Daily Wrap

"Dull markets are dangerous markets", how true that was today and I don't think we're even close to clear of this mess. Let me take you on a little tour from NANEX, they gather and analyze all kinds of HFT market data...

First , some strange VIX futures accumulation when you'd expect them to be winding down VIX futures now that the F_O_M_C has passed.

 Massive VIX Futures accumulation BEFORE the market broke, this is a 60 min chart, for it to lead like that, there's some large underlying flow of funds.

Even intraday the shorter 5 min chart that we watch for timing indications had been accumulating , but well before the market anomaly. As I said earlier, "Either someone's a fortune teller, just very lucky or...?"

 This was followed by a headline out of Japan that the country's Pension fund, GPIF, will increase stock allocation in the fund to 25%, the problem is, this is almost a 2 week old piece of news. I wrote about the very subject on Monday October 20th in A.M. Update...

" Japan announcers the GPIF (Japan's pension fund) will increase its stock allocation from 12% to 25% overnight "

Perhaps Headline scanning algos are just that dumb or perhaps... ? In any case, the result was a spike in the USD/JPY...

USD/JPY

And I'll let NANEX narrate from here...

Actually one of the first events was crossed and locked quotes. While we typically think of the exchanges and liquidity providers being NASDAQ or NYSE, in reality there are numerous pools of liquidity like BATS, Bloomberg TradeBook, Instinet, Archipelago, SuperMontage, etc, all ECN's of liquidity, but they are suppose to aggregate at the best bid and ask which is what you see when you go to place an order (this runs deeper like level two or TotalView) and even more sophisticated ways of seeing the "depth of the book".

So one of the first things that happened were locked (the bid and ask are the same, often resulting in the inability to place a trade) and Crossed quotes  in which the bid is higher than the ask, assume a $10 stock is bid at $10.50 with an ask of $9.50, that's a crossed market.
From the University of Mississippi's Business Administration's report on Crossed/Locked markets...

 "Locks and crosses usually accompany significant price changes." This isn't a matter of supply and demand, it's a matter of broken markets.


One of the first events was a very strange SPX-E-mini  Futures trade first reported by NANEX 

This was a huge market moving "trade" or apparent trade.

 As the depth of the market breakdown was, it started to become apparent this was ne of the worst breakdowns we have seen.

I have long advocated that a bear market decline with HFT's pulling all liquidity would exacerbate the decline and result in broken markets that would cause people to panic and prices to drop even faster. We've seen numerous incidents this year of markets breaking even when volatility was running around price moves of a quarter of a percent on the day earlier in the year, so what happens when a real emotional panic sets in and HFTs pull all liquidity?

It's becoming clear that crossed and locked markets were just the start, and all on a nearly 2 week old headline.

Here NANEX thinks the E-Mini trade that lifted the market was not an actual trade, but a "Screw Up" caused by the market exchange problems.

The NYSE quotes went dark and only NASDAQ stocks were still being quoted. It was reported that in some cases, including within Dark Pools that some orders were being filled with 60 minute old quote data.

It's now clear the E-Mini SPX trade was not an actual order, but an anomaly caused by the breakdown across various markets, thus much of today's climb higher was based on mistakes and broken markets.

1) nearly 2 week old Nikkei headline
2) huge E-mini volume
3) market breaks
4) SPX fails to break 2000
5) Market resumes

It's difficult to rely on data for analysis right now until whatever can be restored or revised is, but there were notable divergences today.

HYG distribution of the last 2 days is taking a toll.

 HYG led the market perfectly until this divergence which is the bigger story, this is one of the best leading indicators we have, "Credit leads, stocks follow", that's how the rally began, with HYG accumulation.

However intraday, HYG followed or led the market, the same is not true today.

HYG vs SPX, totally flat.

Even more interesting, the un-manipulated HY Credit is diverging badly right at the rounding Igloo/Chimney top, this is a signal I've been on the lookout for.

 Pro Sentiment continues to diverge vs the SPX...

And recall yesterday's advice to follow the 50 year yields as they lead the SPX? Look at today's divergence and that's not even including the larger strategic divergence.

Every time the SPX has made a move higher and 30 year rates didn't confirm, 30 year rates were right which makes this larger strategic divergence important and today's more tactical one look like an excellent timing indication.

The markets were highly fractured today as well with the Dow leading at +1.30%, but of the 221 point gain, 145 points of that was due to Visa. The NDX lagged at +.25% and the Dow Theory concept of Industrials vs Transports for confirmation/non confirmation is looking bad for the market.

The Dow 30 in red and Transports in green on their second day heading lower, no longer confirming the Dow or the market, in fact closing -.86% lower despite oil down over 1.5% today.

While I'm going to wait a bit until data is restored and I can see indicators as they were meant to be without the distortion of the blackout, I'll leave things here, but these divergences above, not even including 3C should be taken seriously.

I'm not sure how much I trust the Dominant P/V relationship, even though all stocks were trading by the close, if we do, there was a massive Dominance in Close Up/Volume down, the MOST bearish of the 4 relationships and also one that typically causes a next day close lower, which I'd anticipate anyway with op-ex tomorrow, after all most contracts are likely call and to cause them to expire worthless, a pin to the downside would be what the doctor ordered.

8 of 9 S&P sectors closed green, however the leaders were defensive Utilities followed by defensive Healthcare with Energy lagging.

Stocks above their 200-day moving average remain below 50%, meaning about half of the market of stocks is in a bear market, the averages won't hold up with no support from stocks.

I'll bring you more as I can be sure I can trust the data, but the divergences above like Dow vs Transports, HY Credit, HYG, 30-year rates and more and especially the odd VIX Futures accumulation are all screaming something's up, that's the message of the market from what I can see.

NASDAQ Biotechs

It's pretty bad when the head of the F_E_D calls your industry group out as "Overvalued" or in a bubble like Yellen did a couple of months ago, saying the market itself was not in a bubble, but social media and biotechs were.

If you're a fund holding a rather large position in biotechs, some funds specialize in nothing but biotechs, I'm not sure how confident you'd feel that the PPT would be there to support your stocks if not outright pricking their bubble. However as we have covered many times, it takes time to move orders, whether accumulating or distributing as these are not 100 or 200 ,ot positions, it's not uncommon for a larger fund to have a billion dollar position in a single stock and that's considered a "moderate" size position, so yeah, it takes some time and it takes a lot of demand if you're trying to dump them, especially if the F_E_D just called them out as being over-valued.

I'm not a fan of trading individual biotechs, I've seen too many big moves in both directions that you can't predict, they depend on an FDDA letter and unless there's an FDA leak, you really don't have an edge , but as an industry group, that's averaged out.

We're already seeing the social media butterflies get hit like FacePlant (FB), I seriously doubt bios are far behind, thus I prefer something like the NASDAQ Biotech Index or the leveraged short, BIS.

 The squeeze in biotechs has been huge, but to do that a technical breakout needed to occur, that's above the resistance trendline, at that point shorts cover, the bear trap. However, this move on a 30 min chart doesn't look anything like accumulation or even in line, it looks like what I'd expect after the head of the F_E_D slams the group specifically, a strange thing for her to do in the first place...This looks like distribution in to higher prices which is what you need to move a large position without crashing it like they did with AAPL in 2012/2013 when everyone just sold at once after seeing Third Point's Dan Loeb had moved out of AAPL.

 I like to use price strength and 3C weakness to enter positions, less risk, better entry, this last move which is similar to a market head fake move as a lot of assets are so deeply correlated, "should" have seen 3C move higher and confirm as it did just before, it didn't, that's what I look for in an entry.

The opposite chart, BIS, the2x short Biotechs shows confirmation with a leading positive divegrence in to weakness.

 As for intraday, the 5 min chart is the first timeframe for the most part that intraday action is representative of institutional activity, the leading negative divegrence is what I've been waiting to see as I've been watching bios for a few weeks.

On the same 5 min chart, look at the confirming leading positive in BIS, 2x short NASDAQ Biotechs.

Trade Idea (Options) IBB Puts

I already have a filled out position in BIS (3x short NASDAQ Biotechs), I wouldn't mind adding to that here so that ticker would be BIS.

I'm going to add a small speculative IBB November 22 $295 put position.

Charts to follow...

Market Update

Obviously I'm not going to rely on charts that are anything other than NASDAQ, however this all seems a little surreal, as I said this morning about that 60 min VIX accumulation that was larger than the last leg down when the Dow lost 1200 points, I don't ignore charts like this.

It seems to me something's going on. The Es trade that sent the market higher looks to be a result of the broken market, not a real trade and all of this started on 12 day old news! Something doesn't pass the smell test here.

In any case, the NASDAQ / QQQ looks exactly how I'd expect it to in to a head fake move which is what we theorized we might see earlier this week on the rounding top.

 QQQ intraday from in line to negative at the cross above yesterday's close to leading negative.

 QQQ 2 min at the entire head fake area.

QQQ 5 min at the head fake area.

All Index futures intraday charts are leading negative and they are falling, whoever was accumulating VIX futures was either a fortune teller or pretty lucky or...

More Cracks, VIX Futures Accumulated

Although I don't blame anyone for buying VIX futures right now...As more cracks appear in market orders/quotes...

Note that the VIX intraday accumulation started well ahead of the market break, remember with long term 60 min charts positive we come back to the intraday charts for timing, 5 min was positive as I showed earlier, now the 1 min is joining in, didn't even see this yesterday hedging in to the F_O_M_C.

Trying to get information where I can

It looks like there's a little bit of a panic going on, although I suspect this is not all a coincidence or a mistake.

Looking at AAPL as a bellwether that is trading and being quoted, it looks like they are deciding just to get the heck out of dodge.

AAPL seeing sharp, distribution and reacting...

Just like the Q's.

I'm glad I'm already set with positions, but would like to add, not too sure about this market at the moment though, I'm still watching NANEX for updates.

Yep, things could get real interesting real fast

From NANEX...

It looks like the move in Es/SPX E-minis and thus the SPX, may be a screw up, a big one...

Wondering Why your Charts Look Funny...

Wonder why charts might be looking funny, maybe like this?

SPY, look to the far right.

Someone is desperately trying to goose the market as Nikkei released two week old news that the countries GPIF pension fund would increase stock allocation from 12.5% to 25%, the market acted as if it never heard this before, I published this just about 2 weeks ago.

In any case, the headline scanning algos went berserk resulting in...

NYSE: BROKEN

CBOE: BROKEN

Apparently some trades are being filled on hour old data. I'm going to check Nanex. What was it I was saying about dull markets?

Market Update

Now the market is getting a bit more interesting and I'm not talking about price only. Remember we have an op-ex Friday tomorrow, if memory serves me correctly, when we were very bearish and right near the lows before a move up, they ran the market higher to cause all of those puts to expire worthless.

With the Q's closing in on $100 and the SPX not that much of a pipe dream from $2000 (psychological levels), you have to wonder about tomorrow's op-ex pin.

In any case, remember yesterday I said , "Watch the 30 year yields, they're leading price" and this morning just about everything was in line or slightly bullish...

 SPY in green and the 30 year yield in red, however it would be disingenuous not to include this chart as well...

SPy in green, 30 year yields in red, just a little larger perspective.

The more interesting part of the day is not only the VIX Futures which have a larger positive divegrence on that 60 min chart than they did on the last leg down, but the intraday 3C charts and their reaction around yesterday's close.

 The SPY intraday chart is certainly not in line...

The longer 2 min intraday goes negative right at yesterday's close, I'm guessing a move above yesterday's intraday high would cause some more bull buying and call option buying.

The IWM was in line as shown earlier today, that changed and again, right around yesterday's close (green arrow).

 The divergence in migrating like the SPY, still early, but migrating, again at yesterday's close and above.

And moving now to a 3 min, that's still kind of dull action, but from in line to 3 timeframes of migration, it's getting more interesting quickly.

 QQQ which was in line intraday, also started going negative at yesterday's close which is where VWAP was.

QQQ 2 min with migration as well, also very close the the centennial/whole number (psychological) $100 which is a magnet.

Things may start getting interesting sooner than later. That 60 min VIX chart looks like someone put a lot of money on the belief things are going to get very interesting sooner than later, to the downside.

USO REITERATION (LONG)

I already opened some USO November 22nd Calls because I'm not crazy about the leveraged ETF options available. I "may" add to that position, I'd be looking for a head fake move below support which I'll show you, to make the calls worthwhile or or rather to pick them up at a discount. I'm not against leveraged ETFs for a trade like this, personally I wouldn't just buy USO, but that's just me.

The F_O_M_C yesterday said they expect inflation to move up toward their long term 2% target, but expected low oil prices in the very short term would keep inflation low in the very near term, I'm not so sure how long they can count on that particular assessment, which is a bit strange in a few ways as the $USD and it's correlation to oil (typically opposite), looks as if it's going to see some downside right about the same time USO should make an upside move which would not be what I'd normally expect considering QE was just ended, but perhaps the $USD overshot to the upside a few months ago as it front ran the end of QE and rallied for 12 consecutive weeks (buy the rumor, sell the news).

Also keep in mind we just found out that the Saudis cut oil production during September and there'
s every reason to believe they are doing the same through October, that's profits they are missing and by reducing supply, you push prices higher.

In any case, as for USO (WTI Crude)...

 This is a longer term daily chart, note the H&S top at #1. The downside target using the price pattern implied target would be around the lateral trendline, however that's a support area as well and once broken, sellers pile in, but something else interesting happened that almost makes that move look like a head fake , whether it;s an actual head fake or not, it would create the same end result...

 A closer look on the Daily chart and notice the increased volume at the lows, short term capitulation or selling exhaustion, this is where we often see accumulation events . We also have something similar to a "W" bottom at the white trend line.

With shorts jumping in on the break below support at #2 on the chart above this one, a potential bear trap is set, most stops would likely be just at or above that former support area, now resistance which shorts would expect to hold as resistance on a test and even add to their USO short on a test of that resistance, so it's not like an initial move higher will see shorts cover, quite the opposite, they'll add in to a move toward resistance expecting it to hold.

All in all, this would create a fairly large bear trap as soon as prices cross above resistance as they scramble to cover which is nothing other than buying.

I'm not making a case for a primary uptrend in USO; this is the daily chart, distribution at the H&S is very clear and we don't have the same kind of large accumulation for a primary trend move, but that doesn't mean it's not a worthwhile move that could easily run back to the top of the June range.

The 2 hour chart which is a very strong timeframe also shows clear distribution at the H&S top and some accumulation, this is pretty amazing that it has reached a 2 hour chart in such a short period.

A 30 min chart gives more detail on price action and underlying trade as it is leading positive.

And if you follow the divergences you can see how a "W" was formed, there's actually a slight bit of distribution or just letting off accumulation near the highs of the range, sending prices back to the lows of the range where the divergence starts again, this is typical accumulation behavior ,  buying at the lows.

 Here it is again, but we have some slight 5 min distribution yesterday in to the F_O_M_C as the $USD sky-rocketted on a weak Euro.

If we see a move below this recent range, I'll add to my call position in USO, I think November 22nd monthlies are fine, but if I do add, I may spread that out with a little longer expiration, that's just my preference in buying options.

As for the $USD, I covered it in pretty deep detail yesterday, amazingly almost nothing has changed, it still looks like it's going to make a move lower.

 30 min chart fails to confirm the move up yesterday and forms another negative

Even short term 5 and 7 min charts show distribution in to yesterday's dollar move and with longer term $USDX charts negative, I think it's coming down soon which should give oil a boost.