Daily Wrap

I'm not quite sure where to start as to what's most important. There's some big picture events that have taken place or are underway that would be most relevant to the big picture of the market which some might say is most important. Then there's near term stuff that applies to our near term expectations and trades and at the moment, that may be considered the most important so I'm just going to wing it and hope it all comes together.

First, the macro-data that has been released over across the globe over the last 15 hours or so has been one huge cluster-funk (What did you think I was going to say? I'm a polite guy!). I'm not sure I have all of it, in fact I'm quite sure I don't , but some of it includes: China PMI MISS, Japan's "All Activity Index" MISS, German Manufacturing and Services PMI MISS, French Services PMI MISS, Overall Euro-Zone Composite PMI MISS, US Manufacturing PMI MISS, US PPI MISS,    Chicago F_E_D National Activity Index MISS, Philly F_E_D Business Outlook MISS, Kansas City F_E_D Manufacturing Index LOWER, E.U. Consumer Confidence MISS, Bloomberg Consumer Comfort Index LOWER, Existing Home Sales MISS, and Initial Claims which actually showed some strength.

Initial Claims came in at 264k vs. consensus of 276k (Bloomberg) with a prior of 265k which marks the 3rd consecutive week in the low 260's range, which is one of the best 3-week runs on record, around a 15 year low indicating healthy labor market conditions which may be a harbinger of a better than expected May Non-Farm Payrolls print on June 5th, a couple of weeks before the June F_O_M_C meeting on June 16th and 17th with the policy statement out at 2 p.m. on the 17th followed by a presser by Yellen.

There can be little to really no doubt that the economic picture is quite ugly indeed and this is what I was trying to get to last night in the Daily Wrap... "Why does the F_E_D and their henchmen like the WSJ's Jon Hilsenrath (unofficial F_E_D mouthpiece) keep defending Q1 data and writing it off as a transitory blip?" It seems we might have gotten the obvious answer when Goldman Sachs ran their FRB/US Computer Model overnight and came to the conclusion that there's "little slack" in the economy, a key phrase Yellen has used over and over. On top of that the BEA (the government agency that puts out economic data like GDP) has identified anomalies in 1st quarter seasonal adjustments that make the first quarter unusually weak, which is something the F_E_D noted several times recently with the foot-note that the characteristically weaker than normal Q1 economic activity is a passing blip that is not seen in the other quarters of the year. Suddenly after the minutes are released yesterday, within an hour, the BEA says  they will apply a second seasonal adjustment to Q1's seasonal adjustment to make up for the weak Q1 GDP. This of course wreaks of a "goal seemed" print that the F_E_D doesn't have to explain when they hike rates which in my opinion will be in June with the presser after. In other words, the F_E_D has been defending Q1 GDP weakness as transitory, seasonally characteristic and then the BEA says the reason its seasonally characteristic is because there's faults with the seasonal adjustments and therefore it will be re-adjusted. Then Goldman just happens to run their FRB model overnight and finds there's little slack in the economy,  but the macro data trend would beg to differ.

(I had to borrow the chart from another site) This is the US Macro Data surprise index vs the SPX since the October lows and the end of QE3, not only the worst start to the year in something like 8 years, but the lowest macro data print in 6 years at 6 year lows.

It's hard to justify hiking rates with economic data like that so the F_E_D has introduced the ambiguity clause, so long as they "Feel" like the data will move toward their long run goals, they can justify a hike even if the data is at cycle lows. NOW THE NEW AMBIGUITY FACTOR BEING INTRODUCED IS, "DON'T MIND THE ECONOMIC DATA, IT'S SKEWED, PAY ATTENTION TO THE MODELS". I have documented this entire process since the introduction of QE 3 when it was plainly obvious the F_E_D was already planning for an exit from QE and accommodative policy and every meeting since then has added another piece that makes it easier to hike no matter what the economics say.

THIS HAS LED ME TO BELIEVE FOR SOME TIME THAT THE F_E_D IS BACKED IN TO A CORNER SITTING ON ZIRP RATES FOR NEARLY 7 YEARS WITH NO ELBOW ROOM. Further more I believe they are afraid of something that they wouldn't dare tell the market, something so scary that they will hike rates despite the ridiculously weak macro-economic environment and will put out all forms of silliness to justify or not have to justify the rate hike. That means the economic damage that a rate hike will do to consumer credit, cap-ex spending, housing, the economy as a whole is less worrisome to the F_E_D than whatever it is that they are truly worried about enough that they'll hike rates in such a terrible economic environment and whatever that is, it's coming.

As to more recent activity, the AAII Investor Sentiment was at the second highest Neutral reading in 12 years! This means that both bulls and bears are near range lows. In other words, traders couldn't be more confused about the market, according to the survey they are essentially the most confused in 26 YEARS!

Gee, I wonder why?

 ADX daily has just moved off of a reading of 9, a reading that tells us the market has the weakest trend historically. To give you some idea of how rare this is, out of 16,380 trading days since 1950, readings this low have only been seen 42 times, or approximately 0.00256% of the time and in almost every measure from 1 week to 1 month, 6 months, 1 year, the market has almost always been lower after such a reading. Is it any wonder with the SPX looking like this through 2015?

An extremely tight triangular range that is not actually naturally occurring, but constructed, I believe for the head fake set-up value.

However as you'll see below and as discussed in last night's Daily Wrap, our Week Ahead forecast saw two opposing possibilities that "seemed " impossible to reconcile, either one or the other, but the head fake breakout has been made and at the same time the reversal process expected to finish developing this week has...

Once again, the major averages on the week, with the exception of Transports which have been exceptionally weak, the averages have been dead flat across this entire week indicative of the reversal process and the distribution that comes with it, thus satisfying booth conditions seen as likely to occur as of Friday's The Week Ahead forecast. Again see last night's Daily Wrap for complete details.


Today's move in the market was ridiculous. Not only do we have a huge Dow theory divergence between Industrials that are just off all time highs and Transports which just moved off 6+ month lows, absolute NON-CONFIRMATION, we also saw the R2K diverge from the rest of the market significantly today considering the percentage moves and all of this  ON THE LOWEST VOLUME DAY OF THE YEAR (excluding holiday/half days).

Oil moved toward our target range as we have expected for a second chance short entry on a $USD correction. Interestingly as I suspected and had initially written in last night's post and then took out (or did I? I'm not actually sure)the expected move higher in crude on a corrective move lower in the $USD led the market today, at least ES/SPX futures...

 Crude in redgreen candlesticks led the SPX Futures (ES) in purple during the cash market today. As I suspected last night and had originally written, the move in crude would likely pull up the Energy sector (XLE) and the size and strength in the Energy sector would lead the market.

This is XLE in light blue vs the SPX in green today.

However as the NYMEX closed at 2:30, something strange happened that I wrote about today in this post, VIX Smack Down

As NYMEX closed at 2:30, the crude strength was no longer there to lead the market, then we suddenly got VIX Smashes/Smack-downs as we see initially just after the NYMEX close and when that failed to send the market higher, the VIX was smashed lower again. We saw this in real time and that is what this post was all about this afternoon, VIX Smack Down. PURE MANIPULATION.

USO has moved within the range I expected and hoped to see today on a $USDX corrective move...

 The USDX (futures) 5 min chart with a reversal process for a corrective move lower which...

As we expected, sent Crude oil futures (and USO ) higher as you can see the $USD (green) correlation (inverse) to Crude futures (purple). As I said today, "I think we are in the range, but I'd like to see some more evidence).

 This is the $USD 60 min chart with the downtrend and our expected "LARGER" counter trend bounce that has a lot to do with the carry trade wind down (again see last night's Daily Wrap for full details). Even though we had a pullback in the $USD today, we are still up 2.2% on the week as the $USD put in the strongest 2-day move earlier this week since October 2011!!! THIS IS AN EXCELLENT EXAMPLE OF WHAT I ALWAYS SAY ABOUT HOW POWERFUL COUNTER TREND BOUCES/RALLIES ARE, THEY NEED TO BE TO BE CONVINCING.

Gold was also expected to move higher setting up a second chance entry (short), that didn't happen until we started to get divergences (positive) in GLD today...

 GLD 2 MIN POSITIVE DIVEGRENCE...

Upon the first signs of a positive divergence I closed the June 19th GLD puts at a +15% gain, Taking GLD June 19th $117 Put Off the Table

Shortly after on additional positive divergence I posted a new GLD Call position for the GLD bounce expected, Trade Idea-SPECULATIVE GLD Long

In addition to the +15% gain of the puts closed today, by the close the new GLD calls had a +16.6% gain by the close.

This is the GLD 15 min chart with an initial divergence sending it higher, a negative divergence which is the basis of the larger swing short trade and the bounce expected on $USD weakness which we are playing long with today's new position Trade Idea-SPECULATIVE GLD Long.

I'm looking for GLD to hit the $116.50-$117.50 area before closing today's new call position that is at a +16% gain in addition to the 15+% gain when we closed the earlier GLD puts, then open a new short/Put position to capture the trend lower represented by the larger red negative divergence in place on the chart above.

We also entered a QQQ June 5th $111 put position which is at dead breakeven on some intraday negative divergence in the Q's and the market at large...

 SPY 4 min negative intraday divergence showing stronger near term distribution which seems to be on ANY price strength observed.

The larger 10 min SPY chart with the cyclical/Wall St. set up/positive divergence at May 6th and 7th which you will see repeated over and over through numerous assets and asset classes. This is a positive divergence at a sharp "V" base which was the reason last Friday's "Week Ahead was looking for initial weakness early in the week May 11th in to early May 12th followed by a bounce higher which we are seeing distribution throughout. These 10 min charts are my barometer on when I expect a larger downside move in the market. I'd like to see the 3C leading negative divergence to put in a new leading negative low as I have drawn in above in red at the end of the current 3C line in orange.

 QQQ 5 min intraday leading negative today. Despite the late day strength that was made possible only by a VIX SMASH as seen above to manipulate the market in to a slightly higher high, the QQQ put entered today is flat, I expect it will show significant gains in the week ahead.

Don't forget, tomorrow is an op-ex Friday (even weeklies) and we tend to see a max-pain pin around Thursday's close making most of the day pretty dull until just after 2 pm when the max pain pin is removed as most option contracts are settled by then. These last 2 hours of the day are some of the best 3C data of the week.

The IWM 1 min showing an attempted end of day bounce in to the green for a positive close seeing 3C distribution and sending IWM back below yesterday's close right at the close.

To the left in red is yesterday's F_O_M_C minutes.

And the IWM 5 min chart and cycle since May 6th/7th at a small "W" base unlike most of the averages with a less stable "V" base. Friday May 15th in the "Week Ahead" I said to look for a flat range and the reversal process this week, as you can see by the yellow arrows above, we are in the reversal process as last Friday's forecast predicted. There's also a significant 3C negative divergence through the area.

Leading Indicators are falling apart, I'll post those in an update tomorrow.

As to internals, again tonight we have no Dominant Price/Volume Relationship, nor do we have any short term biases in Sector performance of Morningstar industry groups.

As to futures, the 1 min 30 year Treasury futures chart shows a 3C divergence so I'm hoping for a TLT pullback so we can enter the second half of the trade (long) for a counter trend bounce before entering the next trade which will be a trend short.

The $USD also looks like it is wrapping up the small corrective move we saw today and we should see it resume its counter trend bounce higher soon. All of the Index futures are more or less in line except the NASDAQ 100 futures look a bit weaker intraday...

That will do it for now unless I see some strange futures activity which I'll check on before turning in.

Remember it's an op-ex Friday so there will likely be a max pain pin near today's close that won't release until about 2 pm so it may be a bit slow in the early part of the day which I'll be using to set hundreds of alerts for positions on the watch list that are near entries.

Have a great night.