However, if today's knee jerk rally was related to the short term positive divergences of this week and the levers including HYG, TLT, VIX and USD/JPY), then there was a leak. More likely as I theorized this week, the F_O_M_C knee jerk reaction would act as perfect cover for the move that we forecasted 5 days ago, all it took was the market to define the reaction to the F_O_M_C by leading strongly in to the policy statement which it did and which the leading indicators/levers did in advance of the statement.
When you really look at what was said, this was not a dovish F_O_M_C, thus the knee jerk reaction was either on a leaked policy statement which I doubt as it would have had to be leaked days before the meeting even began or 2) it was as I suspected and the knee jerk reaction was defined by price action which had already been set up and in place as we have been showing all week or 3) it was a totally random knee jerk reaction in which case, as usual they are almost always wrong and faded (recently or the last couple of meetings) within 2 days.
I think after seeing the charts, the levers, and their subsequent reactions, you'll agree with me when I said, "Tomorrow's F_O_M_C's typical knee jerk reaction could be the perfect cover/catalyst for such a move." in yesterday's Averages, HYG, TLT Update post
Or in last night's Daily Wrap, " I would suspect we'll probably see it sooner than later, in fact tomorrow's F_O_M_C looks like the most logical place as the Knee Jerk reaction would be a perfect place, perfect ignition and perfect cover for such a move. Remember that F_E_D events almost ALWAYS see a knee jerk reaction and it is almost ALWAYS wrong, so this would fit perfectly at the 2 p.m. policy announcement and the press conference following."
I believe price action set the tone for the initial interpretation of the F_O_M_C and thus the knee jerk price action, however as I pointed out, there were several things the market DID NOT like, such as this The Market DID NOT Like That when it was mentioned that data dependency could cause rates to rise sooner than anticipated or, the seemingly very blatant warning, "A couple of meetings" with the definition of a couple being 2 which would put a rate hike at the April 28/29th 2015 meeting. There were other statements such as the policy statement's, "Almost all participants see a rate increase in 2015" .
Peter Tchir of Brean Capital believes this is a very direct warning to the market with the addition of Yellen's notation that a rate hike does not have to be on a meeting with a press conference or a press conference could be held by telephone and his notation of her comments, "I keep telling the market what we are going to do, I wash my hands of the market if they won't listen". As such Tchir has taken on an instant bearish bias with recommendations to take positions in 3 year treasuries (SHORT), Front End EuroDollar Futures (SHORT), and SHORT Equities/Stocks.
However we make our decisions not based on Tchir's interesting comments, but on objective data, the same objective data that told us nearly 5 days ago that the IWM > $118 was the target and all levers to ramp the market had been engaged by yesterday.
Of the 4 major market averages, the IWM had the best relative performance which I said to look for in yesterday's Quick Market / Leading Indicators Update "The SPY 1, 2, and 5 min chart now have positive divergences. The IWM 2, 5 and 10 min charts have positive divergences, this looks to be the strongest and should have the best relative performance vs the other major averages." also as early as Monday night's Daily Wrap in talking about the Dominant Price/Volume Relationships, "...of 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!"
The two strongest averages in 3C underlying trade have led the market, the SPX and the Russell 2000 at +2.04% and a much more impressive +3.11% respectively with the NDX coming in at +1.85% and the Dow behind at +1.69%...all impressive moves to be sure, but there's only one average that can draw the Mass Psychological attention of the market and that's the Russell 2000 for this very reason which is why I suspected this move as early as Friday based solely on Mass Psychology until the charts began giving us confirmation Sunday night and through the rest of this week.
The market is not that strong to pull off the move on its own, thus the need for levers which we saw activated all week, furthermore, the most obvious range and breakout which has not yet seen a head fake move would be the 6 week range in the Russell 2000. See the SPX, Dow and R2K's price charts and you'll see why the market that "should" lead a risk on move and get bulls to commit, thereby creating a bull trap, is also the easiest to hit and create a clear breakout that technical traders will buy.
However the very reason we first suspected such a move was based on the Russell 2000 being caught in a range for 6 trading weeks with only 1/3rd of a percent of movement over the entire period, creating a very obvious target for a head fake or a VERY visible, obvious price range...
Now for the interesting stuff...
As far as Leading Indicators go, I listed many of this week's posts earlier here, Levers In Action which can essentially be boiled down to the thing I said this week and the same thing I said on October 10th near the October lows when we expected a MONSTER RALLY that would scare all shorts, even those who knew it was coming... "THERE'S ONLY ONE REASON TO ACCUMULATE HYG, TO RAMP THE MARKET"
It seems those who did the accumulation to ramp HYG and the market with it, are eager to exit the position as soon as possible and as pointed out earlier today, are already well in to the distribution process, although it's not near done which will serve as one of our best indicators as to when and where to enter shorts as this move fades and reverses to continue the stage 4 move lower to a new low below the October lows.
Of the other ramping levers, TLT was mentioned at least 4 times or more this week to be showing the kind of distribution that would send 30 year yields higher and lead or ramp the market as well.
THE LAST TWO F_O_M_C MEETINGS SAW YIELDS DIVERGE FROM THE SPX WITHIN 1-2 DAYS, AN EARLY INDICATION OF THE FADE OF THE SPX'S KNEE JERK REACTION SENDING THE MARKET LOWER.
As such, the initial accumulation starting back up in TLT and lower yields in to the close (via higher 30 year bonds) is one of the first early indications of a downside reversal after IWM > $118 is posted.
While the divergences are not yet strong enough (with only 2 hours behind them) to call for a reversal and likely won't as long as the IWM needs support to break $118, the fact the divergences are there are initial confirmation that our entire theory from start to finish is on the right track as the distribution needed this week in the asset was confirmed, the move lower in 30 year bonds was confirmed today, ramping the market and just after the F_O_M_C, the process to unwind the levers was confirmed.
The exact same signal (distribution early this week and late day accumulation) can be seen in the 30 year Treasury Bond Futures' 15 min chart as well.
The next ramping lever, the VIX was showing signs as early as last Friday of a downside move with a Star on the daily chart. As I warned then, "I don't think VIX is done on the upside, but it doesn't and usually won't move straight up".
Both VXX (Short term VIX Futures) and VIX Futures themselves also showed early signs of accumulation after being under distribution all this week, another lever apparently being slowly or at least gradually considering there were only 2 hours after the F_O_M_C, BACKED OUT OF...
And the fourth ramping lever, USD/JPY was ramped hard and ES/SPX futures with it.
There's no initial signs of a reversal here and I wouldn't expect one until the target is hit, but there is some Yen accumulation underway, but not $USDX distribution, which got an added boost today on Euro weakness as the Wall St. Journal reported the ECB's Coeure who is against ECB sovereign QE (as the Bundesbank made very clear yesterday as well), that among the ECB there is, "broad consensus around the table in the governing council that we need to do more to raise inflation and boost the economy.
The market took this as a sign to mean the ECB has broad consensus, despite the story just a week ago that Draghi has a virtual mutiny on his hands with ECB members, that sovereign QE, a thing that is illegal under the ECB's charter, was imminent, sending the Euro lower.
This is how sick this market is and how addicted it is to QE which has ended in the US, is almost meaningless in Japan and is very unlikely to ever happen in Europe, but once again, the normal fight against deflation that any Central Bank would wage in the ECB's place right now is instantly equated with QE, although no one EVER SAID ANYTHING along those lines, in fact directly the opposite. However, QE is associated with inflation and the market desperate for anything , the story sent the EUR lower and the $USD higher, thus the USD/JPY as well.
So for our fellow Wolves in Europe, if you were wondering what sent the ERU/USD lower today, it was the Wall Street Journal article that again said there is broad consensus to fight deflation in the Euro-area, it did not say ANYTHING about sovereign bond purchases by the ECB, that was the market's wishful thinking, despite it being illegal for the ECB, despite Germany and the Bundesbank never likely to allow it and the "mutiny" Draghi has on his hands.
As for the EUR macro trend...As hard as this may be to believe (we only see what smart money is doing, we don't know why at the time just like the huge accumulation in Home-Builders after the Tech bubble popped, who would have ever dreamed that housing would lead the next bull market after the Internet literally changed everything in our daily lives? Well the accumulation of Home Builders was there for more than a year and a half several years before Home Builders gained +2500% in to their 2005 highs), but for whatever reason, the EUR's macro trend actually looks bullish.
I digress...
While I do not expect to see any meaningful distribution until the IWM has passed $118, as this move not only comes at a perfect area for the IWM's 6 week flat range, but also playing off the "assumption" that this year we will have a Santa Claus Rally like any year (an assumption that may prove fatal for longs with this particular move as price "seems" to point in that direction)... There are things we can still see that tell us our theory is still on the right track as it has been proven right all this week since first put forward Friday and Saturday leading right in to today, among a horrendous downtrend in stocks, simply meaning that most probably would not have called for such a rally in such bearish circumstances and it remains one that I would not sleep well at night having entered on the long side, although yesterday's analysis of which average to take if you were to trade it long was right on...Our look at Leveraged ETF's TQQQ/SQQQ proved to be correct in picking Leveraged Market ETFs: URTY/SRTY, the 3x long IWM over the 3x long QQQ as IWM outperformed QQQ by nearly 100% today.
One of the biggest movers in the market today was the Most Shorted Stocks, but that's not hard to believe with recent market activity. The MSI (Most Shorted Index) saw it's best day in 3 years today.
Eric Hunsader from NANEX provided us with a Tweet of ES action today...
As suspected, the RUT outperformed everything else by a fairly substantial margin, transports lagged at +.84%
However the SPX still put in its best day since January of 2013, this is one of those "seemingly bullish" events, when in reality, bear market rallies (after the last week or so) tend to be some of the strongest you'll ever see so the performance in an otherwise bearish market on a hawkish F_O_M_C isn't all that surprising and part of the wider RUT head fake move we are looking for.
Furthermore, the path of highest probabilities still remains with the longer term charts like SPY 30 min...
Remember this is a move we called as early as Friday, fleshed out the concept over the weekend and showed the levers of market manipulation being pulled right up to today so don't get lost in the short term emotion of the market.
Although the positive divergences we tracked earlier in the week are still there,
That doesn't mean some damage wasn't done intraday.
Oil and our USO calls, although round tripped back to unchanged, still have a very strong positive divegrence and our calls should have plenty of time.
As for market breadth, the Dominant Price/Volume Relationships weren't surprising.
The Dow lacked a Dominant theme, however the SPX and NDX were both Close Up/Volume Down, the most bearish of the 4 possibilities with 258 and 67 stocks so very dominant, while the Russell 2000 saw 1083 stocks in Close Up/Volume Up, the most bullish relationship.
Although there are some next day implications, the fact that all of the averages were scattered doesn't leave me placing a lot of faith in them. However the themes do seem to tell us what we expected, the R2K is strong right now at least until it hits our target while the SPX and NDX are showing typical bear market rally breadth weakness. This is exactly what we should expect when we were looking for relative outperformance in the Russell 2000/IWM.
Last night looking at the Industry groups over a 1, 5, 10 and 21 day period, we had a deeply short term oversold condition, so that was right in line with our expectations for this move. Tonight of the 9 S&P sectors, all 9 of 9 closed green led by Energy at +3.87% and lagging was Industrials at +0.93%.
Any other time I'd call this short term oversold, but I think the IWM keeps going until it hits its target. That doesn't mean the SPX, NDX and Dow have to keep up the relative performance in which they even lagged today also as expected.
Of the 238 Morningstar Industry and Sub-Industry groups, a WHOPPING 235 of 238 closed green, that to me is a 1-day overbought event that would normally close lower the next, but I still think the IWM keeps plugging away until the head fake move (Crazy Ivan) is in place > IWM $118.
Intraday TICK was easily hitting the +1500-+1800 range today, not unusual for a short squeeze, but as the levers like HYG back out, you'll see the signals of where a head fake reversal and short sales are best entered, emerge pretty clearly. Remember there's a reason I decided not to piggy back trade this market long, the support for a stable base is NOT there, you could easily wake up to a massive gap down, but again I think the Russell 2000 breaks out first as that's the point of this entire move.
A lot of our Breadth indicators seemed to move quite a bit today, however others are mired in bear market-like readings, for example the Percentage of All NYSE Stocks Trading ABOVE Their 40-Day and 200-Day Moving Averages are still very low at 37% and 43% respectively so it will take a lot more than 1 day to make a dent in breadth, those rotting pilings under the pier out of view.
As for futures, surprisingly the Index futures that were in line (confirming) intraday, don't look so good tonight (this is what I meant by I wouldn't be able to sleep going long this move- charts like this)...
The 5 min charts are in line for the most part with some Nikkei 225 Futures weakness STARTING to develop.
The 5 min $USDX still looks strong, but as mentioned, the Yen 5 min is also looking like it will strengthen as it puts in 5 min positive divergences, so when the time comes for the lever of USD/JPY to fail, it will probably do so spectacularly.
As for the 7 min charts, where this move was built, the $USDX looks parabolic with no support, again, I take this as evidence that the move near term is strong, but should fade off pretty fast once the IWM makes the breakout move and fails shortly thereafter. The Index futures have good support here except for NQ/NASDAQ 100 futures, a bit weaker than expected after looking at TF and ES. Still I expect this move to finish playing out.
Tomorrow I'll be busy watching the levers, especially if we get close to IWM $118 as that's all that's needed for the market to fail and the levers will be the first place to see that happen. I'll also be very busy looking for the best short sale assets, although you know what some of my favorites are among the leveraged inverse ETFs, I'll be adding individual equities as well.
If anything pops up in futures tonoght (Which I don't expect), I'll post it and let you know, otherwise, keep your eye on IWM $118+ that's the finish line for this head fake move.
