Important Market Update

Again, I'll go back to Friday's The Week Ahead forecast expectations as this tends to be some of the best data of the week (the last 2 hours on Friday) and because there are some key words there and some information on the charts that raises my eyebrow a bit.

"I believe  we will see early weakness on Monday. HOWEVER THIS PART OF THE FORECAST IS NEAR MEANINGLESS COMPARED TO THE REST SO I WOULD NOT GET TOO HUNG UP ON THAT.

I'm still expecting a $USDX led bounce in the equity market as well as the bond market, certain stocks are going to be shorts before others, but this gives us a chance to open or add to any positions we may want to tweak a little.

As I have tried to make clear, it doesn't look like smart money is even participating in this move, thus my own participation level is so low at present having closed VXX puts today.

In comparison to what comes next, this bounce is nearly meaningless like Monday morning's forecast.

The main theme is strong market weakness and any chance we get to open or add to positions we like should be taken."

I'd call the initial early week weakness about half fulfilled, but had certain correlations held, the move expected , the move that would have allowed short term 3C charts to tighten up and offer a more stable long swing entry before the next trend which is at the bottom of the excerpt.

One of the key parts of the forecast is, "I'm still expecting a $USDX led bounce in the equity market as well as the bond market".

This is based on a correlation that I'd say is nothing short of a carry trade unwind. Remember the days not so long ago in which if you knew where the USD/JPY (Carry trade) was trading, you knew what Index futures had done or would look like as the correlation was that tight? That was carry trade based.

In an unwind situation, things are a bit different, nearly mirror opposite. I'll post this chart now, but it's not the thrust of what I'm getting at, but because the $USD has such a tight correlation with USD/JPY for obvious reasons, it's not far off the narrative.

The USD/JPY is in purple and the ES/SPX futures are in red/green candlesticks. Note how tight the correlation has been until the last few days, even the better part of this week to a lesser extent.

However once again, the Week Ahead forecast was calling for a $USD-based bond/equity bounce. I should remind you I have been expecting a counter trend bounce in the $USD which would have a similar effect on USD/JPY above.

This is the daily 3C chart of $USDX which shows a large area of distribution at the highs and a leading negative divergence since.

 A closer look at the same chart shows the failure to make a higher high @ #1, the break below to a lower low in the area of #2 and intraday lows at 3, which is around the area I expected the $USD to gather some steam and produce a counter trend bounce to the upside, not a change to the downtrend though.

On April 2nd in a market update I posted my expectations for the $USD as follows...

"The $USD is seeing some weakness which is something I expected near term before a larger bounce and then an even larger decline"

4/2 (April 2nd is the Thursday to the far left of this 60 min $USDX chart. On that day the $USD was weak, but just days later it out in a base and the near term larger bounce  which is in green, the accumulation for that at the white area to the far left.

The next expected trend after the bounce according to our 4/2 forecast was an even larger decline which you can see at the series of red arrows with normal counter trend or corrective bounces at the yellow arrows.

This week's $USD led market/bond bounce was to be another counter trend move like the yellow arrows, except I expected a bit of a stronger move.

As of Friday, here's why the correlation , $USD charts, 10 min QQQ (and similar charts) were so key to the "bounce" part of the forecast...

*The $USDX is represented with a  purple line, the comparison assets with candlesticks...

 This 10 min $USD vs ES/SPX E-mini futures has a near 1.0 correlation between the two assets which would not be surprising in a carry unwind. I marked Friday's cash market in red on the time axis. Note the sudden divergence between the $USD and ES as the $USD heads lower in line with what the short term charts of the averages were telling us about price action early in the week. ES has stayed in a range, but had it come down as expected to last week's intraday lows area, it could have built in that stronger base that would have been more trustworthy for a long swing/bounce trade. That still hasn't happened.

 This is the correlation between the $USDX and long term 30 year Treasury futures in candlesticks, again a tight correlation with the $USD, but in this case bonds have moved lower as we expected last Friday for this week and as you've seen in the last few TLT/Bond posts, they have built a more solid base and look much more secure for a long trade/counter trend rally.

This is the "normal" USD legacy arbitrage correlation vs Gold in candlesticks. Remember our trade idea this week for GLD on Tuesday, GLD / Gold Long Trade Set-Up was for a LONG gold set up, the thing we were looking for first was a slight pullback to strengthen its base.

Oddly the $USD reacted or overreacted to the downside on the US Retail Sales data, I don't think this was a genuine reaction to Retail Sales, I haven't seen many reactions like that in $USD to retail sales, it's almost as if that was just the "catalyst" or cover for a move lower in the $USD which sent Gold higher.

There are a couple of scenarios that are starting to look probable or worth looking in to.

The range and clear resistance zone that we see in the SPX would not have been possible if the SPX futures had followed their correlation with the $USD this week like bonds did and equities have the last several weeks.

When I see a resistance (or support area) this clear in an asset as watched as the SPX, I immediately suspect a head fake run both hitting stops and limit orders/new orders as Technical traders see a breakout above a clear resistance line.

I have no doubt such a move would fail as the charts below show in terms of very high probabilities...

 The exceptionally large leading negative divergence on na daily SPX futures chart through 2015, this is a huge trend of distribution.

ES 4 hour chart showing the same with increasing distribution more recently.

The second scenario I'd consider is an Options Expiration Max Pain Pin as tomorrow is May monthly options expiration. While it seems less likely, there's some reason for the divergence in equities and the $USD where there's not between bonds and the $USD, it could be the max-pain level is in this area.

I'd normally give the tip to the first scenario, but the one thing that has been missing is the short term charts showing positive divergences which are like timing as they are the equivalent of institutional day traders or short term traders, they'll scalp a move like that, but as we have seen all week, they seem to not be participating which causes me some doubt about the scenario I'd normally call the most likely by far.

As for the $USD counter trend bounce (remember the correlation between the $USD and TLT/Treasuries is still tight....

The $USD counter trend bounce expectation is something that fits with other assets like oil expectations lower, gold expectations near term lower, Treasuries making a counter trend rally,  but the $USDX counter trend bounce and those correlations are secondary, the analysis of $USD is why I suspect a counter trend bounce.

 This is the 30 min (strong) $USDX 3C chart, still in a positive divergence.

This is the 15 min chart showing a clear negative divergence and lower prices in to accumulation , again suggesting the counter trend bounce expected this week from last week's forecast.

The 5 min $USDX positive divergence and it is here that we have an example of what is not happening in the market averages. 

They were expected to pullback and repair their shorter term charts just as the $USD has done, they haven't done that and that's WHYB I DON'T TRUST A LONG (MARKET AVERAGES) POSITION. I TRUST THE TLT OR $USDX BOUNCE A LOT MORE, THEY DID THE WORK.

And right down to the 3 min chart in $USDX which would tell us that such a counter trend bounce in the $USD is close, ironically the correlation that has held in treasuries with the $USD also looks very close to a counter trend bounce /Rally, it's stocks or market averages that have diverged and I'm not quite sure why, but I don't trust a long position in such an asset even if a bounce is high probability because without the support the $USD and TLT have built, you can easily wake up to a gap down taking out weeks of trade.

I'm still looking for what the probabilities are and any changes in the market averages, but these are the scenarios and odd market action this week. I'll try to give it to you in something you can trade, but sometimes standing aside is the more profitable stance.