Close Call

SORRY FOR THE RADIO SILENCE, BUT MOST OF YOU KNOW, IF I'M QUIET IT MEANS I'M EXCEPTIONALLY BUSY.

This is turning out to be a very close call. The one thing that changes in the market as volatility increases and fear levels increase, is the "Wild Card" or predictability, rather the unpredictability factor and it almost always is an increase to downside surprises. To be very clear, we were in a stage 4 decline that retraced not only the entire head fake ramp of the February cycle (this was because there was a tight range in the market that was extremely obvious and extremely easy for smart money to use on a head fake /false breakout to get retail traders to follow and buy the breakout above a well known, and very visible resistance range, not to mention all time new highs which technical traders will buy, especially with what I believe is a very mistaken opinion that "This time is Different" and the "F_E_D has their back".

Both of these opinions are nothing new and are sorely mistaken in intent. If the F_E_D decides not to hike rates it's not because they care one bit about retail traders , of which most know nothing more of the market than the F_E_D accommodative policy period, they grew up as traders during one aspect of the market and don't have a clue as to the entirety of the market that plays out over decades, look at the roaring 29's and the 1929 crash and Great Depression after. I'm sure the same things were being said before the crash, The F_E_D has our back and "This time it's different" which has always been the sure sign of a bubble in whatever asset the slogan was being applied to.

I want to give a quick shout out to the best members I could ever imagine. Way beyond statistical averages and way beyond anything I could ever dare to dream, somehow I've been blessed with the greatest group of people, well beyond what I ever could have hoped for. I appreciate all of the emails of support and all of the second sets of eyes as I've been getting numerous emails pointing out different assets and signals that I just couldn't see all on my own during a trading day. You guys have taken to the concepts, the indicators and have really come up with some fantastic insights and very helpful emails and I just want to say thank you and I couldn't be happier or prouder of such a diverse group of people from all walks, different countries, different trading styles, all sharing two things in common, your love of the market as well as deserving of the ability to beat the crooks on Wall St. and in the government and your exceptional decency as human beings, again well beyond what I could imagine and defying any statistical norms like the 80/20 rule.

In any case the point of the post is this is a close call.

Intraday most signals are about in line and the longer term strategic signals are very negative so all things being the same and without strong intraday signals, the probabilities would fall to the market losing ground.

I am monitoring this very closely and most of the say, the market has been close to inline, not giving the strong signals that are our edge. Patience is key, but there's a thin line between patience because it's the right thing to do based on objective evidence and the emotions of not wanting to miss the trade which can cause you to act before you should. I just warn that without a strong edge, we are doing nothing but gambling and that fear of missing out on the trade is actually not Fear, one of the two emotions that rule market movement, but greed and greed can be much more dangerous than fear. 

As the saying goes, "Bulls make money, bears make money, Pigs get slaughtered". I'd encourage patience until we have that edge, which we do have on a broader basis and this is why I have maintained core short positions. My own broad portfolio consisting almost exclusively of core , long term trend based shorts, has been up as much as +3% today. However, I want to capture and point out any edge or probability the market offers and right now that's focussed on near term trade and tactical positioning. Strategically, it's my feeling that we should already be well positioned.

THE MARKET:

So far most of the day the market has been holding the SPX/Futures right around the VWAP (Volume Weighted Average Price" or what is better known to us as the report card for middlemen like market makers and specialists when they fill a trade for an institutional client in an asset they make a market in. If they fill at VWAP or better, it's likely they'll get more business from that institution/hedge fund/pension fund, etc. If they fail to do at least VWAP or better on the orders' fill, it's likely they'll lose that client and a large stream of income in stocks they make a market in.

So VWAP has been an issue today.

The dominant Carry
Trade Correlation since EUr/USD swapped out late last week has been the former USD/JPY. It was just a week or so ago I was saying how dominant EUR/USd has been in leading Index futures and it almost seemed as if it was a lifetime ago when USD/JPY (carry trade) was last leading the market as well all likely remember very clearly. Well last week, late in the week that correlation re-established itself.

Very short term intraday, ES is leading the USD/JPY...

 Overnight you can see the carry trade (FX) led ES to the downside after the European open. Since the US open, it has largely been ES leading the USD/JPY correlation which would "seem" to suggest that ES revert back down to the FX (carry trade) correlation.

While these correlations are getting volatile and I expect them to be more so as the GREAT $9 trillion $USD carry unwind takes place, for now looking at the correlation since USD/JPY took over last Thursday...

We can see ES (purple) in line with the USD/JPY correlation and leading to the downside suggesting that near term, beyond simple intraday, ES has support at slightly higher levels via USD/JPY (Candlesticks).

Intraday, the charts have been largely all over the place. This is where things get difficult as the emotion of greed (and I'm not saying this to be derogatory to anyone, I know you are all good and generous people, it's just a natural emotion in the market that I'm even struggling with) starts to set in. I'd better define this as "Not wanting to miss the trade". However one of the most dangerous lessons we learn in the market is to follow emotion and if we are rewarded by that emotion LACKING OBJECTIVE EVIDENCE, it sets a subconscious, psychological precedent in which whenever there's confusion about which way to go in the market, you let your emotions determine the course which is as I said, one of the greatest dangers.

You may have heard of my poor analogy on the subject of a solider who comes across a minefield in which one wrong step could mean his life.  After some consideration the solider decides bravery should dictate his actions and judges it's best just to run across the minefield and he does so and makes it successfully. 

What is the lesson that was just reinforced in that solider's subconscious if not in his conscious?

The next time he comes across a minefield, the best course of action is to just run across it. This is akin to gambling in the market and just like Vegas, you may get lucky once or twice, but soon enough probabilities will catch up with you and they'll be carrying out of the market feet first.

So while I've been a bit quiet this afternoon, most of you know that's because I've been extremely busy.

What I've come up with are the most basic of probabilities, longer term very negative market bias, near term probabilities favor patience and the objective evidence is on the charts of Es/S&P E-mini futures below.

Starting from the highest longer term or rather "Big Picture" or "trend" probabilities, nothing has changed and the core shorts we have been building have strong objective evidence to continue to hold them, which is one of several reasons I said I thought our best course of action during the last 2 bounces since MArch 10th is to hold long term trend shorts, not to introduce long side risk and to use any opportunities we get to sell or sell short in to price strength.

ES 1-day chart, the strongest of all of these probabilities and charts below.

 The area in red is 2015 and I didn't draw anything on the 3C divegrence (light blue indicator) because this is such a strong chart and signal that I didn't want to distract from it.

Remember the position changes in Soros's portfolio or Appaloosa's from Q4 2014, when we see Q1 2015 in 45 days, I believe we'll see an even worse story unfolding of heavy distribution above and beyond David Tepper's selling of all AAPL, Facebook and 10 or so other positions, reducing his equity exposure by 60% in a single quarter on top of the selling he has been doing since May of 2013.

Soros increased his SPY Puts by 600%, a position size he hasn't held in SPY Puts since Lehman collapsed in 2008. I believe the signals above are showing something much worse during Q1/2015.

The next longest chart, 4 hour ES/SPX futures...

 Here I've drawn in several divergences and in green the 2015 market range  because I had specifically said well before there was any price move above the range that it was my strong belief that before we saw any significant downside, smart money will use a head fake/false breakout to set a bull trap and as such, we'd need to see a breakout above that range before we move to a primary downtrend or bear market breaking the October lows.

NOW IN RETROSPECT, YOU CAN SEE WHAT SMART MONEY USED THE BREAKOUT AND NEW HIGHS FOR ABOVE THAT RANGE, EXACTLY WHAT WE SUSPECTED LONG BEFORE THERE WAS EVEN A BREAKOUT ABOVE THE RANGE. 

I point this out to show in retrospect that our concepts were correct even before we had the objective evidence to support them and that the longer term daily chart's probabilities were telling us what the breakout probabilities were before it even began. Now YOU CAN SEE THE PROOF WITH YOUR OWN EYES LOOKING BACK.

ES 60 min and this is where I'll stop in moving from the longest charts down, I'll start after this from shortest charts up.

 To the left in white is the March 10th suspicion we were about to see a base, which is why the MArch 20th AAPL/QQQ puts were closed that day as I suspected by the time the bounce I suspected was coming was done, those puts would have been worthless, rather we captured the gains and the divergence formed the very next day. The green arrow is the warning about the F_O_M_C Knee-Jerk reaction and how it's most often wrong and retraced. You can see the distribution in to the knee jerk move and the eventual reversal taking back ALL knee jerk gains.

To the far right (now) there's some ambiguity on the chart, not reflecting what the 60 minute charts were reflecting a week ago or more when we were near the recent highs and that was distribution and a move lower which has come to pass.

For now though, we don't have that strong signal thus I believe patience is the best course for the moment.

Now I'll work from intraday charts up to the 30 minute.

 This is the overnight and current ES 1 min chart, we've had decent divergences telling us which way the market was headed. Right now we are still in a positive divegrence even though price has moved a bit since this capture,  it has moved down toward the wider intraday base I was talking about this morning as a probability.

QQQ intraday 1 min. This is already a stronger base area than what we would have had if the market had just rallied and continued to rally off the 10 a.m. lows, that would have been a dangerous bear flag that would have been much more unpredictable than what we have now.

ES 5 min, the next longest timeframe.

 Remember just Friday this was part of why I posted the "Week Ahead" forecast and expectations of the market moving broadly lower from Friday's close as early as Monday. That has occurred, but we don't have that same divergence right now, that same strong probability of downside.

For the moment, we have an in line signal that is along the lines of reversion to 3C's reality or put another way, the move that the chart reflected has taken place, just as the longer term moves that the 1-day and 4 hour chart's reflect will take place.

ES 7 min

 This chart was also very clearly negative as of last Friday, you can see the divergence from that period and the move lower since.

We have a near term positive, not a strong one yet, but I think as the 1-5 min charts work through intraday confusion, they will form a stronger very small base here which is why  I want to be patient. 

I still DO NOT want to try to ride this long. If you would have felt comfortable taking your chances and risking assets for the meager bounce gains since March 10th , you might consider a long if this chart improves, but with increasing volatility, increasing fear and VERY small rewards compared to the risk, I think most of you will agree that even though we may know the probabilities for near term direction, the reward simply isn't worth the risk.

The increased volatility we have now seen as we forecasted, has the ability to gap down one morning and take out the entire year of longs with it, that's too much downside risk and trading against probabilities even for me and I have a high risk tolerance.

 The 15 min chart shows the ES positive from last week, the bounce and the decline as we called fro in the Week Ahead last Friday. We have another small divegrence and not well formed, but this tells me that patience is the best course unless you are willing to take the long trade risk, I am not.

 The 30 min chart shows that neither positive divegrence above on the 15 minute was strong enough to make it to the 30 minute meaning the probabilities still favor any upside price strength seeing distribution as we have seen this week as the dominant feature of the chart is still a leading negative divegrence that has made good on its forecast.

I'll bring you more and some asset updates if possible, but with near term probabilities shaping up as the market having found very short term support, the best trade set-ups are still yet to come, thus I still believe that unless I find something that contradicts all of this with stronger probabilities or unless these charts start to reflect different signals to the negative in near term 7-15 min charts, Patience is the best path to follow.

I realize it's also a difficult path to follow as we want to make something happen, we want our portfolios to grow, but one aspect of being a good trader is realizing there are 3 positions you can take, long, short or cash and just like the market that moves up , down or sideways, a good trader recognizes these paths and probabilities and acts accordingly. 

Of all the Jesse Livermore quotes (one of the world's greatest traders ever) I've peppered you with as I believe that if you aspire to be a better trader, you must surround yourself with the people and concepts that represent that aspiration, I think you'll agree that most of his advice revolved around not simply knowing the probabilities, but HAVING THE PATIENCE TO SEE THEM THROUGH.