Daily Wrap

As we expected Friday, the negative divergences that ended the day took up and kept going today at the cash open as is the norm even though there was a push overnight causing a gap up, it didn't take long for that to fall apart. This is one of the tactical reasons I keep my shorts in place, if we get a bounce then I can add to it, but otherwise, I just let the short positions work and they have been working.

As far as the scenario discussed, I think it's still on the table but will need a lot of help.

The averages are trying to get something together.

 SPY 1 min with late day improvement

SPY 2 min

But at 3 min, still in line, the market can't go too far like this, not without the 5 min charts.

The Q's are trying as well, 1 min

And out to 3 min, but that's about it.

Some industry groups are trying to put something together as well like Financials above, something worth shorting in to if they get it together.

 And XLK/Tech as well.

Transports actually are starting to look a bit better and it was Trannies and small caps that I thought would be the out performer in any such move.

Despite credit falling apart, the lever HYG is also being bid and there's no reason for them to do that unless they are planning on trying to get something going and I still think the faux Santa Claus rally is the best probability, although we need to see more evidence before it can be trusted.

We expected gold to be hit, see last week's and last night's post re: futures, thus I have kept the gold/GLD short open, today GLD was down over 2.5% on volume, making our charts look pretty good.

GLD down

Silver was hit by more than -5% today as was oil at nearly 4%, thus the speculative call position, but the charts there are working on something and today may just have caused a short term oversold flame out.

Treasuries were hit and yield curve flattening continues.

The SPX broke some of those levels I mentioned that may cause some short term hang-ups like the 50 and 100 day m.a. today. I think the market will try to find a toe hold in the area, especially as oversold as some indications are, but this is real selling, not some dip for longs to buy.

While it lightened up a bit toward the end of the day...

My custom TICK indicator vs SPY today...

The fact is we were hitting NYSE TICK levels of -1850 which is about as extreme as you get.

Just to give you a bird's eye perspective of how bad this selling is and how much damage it is doing to market structure, the pilings that hold up the pier...

Since about a week ago when I said I could see the Percentage of ALL NYSE Stocks ABOVE Their 200-day Moving Average starting to roll-over, they have clearly rolled and now stand at a mere 39.5%.

Of the Percentage of ALL NYSE Stocks ABOVE Their 40-day Moving Average that indicator is now standing at less than 30%-less than 30% of all NYSE stocks are still above their 40-day.

As for the momentum stocks, the Percentage of ALL NYSE Stocks 1 Standard deviation ABOVE Their 40-day Moving Average, they were at 50% at the rally highs and are now at less than 13%!!!

However there are some signs of a short term oversold event that can possibly get a toe hold if all the levers do their job. For instance, NINE OF NINE S&P SECTORS CLOSED RED TODAY WITH INDUSTRIALS PERFORMING THE BEST AT A LOSS OF -.33% AND HEALTHCARE PERFORMING THE WORST AT -.92%.

Amazingly only 35 of 238 Morningstar groups/sub-Industry groups closed green today!!!

There wasn't an outright Dominant P/V relationship today, but close. The Dow was Close Down/Volume Down with 14 stocks, everything else was Close Down/Volume Up, which is a short term oversold condition, although not that dominant. The NDX had 59 stocks which is dominant, the Russell 2000 had 818 which is dominant, but not that impressive and the SPX had 202, again dominant, but not that impressive and not all 4 averages shared the same relationship which may be reflective of only the IWM needing to make the move I mentioned, the others can lag with worse relative performance or even be red!

As for the levers...

As already posted, my two custom indicators the SPX/RUT ratio and the VIX Term Structure are both supportive of near term/short term higher prices.

 The red SPX/RUT Ratio is not confirming the lows and the VIX Term Structure gave a couple of small buy signals which always ruin a bit early, they are small as well, not like the October lows which were thick multiple signals.

Strangely on a day like today VXX underperformed its correlation as did Spot VIX with some of the strangest intraday volatility I have seen in VIX- see above.

I suspected we might see something along these lines after spot VIX's Friday closing candle forming a momentum losing Star with long legs.

The VIX closing lower on the day was strange as well with most of the averages down between 0.60 and 1+%.

There was nearly a VIX sell signal in the Bollinger Bands.

 VIX closed outside of the Bollinger Bands Friday and nearly inside today which would have been a short term VIX sell signal, it just cleared the bands, but was down on the day despite the market with that strange intraday volatility and VIX futures themselves...

Showing a 7 min negative divegrence at today's intraday / weekly highs.

Someone is up to something and I wouldn't be surprised if our thesis re: the Santa Claus rally and then pulling the rug from under it wasn't close to the mark. Of course we do have the F_O_M_C meeting starting tomorrow and wrapping up with the policy statement on Wednesday, so that's something to look out for too as many "expect" the "Considerable time" language to be dropped from the statement and there were very clear cues from the F_E_D that they will not rescue the market, although we know they'll do something as to not have the economy and banking system fall in on itself, as I say, the Plunge Protection and Market Correction Team making sure money is transferred from the average Joe to the banksters.

One of the most obvious and go to levers for short term manipulation is HYG, remember the end of day selling settling down on my custom TICK indicator as they went for VWAP in to the last 2 hours of the day today, well take a look at HYG's relative performance vs the SPX.

 HYG outperforming SPX end of day and...

 HYG divergences continue-still on short term charts 1 min

And out to 3 min, but not too much further, although not a lot of support is needed for this.

Other HY Credit underperformed, but not to the extent it has been recently, it was closer to in line.

Even the Pro sentiment indicator that has been in sell mode just about as long as I can remember was in line today.

For the first time in a long time pro sentiment wasn't leading to the downside but in line intraday.

Short term yields are up leading the SPX, while the mid term...

and long term are flatter, curve flattening.

Very short term this is helpful for the market (5 year up), but curve flattening is very ugly for the market.

TLT as expected is seeing continued near term distribution

2 min TLT

3 minTLT so I expect this to move lower and 30 year rates to move higher, again supporting the market as another lever.

As for futures right now, The Index futures intraday look pretty good, but it's a long night, The Yen looks a bit negative which may push USD/JPY up and help Index futures.

 All Index futures 91 min) are looking positive like ES above. Gold looks like it may see a little bounce while Crude...

The positive divegrence continues, looking like a short squeeze is coming.


On 5 min Futures charts, everything is about in line, only the Yen looks a bit weak, but on 7 min charts..

The Yen looks weak again, another helpful lever in USD/JPY up. Gold is about in line so I don't expect a bounce to lead to much and will stay short there for the time.

Crude has a nice positive divegrence. 30 year Treasury futures are in line with TLT with a negative divegrence, which is another helpful market ramping lever with 30 year yields moving up

30 year futures negative like TLT

And all Index futures are positive on the 7 min especially the Russell 2000.

TF 7 min leading positive divegrence.


While there are some divergences on the 15 min charts like 30 year treasuries negative, one of the more impressive is ES/SPX futures again with a positive.

Es 15 min.

I've said since late last week I think something is coming up on us and Saturday I fleshed out a scenario, I still think form a mass psychology point of view, using the Santa Claus Rally against traders who initially think it has kicked in, would be an amazing upset as they feel they are entitles to it and take it for granted as a done deal. That in my view would be the best use of an IWM head fake move, or the Crazy Ivan move in IWM, which has put in the first half or first 1/3rd of the move today.

IWM breaks 6 week range for the first time and on VOLUME!

Yes indeed, I think something is going on, but internals are clearly showing this is not going to end well as market breadth is almost as bad right now as it was at the October lows and we still have a ways to go before we hit those, it could be a speedy trip down to them off a head fake/bull trap.

I'll check futures again tonight, but I think we are on to something. As far as the question, "Would I trade this long as a piggy back trade?" As of now my answer is no, I'd use any price strength to short in to , let the trade come to you, but if we get stronger data, I may revise that position to include speculative longs.

Oh and SKEW is up again tonight, at $135, the Black Swan Index is in the red zone.

Quick Closing Update

Today looks like a transition day. As you know we had negative divergences going in to the close Friday suggesting we'd have a negative Monday which did not start out that way because of overnight futures action, but as soon as the opening bell rang, we ended up where we left off, with lower prices and a very interesting break below the IWM's 6 + week trading range, the very day we expect something to happen that possibleCrazy Ivan head fake move is put in.

While it's not broadly apparent, today seems to be a transition between last week's very negative signals and perhaps accumulating near the lows of the IWM's range with a daily candle closing on higher volume, and while not a bullish reversal, certainly off the lows.

It looks like the start of a Crazy Ivan dual shakeout of both sides of the range to end as expected.

I'll be putting charts up, but there was nothing to do today beyond trade management, other wise it's patience until there are enough probabilities to either make a long piggy back speculative trade worth it or to wait for a move higher and short in to it with a long piggy back trade not worth the risk. The highest probability trade here is shorting in to price strength and some very odd things have happened today in VIX and other assets that suggest we are on the right track. After over 30 trading days of RUT range bound trade, the day after we put forth out thesis on what the IWM will do, it starts what appears to be a Crazy Ivan shakeout, it didn't even come close over the last 30+ days, but as soon as it starts to become a more obvious probability, three it is.

Charts and the Daily wrap will follow.

For now I'd maintain the oil long/call position and keep core shorts in place.

Today does look a lot like a transition as there's a reversal PROCESS, not an event , than must take p;lace, Today appeared to be a part of that process, especially when assets are accumulated below a range's support for a momentum move, it's typically more than a single day, just look at the XLF example provided earlier today.

Leading Indicators, What they Do and Don't Say

There's quite an eclectic mix of signals in leading indicators, I think this represents the fact that some are levers, some are piggy back riders, some are just moving one direction no matter what happens.

For the short term this isn't the overwhelming confirmation I seek, but it's close enough for the situation at hand or at least what I suspect to be at hand with some very interesting intraday moves. The big picture is unmoved.

 VXX/Short term VIX futures shows a leading correlation vs the SPX in white (*Note SPX prices in green, are inverted to show the relative performance of the correlation which inverted is near 1.0 meaning VXX trades nearly opposite the SPX or nearly exactly the same when SPX prices are inverted).

In the middle we see near perfect confirmation & correlation in green earlier today and then VXX underperformance vs the SPX, suggesting the market is getting ready for a move to the upside (thing IWM breakout of range) and VXX is one of 3 major levers that help the market when it's not strong enough on its own.

The actual VIX futures show a 7 min negative divegrence at today's intraday high.

even stranger, spot VIX...

 is nearly perfectly in line with SPX until today where a VERY STRANGE set of price movements occur, this doesn't look like anything natural, but more some kind of algo-,manipulated VIX move, when is the last time you saw VIX or any asset for that matter trade like that intraday ?

 Here's a closer look at Spot VIX alone.

I did mention Friday's closing Star Candlestick in VIX, indicating a high probability short term reversal. While I do not think VIX's upside move is done (or the market's downside move), it's not unusual to have an interruption during the trend. past VIX moves have seen the same, even the last one off September market highs/VIX lows.

HYG's leading negative dislocation vs SPX (green) has now turned to near perfectly in line.

As I have shown, we have short term HYG accumulation signals and the simple questions is , "Why would anyone accumulate HYG?" The simple answer as it has always been when removed from the long term trend and looked at on a short term basis is, "To use it to ramp the market and fool algos in to thinking smart money is in a risk on cycle".

 I wouldn't be so presumptuous as to call this a strong signal of a bounce yet, there are signs of HYG accumulation, not nearly on the scale of past significant moves of a week or more.

In fact looking at other HY Credit assets, we see not so much a leading positive relationship, but a less negative correlation than last week.

 HY Credit in line with the SPX, rather than leading it lower in a sell-off.

PIMCO's HY Fund, also in line intraday rather than selling off outright.

 5 year yields which have been in line largely or leading negative are actually leading positive intraday today only so far.

10- year yields have transformed from leading negative to in line today.

30 year yields have done the same. These are not positive leading signals, but they are an improvement over last week/Friday.

The pro sentiment indicator that has been relentless in selling off is more in line today than anything.

However one of the most interesting signals is the SPX/RUT Ration and the VIX Term Structure, both showing short term positive signals, I emphasize short term.

Beyond that most information is still in the realm of Mass Psychology, HYG charts, TLT charts, VIX behavior and the 3C charts of the averages and Index futures.

USO Position Update

I'm not ready to add to the USO position entered Friday, Trade Idea: USO (Speculative Options) Jan $22 Calls. To bring this up any further than a speculative position would require significantly more evidence.

However, interestingly, just as last night's Futures start to the new week, Sunday Night Futures and the Week Ahead, indicated, there were sharpening positive divergences which played out in the overnight session with some nice gains, however during the cash session the 3C concept of picking up where you left off took over and those gains have dissipated, but it doesn't mean the original signals that remain aren't still significant for an upside move.

Just like any other asset moving from one stage (in this case stage 4 decline) to another, there's always a change in character and often by way of volatility, that is obvious when looking at USO's Trend Channel chart.

 Using the daily Trend Channel on USO, you can see the change in price Rate of Change, this is no different than a channel buster such as the BABA channel buster we called on a strong day up with the next day beginning the pullback exactly to where we forecast weeks earlier.

While BABA's specific head fake move is characterized as a "Channel Buster", remove the channel and watch the rate of change in price and you set the same thing as USO above. An increased ROC in price which serves as a warning between all 4 cycles just before a transition, but especially between cycle 2 (Mark-Up and cycle 3 (Distribution/Top) and cycle 4 (decline) and Cycle 1, Base/Accumulation.

You'll notice there's an increased ROC in price just before an transition to the next cycle, for BABA that was to stage 3 top/pullback and we forecasted a move below the channel as of the first post at #1 with our target at #3.

If we take away the actual,Channel of the "Channel Buster Concept", we still end up with an increased ROC of price to the upside that "seems" bullish, but just as our post at #1, the very next day the pullback started, breaking the channel to the downside for the first time in months.

USO is no different, again...

Again, take away the Trend Channel and since the gap down (commonly an exhaustion gap), the rate of change picks up, just like BABA's seemingly bullish ROC of price was actually a warning, USO's seemingly bearish price ROC is actually a warning.

 As I said last week, Do not make the mostake of thinking this is a change of trned, the 2 hour 3C chart of USO is overwhelinmgingly negative. To the left at the orange arrow are divgerences that would normally stand out and scream on this chart, but to the right at the red arrow we have a divegrence so big it dwarfes the normal ones and makes them look out of proportion next to its immense size. 

As I said, this is no change in trend, but it could lead to an immense short squeeze bounce that calls will benefit hugely from.

USO's increased negative 5 min divegrence at the exhaustion gap area followed by a positive divegrence.

The 2 min USO chart positive in the same area.

And the timing, 1 min chart in line for all of the downtrend now showing a positive divegrence, something certainly seems to be changing near term for USO.

As for the CL/Oil futures (Brent)...

 Overnight we can see some sharp Smash Crash to the upside on huge volume for the overnight session around 9:23 p.m. last night and another following. Look at the volume, someone was buying in size, apparently trying to create a noticeable price move. You can see midnight and the 3 a.m. (EDT) European open where the 3C divegrence has already faded in to a leading negative divegrence suggesting lower prices ahead shortly...

And from the same European open, just after the divergence of the last chart, Crude Futures fell until the US open when they started to show positive divergences againn.

It would seem we have a decent position here, but as I said, before adding to it, I want more evidence that this is a stronger trend to move further and one that deserves more trust as the overwhelming highest probability charts like the 2 hour above are clearly negative and in line with the entire trend lower.