EUR/USD Update... ECB QE?

We already covered one of the stranger moves post F_O_M_C today, F_O_M_C , the Euro decline and $USD advance on Euro weakness.

To understand this is pretty simple terms, a currency is debased when there's massive printing such as the F_E_D engaged in during the Quantitative Easing Episodes, more $USD's floating around lowers the value of $USD's in your possession which is one of the many ironies of QE, those who were responsible savers were punished the most by the F_E_D as they not only couldn't get a decent interest rate that kept up with inflation anywhere, but the buying power of their savings plummeted especially as it relates to food and gas, the "Volatile" CPI components the F_E_D rather ignore.

There are several advantages to debasing your currency, if Greece had control of its own currency rather than being a part of the European Union and using the Euro in which they have no sovereign control over their own currency (the European Central Bank/ECB does), Greece "may" have been able to deflate their currency and wiggle out of some of their problems. Lower currency values usually result in higher exports so if you are a country that does a lot of exporting, it makes it cheaper for other countries to buy your goods and services, however on the flip side, it makes it more expensive to buy imported goods from other countries which also has a flip-side as it increases consumer demand for sovereign products and services.

The Euro's strength vs the $USD was a source of pride among many of my European friends, especially some of the German ones, I kind of chuckled privately knowing it meant US exports would be higher and European Exports would be lower is essence, not all that they might have thought it to be.

The dramatic plunge in the Euro this afternoon sent the $USD skyrocketing, in fact the $USD went from its low of the week to the high of the week in 2.5 hours today.

This also sent the EUR/USD pair lower...

EUR/USD 1 min chart with a negative divegrence in to the weekly highs just before the F_O_M_C and a small relative positive in to the lows of the week just after the F_O_M_C, so it was a pretty big swing.

As you already know, the move was on expectations, for whatever reason that the ECB would engage in US style QE and start monetizing sovereign's debt which the ECB is expressly forbidden to do by its charter. In effect if the ECB went ahead and did what the market was acting like it would do, there would be a Euro-constitutional crisis which would require the ECB's charter be changed which may not be so easy as Germany exerts the most influence and they don't want the ECB buying up Portuguese, Irish, Greek, Spanish and Italian "junk" bonds for lack of a better term.

I don't have a lot of ways of looking at the FX pairs with 3C, I can see short term divergences like the one above, the rest requires a little creativity...

 The 5 min chart of the $USDX shows NO positive divegrence, in fact it's nearly perfectly in line with the $USD's downtrend so today's pop higher is unlikely to hold with no accumulation supporting the move,  this is a true knee jerk move and really on nothing other than wishful thinking, the F_O_M_C did not provide any kind of guidance whatsoever on what the ECB may or may not do, it was a silly move.

 Furthermore as seen earlier today in the USO update in which I covered the $USD extensively, it looks like it's set for more downside as this 30 min 3C chart of the $USDX shows with a leading negative divergence.

As for the Euro...

 This 30 min chart of the Euro shows accumulation at a small base followed by a move higher and then small distribution to send it lower which is typical of the formation of a larger base, as supply is accumulated price rises and has to be knocked down so they can continue to accumulate at the lowest possible price , typically forming something like a "W" base which is what I think we will see here as the signal was in place before the F_O_M_C.

The 7 min Euro chart also shows the same signal for a move lower, but again, I don't think this is typical distribution, but rather steering distribution to get the asset back to the accumulation/base area.

This would suggest a move higher in the Euro and perhaps a more realistic view of QE in Europe.

As for other indicators I can use on the EUR/USD, the Ultimate Oscillator went from an oversold condition to a positive divergence which interrupted the downtrend in the pair.

 Our daily X-Over Screen is just days away from a long/buy signal

And the downtrend ion the EUR?USD was broken as it stopped out in the Trend Channel which carried the majority of the most recent leg down. All of this is a major change in character which leads to changes in trends.

I suspect the knee jerk in the Euro and $USD today at 2 p.m. will both reverse and a new trend will start to develop as the EUR/USD builds a larger base, if that's the case, I'd be looking for an upside reversal in the pair.

Market Update

I'd actually prefer to see the market move sideways from here even though I'm fully loaded up short with a little room to add from closing GLD puts earlier, I'll be saving that for the right opportunity.

I'd like to see a little more time as there's a process to a reversal and it gives us good opportunities, strong signals and is most often the way a reversal unfolds.

The problems are I don't see the breadth to support the market; parabolic moves like this one (below)  tend to end in as spectacular fashion as they start.

 I'd almost never forecast the bottom as anything other than a longer reversal process, which is what we see at least 90% of the time, but in fact we did forecast a quick upside reversal "V" reversal because it was the most effective way to achieve the goals of this move.

In like manner, a sharp "V" downside reversal would also be most helpful in achieving the goals of this move as recent bulls would be trapped, the same theory as was drawn out Monday as we had a rounding top and a loss of upside momentum which would create doubt in the minds of longs which were difficult to get on the other side of sentiment from their previously bearish position, the move yesterday was almost a way to lock them in, to convince them "This is a real move, this is a real change", which is what we predicted this move would be all about before it happened as you can see in last night's Daily Wrap as we look back to the forecasts previous to the move starting and our expectations.

In any case, Plan your trade, trade your plan", it's the emotional stuff that makes that hard, but I'm where I want to be position wise, I'm just looking for hints as to how this is going to unwind from here. I suspect the real market view and movements are going to come overnight when people have little chance to react to them.

I have little doubt that we are headed down, my job right now is determining in which fashion. As I said, it doesn't matter too much either way a I've already traded my plan and am set up other than a few possible additions  from some recent dry powder, however as always, I want to give you the most accurate forecast possible.

I just don't see much right now beyond what I've already mentioned and shown that adds any insight, these periods never last long though. In fact it was October 14th, the day before the bottom and upside reversal that I said in this post, Market Update ...

"Today feels exceptionally dull, those tend to be the most dangerous markets."

The reason being is they lull you in to a sense of complacency and that's typically right when the market does something extreme as it did the next day.

Right now things feel a bit dull as opposed to what you might expect on a day like today, but don't be lulled in to complacency or expect this to last long, it never does. I'm sticking with the most probable outcome, sticking with the shorts opened.

F_O_M_C

Right now we are in a kind of no man's land, I don't think the market knows exactly what to make of this all with one interesting asset move, a very weak move in the Euro right at the policy announcement which sent the $USD higher, gold lower (even though Greenspan was quoted just before the F_O_M_C as saying "Buy Gold")...

 The Euro drops right at 2 p.m. on apparent expectations that the ECB will pick up with a QE program to replace the F_E_D's even though the end of QE at this meeting was expected and ECB bond buying would violate their charter which opens a whole can of worms and sets up an inter-eruo country fight which Germany will win, it seems a bit silly.

The weak Euro sent the $USD rocketing higher.

The statement itself had some interesting tidbits, the end of QE was not a surprise although Kocherlakota did dissent, as he'd rather see the current pace of QE extended, much like Bullard's October 15th comments.

The F_E_D did throw the market a bone and left in the "Considerable period" language with regard to rates and how long they keep them low, however there were some slightly contradicting statements such as "Solid job growth gains and lower unemployment"; seeing the underlying broad economy as strong enough to support maximum employment in the context of price stability;; they see the underutilization of labor resources diminishing and feel that the inflation target is on track although in the very near term weakness in oil may keep inflation a bit low, but seen as transitory as far as inflation projections go.

Essentially the message was "Substantial Improvement in the labor market", "Economy expanding at a moderate pace and able to support maximum employment". It looks and sounds like an upgrade of the labor market , substantially, which should cause market participants to wonder just how long ZIRP (Zero Interest Rate Policy) will actually be maintained despite the "Considerable Time" language remaining which has been defined by some F_E_D members as 2 months to 2 years. 

The current view that the first rate hikes won't come until mid 2015 almost sounds like it has been pulled forward by an overall, "Everything is fine and progressing according to plan", except softness in the housing market. I don't see any reason why the market won't take that as "Interest rate hikes sooner than later", but perhaps slower than expected.

As we work through the initial fog of the F_E_D, TICK is bouncing around between +1050 to -1750, lots of intraday breadth volatility which explains why price is kind of choppy, but not real knee jerky at this point.

I would keep an eye on the 30 year yield vs the market as we wait for some other indications to build in on this initial fog. The 30 year yield seems like its leading the SPX intraday as it has on a broader basis.

30 year yields (red) post F_O_M_C seem to be attracting prices toward them.

More coming...

Black out Coming

I checked leading indicators real quick, again no smoking guns, although I applaud several of you who wrote in over the last hour regarding the spike in the 5 year treasury yield, a leading indicator we have had a lot of success following, however in this case, the reason is the Treasury, for whatever reasons, scheduled an auction of 5 year bonds at 1 p.m., it didn't go so well so that's the reason the 5 year yield spiked.

The bigger, more important picture may be the 30 year.

the 30 year yield vs the SPX has won every time there has been a divergence between the SPX (green) and the yield (blue), note the large divegrence now, we saw these at the July decline as well as the Chimney from the August cycle, although no where near as big, they all led to lower SPX prices.

 VIX is outperforming the SPX (SPX prices in green are inverted to show the normal correlation).

The same is true of VXX which we already know was seeing demand today and over a larger period recently on stronger charts.

HYG has been leading the market lower intraday, remember distribution yesterday, it looked like it would support a bounce pre-F_O_M_C, perhaps this is a pre-planned knee jerk...
 

 HYG on a longer basis of course is still in a deep leading negative position and as far as the historical leading of HYG...

Here it is and worse than ever.

I'm going to be watching the market very closely during the F_O_M_C so I might be a bit quiet, but anything I catch I'll have out to you right away.

Market Update

I've been looking at numerous assets in numerous timeframes, probably close to 200 charts by now, I don't see anything that looks like an F_O_M_C smoking gun.

TICK is very dull, it looks like you might expect considering yesterday and considering what's coming an hour from now.

 Early orders from pre-market or last night from retail on technical buy signals like price above the 50, 100 or 200 day moving averages seems to have taken place this morning looking at TICK, this isn't surprising as most longs in retail tend to get in toward the end and get left holding the bag. However, no trend has developed through the day, which isn't surprising on an F_O_M_C day.

 Right now TF and ES have some intraday 1 min positive divegrences, NQ doesn't so a little move to the upside pre-F_O_M_C looks probable.

The 5 min charts haven't been effected at all, still leading negative like TF above

As far as my original theory that the market had enough gas to pullback to the October lows and put in a "W" base and another bounce, it's looking less and less probable as the 60 min SPY divergence right now is larger than the positive at the October lows.

 Intraday, SPY 1 min shows early distribution on what I suspect were the overnight/pre-market orders that working folk put in, which is one of the reasons a lot of professional traders won't look at the market until after 10:30-11 a.m. as there's just a lot of game playing like orders being filled high and taken down to hit stops. You can see a small positive intraday just like the Index futures on this SPY 1 min chart.

 The Q's which didn't have a 1 min Index future positive seem to be seeing heavier intraday action as this 2 min chart is leading at a new low.

The 1 min IWM looks like the TF chart with a small intraday positive divergence pre F_O_M_C. I want to keep an eye on these as they may be indicative of a pre-palnned knee jerk move, I doubt a leak though.

And the IWm 5 min is seeing heavier distribution as well so again nothing that looks unusual.

The one possible soking gun is the VIX futures...

This 5 min VIX futures chart is flying (3c) and it joins the longer 15, 30, 60 min charts. Often with longer charts already in place, we roll back to the shorter intraday charts for timing which if this wasn't an F_O_M_C day, I'd say we are seeing, especially with the shape of price, the rounding over earlier in the week and the "Chimney" yesterday. At this stage I should assume this is pre-F_O_M_C hedging, but that doesn't  change the 60 min positive in VIX futures now, that's much longer and larger than F_O_M_C hedging.

I'm going to keep looking ...

GLD Follow Up

The Put options in GLD were opened Monday October 20th, Trade Idea (Options) GLD PUT. After just closing them out, the P/L looks like this...

With a fill at $3.10 and a cost basis of $2.30, the P/L was nearly +35% for the position which is fine, I used the puts because I'm not crazy about the GLD leveraged ETF choices.

The $USD, which I covered in some detail this morning in the USO Update (Crude) update, has been moving down since the open, as if the market is expecting a dovish F_O_M_C which wouldn't be surprising given they are likely ending QE with no press conference, so I'd assume they'd have to put something dovish in the statement to counter the end of QE as well as the probability that the "DOTS" have moved up again as has been the trend the last several meetings.

$USD 1 min moving down since the cash open and as the USO update showed, it's likely the $USD sees further downside which is what the F_E_D has wanted as well the past month.

 The 30 min GLD chart shows a small positive divegrence on a head fake move below support before moving higher in to distribution and a top on 10/21, the day after we entered the GLD puts so I'm pleased with the timing of the entry and generally speaking it looks like gold has more downside to go, but I can always re-enter the GLD put/short, I don't see the need to risk decent gains here.

The 15 min chart shows the same thing, accumulation/positive divergence in to a head fake low under support with a move up that was sold in to... distribution/negative divegrence. The 15 min chart also suggest more GLD downside in the near future, however the last several days of flat trade with a drop this morning below that small range looks a little like a short term base and head fake below it/stop run for a possible small bounce and with the $USD acting the way it is, why put the gains at risk when the trade can be re-entered?

Very short term charts show some positive activity, again if anything, seemingly along the lines of a small bounce which would work great as a new put/short entry.

The 5 min chart as well.

So for now, I'll be a spectator here and look for the next entry. I hope you did ok with the position.

Closing GLD November 22nd $120 Puts

I have a decent gain in these and expect more downside, but with the $USD plunging this morning (Good for the USO calls), I'm a bit worried about them and would rather just take the gains off the table.

Volatility Bid

This isn't a brand new discovery, it has been creeping up over the last several days.

Last night in our little look back, one of the posts showed the call of the absolute top of the VIX which had made a high not seen since December 2011 as the market came down and the Dow lost 1200 points in 3 weeks (remember the VIX moves opposite the market).

We had a sell signal on our custom DeMark inspired custom indicator along with divergences to go with it, it looked like this at the time on October 15th (also in last night's Daily Wrap)...

"VIX bearish shooting star close after a bearish Harami Monday/Tuesday."

In addition to the candlestick bearish sell signal or reversal, our custom indicator fired off a sell as well...

 Daily VIX sell signal at the bottom of the October decline...

As I mentioned, there have been recent VIX futures positive divergences getting stronger, we also have some bullish buy signals on the 60 min VIX chart using the same indicator as above.

The two buy signals are both at bottom ends of a small range as the VIX has largely been ignoring the moves in equities the last several days, excluding yesterday. Also note the pinching Bollinger bands, indicative of a highly directional move, in this case with buy signals, I'd expect an upside breakout, again remember the VIX trades opposite equities/the market.

Other interesting charts include VIX futures themselves (the above is the spot VIX Index)...

 The VIX futures divegrence started on a 15 min chart and within a day moved t the 30 min chart, a larger, stronger divergence/accumulation and the day after moved to the 60 min chart...

VIX futures 60 min chart.

Today on the 5 min chart we have another strong divergence... 

VIX Futures 5 min positive.

I suspect the 5 min chart's action is related to hedging against the F_O_M_C today, however the longer term charts are clearly not F_O_M_C hedging and seems to have larger implications. I'm not a huge fan of trading the VIX related ETFs, but we'll keep an eye on what's going on here, I suspect there are two signals, long and short term that may not be two separate events or reasons, at least not to the degree it appears; in other words, I suspect this is more about 1 larger event than just F_O_M_C hedging.

USO Update (Crude)

There's really not much reason for oil to rise given the recent spate of global economic downgrades, the one reason is as we saw with a recent announcement last week that the Saudi's cut back supply through September and many believe they've done the same through October and will announce that soon as well.

The other issue is the $USD which as we suspected about 2 months ago was starting to return to the pre-QE/F_E_D intervention legacy arbitrage correlation , in which dollar denominated assets move opposite the dollar; assets like gold , silver, oil and stocks. This correlation use to be just about as good as any JPY based carry trade correlation was like USD/JPY before those started going south (the correlation).

$US Dollar Index (green) vs USO (Brent Crude) red on a daily chart shows the typical legacy arbitrage correlation.

Over the last several months the $USD has been on a tear with 12 consecutive weeks of gains when we noticed several stronger negative divergences, a week later the $USD had broken the weekly gain with its first decline, just after that the F_E_D came out and said they were concerned about the $USD's strength effecting growth prospects for the global economy and we saw numerous F_E_D speakers hinting at another round of QE, Bullard in mid-August suggesting extending the current round of QE before he backtracked on the comments a few hours later, but that wasn't in the headlines. It seemed to me the F_E_D was doing what MArio Draghi of the ECB has been doing (whether effective in his case or not is debatable) and jaw-bone the $USD lower as the end of QE or dollar destruction was what was sending the $USD higher in a front-running long $USD trade.

USDX breaks out of its trading band on 12 consecutive weeks of gains and starts to falter as the F_E_D piles on.

As for the $USD itself...

 There were several divergences in the 60 min range that were turning south as we were warning of upcoming problems in the $USD a couple of weeks before it broke the weekly winning streak. This 4 hour chart is showing a fairly substantial negative divergence in the $USD which would "normally" have a beneficial effect for many dollar denominated assets. 

The 30 min $USDX with a negative sending it lower...

The 15 min chart confirming the price trend lower thus far.

And the 5 min also confirming the trend thus far.

We've had pretty good success with USO signals when they're strong, we called the 2008 USO / oil top within 2 weeks after a huge bull market during the GW Bush administration as oil jumped from the teens to near $150, ironically the same week Cramer told viewers to buy oil on the next bad EIA report/pullback as a "Contrarian trade", one of his finer calls as everyone who bought, bought at the top and just how is it that millions of viewers all doing the same thing at the same time is considered "Contrarian"? In any case, it seemed like Cramer was providing demand for some of his richer friends to exit oil.

As for Brent Crude Futures...

 /CL 60 min with a positive divegrence and a fairly large, flat base.

/CL 30 min moving off the right side of the base.

And /CL 5 min suggesting a possible pullback.

For now, I'm sticking with the USO November 22nd calls bought and added to, but there may be an opportunity for a longer term trade here and one with some diversification.

 Daily USO 3C chart with several divergences and a strong leading negative in June sending USO lower. I don't see a primary trend base or positive divergence, but this can still be a worthwhile trade.

 The 2 hour USO chart shows a H&S top, the trendline isn't drawn exactly right, but you can see it as well as the distribution in to the stage 3 top formation. The price pattern implied downside target of approximately $32 was met and surpassed as is usually the case with these targets, but is starting to show a fairly substantial 2 hour positive divegrence as if USO is working on a base here.

 The 30 min chart shows the same with distribution at the H&SS top and recent accumulation while the downtrend had near perfect 3C confirmation, making lower lows with price.

This is a closer look at the 30 min chart and potential base. The accumulation has been at the lows of the range.

This 5 min chart shows the accumulation has been at the lows with light distribution as price climbed a bit.

For now I'll keep the long call options in USO, but if it forms a bigger base, perhaps puts in a head fake move below the trendline, I'd have to seriously consider a leveraged long as this would be some nice diversification.

You might consider setting price alerts for the $30.30 and $30 areas to remind you if USO does make a pullback to a wider base.