the F_E_D is not concerned about overshooting on unemployment, but rather on inflation. You can go back about 5 months and you'll see I've been consistently posting that the one thing that ties the F_E_D's hands and leaves them no choice but to hike rates is the inflationary trend getting out of control,  this is nothing new, it's just being yelled now instead of spoken.

"These participants were increasingly uncomfortable with the Committee’s forward guidance. In their view, the guidance suggested a later initial increase in the target federal funds rate as well as lower future levels of the funds rate than they judged likely to be appropriate"

This speaks for itself... Participants are essentially saying in an official forum rather than FOX news that rate hikes are coming sooner than later and will be larger than expected. You may recall from Yellen's own words, the committee expected rates to be at 1% by the end of 2015 which essentially means rate hikes are right around the corner and they'll be successive assuming they are done in 25 bps increments,  this is a market slayer.

While we're on the subject of guidance ... there was this gem (although not the first time it has been mentioned)...

"The (FED's) Balance sheet should be cut gradually, predictably"

With over $3.5 billion in balance sheet expansion from accommodative policy, the Bank for International Settlements" in its annual report questioned whether "Leading Central banks" would have the ability to respond to even a run of the mill recession, in other words the F_E_D's balance sheet is tapped out which is likely one reason QE is ending other than the market bubble and inflationary concerns.  However, initial guidance from Helicopter Ben" was that assets on the F_E_D's balance sheet would be allowed to roll off at maturity, that's not the same as reducing the balance sheet. 

I'm not sure what the angle is here other than the fact the F_E_D has absorbed most quality collateral which has forced banks to use the 1-day reverse repo facility at the end of the month and quarter for window dressing to make it look like they had collateral when in fact they only "borrowed " it from the F_E_D for a single day, the last day of April and the last day of Q2 setting the second highest usage for the facility in April and a new record high at the end of June as they dressed their windows to make their financial condition look better than the mess it truly is. It seems among the 94 banks that participated in the "Art of looking smart" for the end of Q2 (the very last day mind you), there's about a 1/3rd of a trillion dollar shortfall in collateral at the banks. Perhaps this is one reason the F_E_D wants to cut its balance sheet so banks can pick up some much needed quality collateral, of course the inability to respond to a garden variety recession may be another as the balance sheet is bloated. A third reason may be the fact that the F_E_D (yes the F_E_D) has shareholders and is a "For profit" quasi-public/governmental corporation, not much different than Bank of America being given exclusive rights to print money and set monetary policy.

The F_E_D's unofficial mouthpiece, Jon Hilsenrath of the WSJ summed it up with this, 

"The minutes of the meeting, released Wednesday, provide fresh evidence of an intensifying debate inside the central bank about when to respond to a surprisingly swift descent in the unemployment rate and rising consumer prices."  Emphasis added, although probably more appropriately to "Rising consumer prices" otherwise known as inflation, just what we've been warning about as the one thing that ties the F_E_D's hands, although that was when they were still playing the "Accommodative policy in place for a considerable time after the end of QE" card, which is now clearly moving off the table.

The bottom lime is the F_E_D has been planning their exit the very same day they announced QE3 when they hinted at using a different yard stick, the initial stage was being set to move from quantitative guidance such as a specific date to qualitative guidance which as I said, seems reasonable, but qualitative guidance s used in putting forward quantitative guidance, it was really nothing more than a way to move to arbitrary decisions and remove the one thing the market craves, certainty.

Since that day when the debate about the yardstick started, the F_E_D has been on a steady path of extracting itself from accommodative policy even as they introduced the newest and last QE program.

If you wonder why market breadth looks the way it does or why High Yield Credit fell off a cliff, it's simply because they understand what the F_E_D had been subtly hinting at, now they are saying it up front and with a louder voice, it doesn't get much louder than, "The market's are wrong" from a regional F_E_D president, but for now, retail is more than content to keep whistling past the graveyard and buying the dip even though they apparently have no idea what supported buying the dip in the first place and the fact that it's rapidly disappearing at the rate of $10 billion a month and will end completely in October. That doesn't mean buying the dip is a good idea until October, the market ALWAYS front runs the F_E_D and this is a mess the likes of which the world has never seen, at least no one alive today.

Knee Jerk Follow Up

In a follow up to this post just after the F_O_M_C minutes were released, Hawkish F_E_D Minutes Cause Knee Jerks with Accelerated Distribution it's easy to get caught up in a strong price move and believe there's something more, however without even looking at 3C and just reading the highlights of the F_E_D minutes, it was an obvious knee jerk move which have their purposes.

I posted the initial distribution in to the move, here's what things looked like just before the close.

 After the immediate reaction to the downside on hawkish F_E_D minutes which basically say what we have already said and known for almost a year now, the knee jerk move higher showed immediate distribution and continued through the close, eventually overwhelming demand and starting a move down toward the close. However most retail traders will only see the move up, it wouldn't be surprising to see them to continue to chase it. Even though I think we are already in the reversal process, this is an extreme version of some of the volatility that should be expected, a nice predictable rounding top is not likely here as they want to keep the idiotic BTD crowd locked in for the first major break to the downside as they'll want someone to buy, it's like Pavlov's dog whistle.

Meanwhile the distribution in to higher prices was having a real effect on stocks.

The initial move on the minutes was an extremely bearish -1500 on the NYSE TICK Index, followed by the knee jerk higher in the channel and as distribution continued you can see the early warning of TICK falling out of the channel.

As I mentioned, an issue I'm very interested in, FAZ long and an XLF move above the range to enter it made progress toward that end. I don't think the break below XLF's range was coincidental, I believe it was the short squeeze, momentum generating move that was needed to break the level as smart money apparently has the same ideas about entering at the same place as I do, actually it's the other way around, I have the same ideas as smart money has.

As for XLF...

 The target XLF head fake move that I have waited for since June/July to fill out the FAZ long is now only ten cents away on a closing basis and $.13 cents away on an intraday high basis.

Patience pays...

And as for XLF, the earlier leading negative divegrence before the minutes makes sense as it forecasted a move lower, the move at "b" is the power of contradiction, this just continues to confirm that the best entry possible in XLF short or FAZ long will be well worth the wait.

GDX , NUGT & GLD Charts

For now this is a trading position as there are still longer term divergences that still suggest a pullback in GDX and if there's a break below recent support that ends up being a head fake move, I'll have some room to add to the position. Watch the chart of Gold Futures as it contradicts the knee jerk reaction on the release of the minutes...

 GDX intraday contradicting the knee jerk lower.

However I've been watching this for a couple of days as mentioned yesterday, "There are some short term positive divergences developing in GLD/GDX".

NUGT intraday on the knee jerk lower.

And NUGT's 10 min over the last several days.

 This is intraday Gold futures leading positive right at the downside knee jerk on the minutes release.

GLD 5 min as mentioned yesterday.

And GLD's 10 min chart going nearly vertical.

For me, this is worth a trade, I'm still very interested in a longer term position, but I'll wait to se how this resolves and if the pullback divegrences (longer charts) maintain their signals.

Trade Idea (Swing) NUGT Long

The past few days GLD and GDX have shown some positive signals, I believe both will bounce shortly, I'll be entering a trading position in NUGT long (3x long Gold Miners).

I think GLD will bounce here as well, I just don't like the leveraged ETFs for GLD and this isn't the type of call set-up that I look for.

Keep FEYE on the Radar

This is a stock that doesn't have good longer term upside prospect, in fact I chose weekly calls because there's nothing positive here beyond a 5 min chart. This means FEYE likely needs market support to make its run and as you just saw there's a typical F_E_D knee jerk reaction to the upside which seems counter-intuitive as the minutes were hawkish and not favorable for market upside, however as usual these knee jerk reactions are almost always wrong, almost always faded.

Still the biggest influence on a stock's directionality, accounting for about 2/3rds is the broader market so FEYE likely has little time to get its bounce off the ground which makes this intraday divergence just popping up and gaining strength quickly, very interesting as a fuse to set the move in action.

Hawkish F_E_D Minutes Cause Knee Jerks with Accelerated Distribution

The F_E_D minutes were not what the market wanted to hear, you saw that on the initial reaction as they came out at 2 p.m., so why has the knee jerk bounced the market higher? Because they are scrambling to sell everything they can at higher prices , distribution has increased on the move.

Imagine you are a money manager and you just got some bad market news, but still hold long positions or haven't finished filling out short positions, maybe something like XLF which just hit an upside target of mine, you are looking to enter short above resistance as I am... Well this bounce looks like it's that scramble to clean up positions quickly and I have the proof.

 The initial market reaction to more hawkish minutes than many may have expected, then the knee jerk bounce, why? To sell in to...

 The MSI is lagging the market, it's not rallying or forcing the market higher on a squeeze.

The SPY is seeing heavier distribution intraday in to the upside knee jerk reaction.

As are the Q's, look at the relative level of price and 3C at the same spot.

XLF/Financials that just hit one of my alerts for an upside move are seeing heavier distribution, nothing approaching in line/confirmation.

VIX short term futures / VXX are seeing accumulation on the knee jerk decline (as they move opposite the market).

And Treasuries, at least TLT are seeing accumulation intraday in to the initial lows.

Getting Ready to Add Core Shorts Back-FAZ

Last Friday's The Week Ahead forecast was, 

"it wouldn't surprise me if we were very near the end of this bounce, maybe a day or two more, but I suspect we'll be seeing a lot more lateral (sideways) trade next week, a reversal process. which is where we'll find most of our short entries."

So far we've been right on track with additional gains Monday and Tuesday and today seeing the market flatten out ("a lot more lateral (sideways) trade") today, which is nearly perfectly on track.

SPY's Monday/Tuesday additional gains, "maybe a day or two more " (of additional gains) and today flattening out toward the reversal process. RATE OF CHANGE (ROC) IS VERY IMPORTANT IN DETERMINING WHERE A REVERSAL PROCESS/PIVOT POINT IS.

On 8/1 when it was clear a base was going to form and a bounce from that base would be high probability I closed my long FAZ position , but kept the bulk of short exposure in place. Closing FAZ allowed me some resources to play short term piggy back trades, allowed me to protect the gains in FAZ and will ultimately allow me to re-enter FAZ at a better price in full size as the previous position was not all the way filled out. I'm looking for an area to add to that FAZ position and be ready for the next leg in the market (down) as this bounce exhausts it's resources.

While the minutes just released were not taken favorably, it's still a short term intraday event so I'll treat it that way until/unless I see larger signs/signals that there won't be a reversal process, but rather a reversal event.

You have some idea of what I'm looking for in XLF and thus my FAZ long re-entry, lets take a closer look with an eye specifically to add short exposure in FAZ long (3x short Financials).

*These charts were captured just before the minutes were released at 2 p.m. EDT.

 XLF or Financials look like a solid primary trend short play as this 4 hour leading negative divegrence makes pretty clear. I'm not looking for a move of 20% in FAZ, I'm looking for a move of likely 80-100% over the primary trend's term so recent gains in FAZ have really been small trades, not positions.

Speaking of FAZ, this is the 1 min trend, you can see the positive divegrence and a buy area as well as the negative divegrence (there were more than a single chart that caused me to close FAZ) which was particularly acute on 8/1 which is where I sold the 3x short Financials ETF. As you can see, I didn't leave much on the table.

XLF on the other hand on this 3 min trend chart shows the same base at the same period from 8/1 through 8/8 with the bounce starting 8/11, since then XLF has shown significantly more distribution over the last several days than what went in to the base's positive divegrence,  in other words, on the whole this was a net distribution event. The base was only set up and strong enough to create a sustainable bounce that could be sold in to.

The Rate of Change for price this week is very important as it reveals the end of the bounce phase (with the caveat of some noise here and there and maybe a head fake move). It's clear this week that the bounce phase is ending and the reversal process is starting. How long will the reversal process be? Usually it's a bit larger than the base, that has been our experience, but many things have changed since Q3 began starting right at July 1 so this dynamic may change as well as this is the first respectable bounce since July 1 so i'll assume the concepts that have worked will continue to work, but be mindful that there have been many changes and the size of the reversal process may be one of them.

For traditional technicians, note RSI (one of the traditional indicators I still like) is positively divergent as FAZ flattens out from it's downtrend.

FAZ's 2 min chart also shows the 8/1 divegrence, again the exit from FAZ on 8/1 left nothing on the table other than open market risk, but no additional gains as that was the same period the market was building its base (8/1 through 8/8). However note the recent leading positive signals in FAZ.

The FAZ 5 min chart shows the negative divegrence leading negative by the time we reach 8/8 (the end of the market's base) and a nice 5 min positive divegrence.

What is important to remember is we are following underlying price action that contradicts real price action, a divergence alone is not a signal to buy, but an inside look at what is transpiring under the surface that is masked by real prices. I want the strongest divergence possible before entering, I also want to follow the concepts that have proven to work so well which include allowing time for a reversal process and usually a head fake move just before a an upside reversal (in this case), that would mean any strong support that develops in FAZ raises the probabilities of stops being run just before price moves to the upside. PRICE ACTION IN THE MARKET IS VERY DECEPTIVE, BUT IF YOU UNDERSTAND THE CONCEPTS AND WHY THEY EXIST, THESE PRICE MOVES THAT ARE SEEMINGLY AGAINST OUR POSITION, ARE SOME OF THE BEST ENTRIES/MARKERS WE HAVE.

Like XLF's 4 hour primary 3C trend leading negative divegrence/distribution, FAZ has a confirming 4 hour leading positive 3C trend. As far as upcoming market price action, I want to be on the side of highest probabilities which is Financials short.

 

Still, the probability of a false breakout/head fake move above XLF's range is still high. This may not happen as XLF is falling apart quickly, but it could still happen as a result of a reversal process and a head fake move which would be a break of FAZ's reversal process support and a break above XLF's reversal process resistance. For now, unless/until things show definitive changes in character and the concept of the reversal process, I'll wait for the best entry possible, b however as far as primary trend positions go, looking back a year from now, catching an entry a few percent better than today's will hardly matter.

Gist of Minutes

Rate Hikes Are likely coming sooner than later

Minutes Are Due out

I wouldn't be afraid to use any knee jerk momentum from the minutes to your advantage if they present one

IYT/ Transports Trade Set-up

The last time we entered IYT (short) the divergence setting up the downside turn was very quick, at least the tactical timeframes, the strategic had shown damage ever since Transports saw an increased rate of change in upside price movement which often precedes a downside reversal even though it appears to be a very bullish event.

I'm very close to pulling the trigger here to fill out the IYT partial position which has room for about another 1/3rd addition.

Here's the initial position entered and held since the last top.

Even with nearly a full retracement of the July decline, the position has held up well because of a good entry for the first portion.

 The intraday chart is falling apart in to the last 2-days , many of the watchlist stocks have a similar appearance today.

The 2 min chart is going negative in the same area,

As is the 3 min chart which shows the exact same base area as the broader market, August 1 through August 8th.

The 5 min chart shows the trend of underlying trade during this bounce which is what the broader market shows as well.

And the 15 min chart would be the bases's positive divegrence for the bounce, again from 8/1 through 8/8 with recent deterioration like we are seeing in the same charts for the major averages.

 The stronger charts which don't show the same divergence (positive) as it was not strong enough to show up on them , shows the very fast deterioration of the last top when we entered, I believe there were only a couple of days before it turned down, much sharper than typical reversal events. The 3C posture here is in even worse condition.

The 60 min chart shows transports in line as price's ROC to the upside increases, again this seemingly bullish event often leads to a much bigger top/ reversal. Again, 3C is in worse position on this second near double top.

It's the strategic 4 hour chart that shows the long term underlying trend which deteriorates badly as the increase in upside price ROC begins (the steeper second trendline on price). This is the highest probability intermediate to primary trend resolution or in other words, a bear market.

I'm tempted to fill out the position here today, however, the concepts we have learned over the years would suggest the highest probability would be for a head fake/failed breakout above former highs or a failed breakout from a double top.

Since I don't have any daily bearish reversal candles in place yet and the head fake area is so close, I'll set DJ-20 price alerts for a break above $8515 and look for my entry at that level.

However as a longer term investor./trader, I don't think an additional +.005% is really that big of a deal over the longer haul, it really only matters to me for the purpose of timing.

Market Update

You already saw a lot of this earlier today, but from what I'm seeing now when I said yesterday that we may already be in the reversal process, that statement looks more and more true as today continues. I do not think this is nervousness before the minutes although there will obviously be some, this is about the right place considering the positive divergence/base's size and recent market behavior during bounces.

 IWM 1 min has failed to fill the gap, again underperformance by the IWM which is significant because the Russell 200 "should" lead any risk on move and in this one it has been the laggard.

2 min IWM with a deeper leading negative divegrence today, but more importantly look at the right turn price is taking, this looks to be the reversal process, it may be a bit too early to make that statement, but considering it may only be several days, we'll need to determine this quickly. Going through the watchlist and seeing a change in character would be pretty solid confirmation and I'm making my way through that list now. Any volatility from today's minutes release is temporary (on the upside), the support for the bounce or "gas in the tank" is now in the red light area. While the minutes could cause a knee jerk reaction, it would be one without support and therefore not really a factor in this process other than perhaps giving us a tactical advantage on some entries.

 QQQ 1 min is seeing a deeper leading negative divegrence which really got started yesterday , remember the NDX did hit our $4k target.

QQQ 2 min chart is seeing migration of the divergence like the IWM .

SPY 1 min is the 3rd average giving good confirmation and showing we are not seeing a difference in relative performance (3C), but rather a trend among the averages/market.

And again the 2 min chart is seeing migration of this increased downside negative divegrence.

I'll let you know what I find as I finish up going through the watchlist , there may be some assets that are close to entries.