Daily Wrap

Today's market was much more interesting than yesterday's which was almost depressing, not because of the market action or lack of market action, but because I felt like I was losing my grip on the reality of the F_O_M_D or the F_E_D and for me that's like losing a grip on reality as this is all I do all day, every day.

I was glad to see that overnight both Goldman Sachs and CITI issued revisions to when they believe the first rate hike will be and their reasoning for it. As I said earlier, the F_O_M_C was a "Study in contrasts" or perhaps more appropriately a "Study in contradictions", which was best defined in last night's Daily Wrap:

 "Economic projections fell while rate hike probabilities increased"

Two ideas that are contradictory to each other, issued in the same F_O_M_C statement, thus I was happy this morning when I head that Goldman Sachs had put out a paper revising their target rate hike date from September to December while CITI's research department put out a similar paper, except they pulled their expectations forward from December to September. Both are well funded research divisions of well respected (or at least big) investment banks and both were moved enough by  yesterday's F_O_M_C to revise their outlook and both took away totally opposite interpretations of the F_O_M_C. Thus, my feeling of ambiguity, contradictory statements, facts, figures and projections, were not at all a short coming of my own, but simply evidence of a totally non-sensical F_O_M_C policy statement, interview and projections.

I guess it's not too surprising that yesterday's market action did not produce the typical F_E_D related Knee Jerk reaction which I have diligently warned of at every  F_O_M_C and every F_E_D Minutes release for the past 4 years or more.

Yesterday's non-knee jerk reaction from yesterday's intraday chart of the major averages...

2 of 5 of the major averages closed red, the other 3 wee far from spectacular, thus last night's commentary on the knee jerk, "a knee jerk reaction and as I said earlier, not the most impressive one I've seen by far. "

That's ok, while there's a larger concept at work from earlier in the week today we got something that looked a lot more like the emotionally , stock chasing driven Knee Jerk Reaction. In fact, Eric Hunsader, (1of about 7 people I follow on Twitter) of NANEX, which tracks EVERYTHING market related, like a real-time Stock Market Almanac/BS detector, tweeted out early this morning the following...

Which I want you to remember, as this is a concept that I've talked a lot about, I've forecast it days ahead and shown recent evidence of it in hindsight, in other words, proof of the concept's reliability.

I do find it somewhat interesting that despite some overnight strength in futures, the real strength didn't come in pre-market or overnight, but on the cash open where shares can be traded in size and volume unlike the thin overnight or pre-market sessions. In other words, if you are a large institution and need to move large positions, you wait for the cash market when're volume increases dramatically.

To give you some idea, just look at S&P futures volume at 9:30 or during the cash market...

 ES/SPX futures and volume which increases notably at the start of the cash market at 9:30 (green arrow).

Or when looking at after hours or pre-market trade in the equities such as SPY, note the same...

The light blue shaded areas are the extended hours, dark blue the regular hours, note volume. Where would you be transacting large positions without moving them against you? Thus is it any wonder that the bulk of the move was not overnight or premarket, but on the cash open.

The ES contract since the F_O_M_C yesterday and the obvious increase in movement at the cash open to the minute. Whether we define this as a knee jerk reaction or not is really not important, although it is a lot more like a knee jerk reaction as the name itself implies.

If you'll note, the market which deserves its props today, did almost nothing after the European close.

At the red trendline, the averages barely do anything as Europe closes except for the Greek deal rumor which was promptly shot down minutes after it came out,  but why do you think such a ridiculous rumor was floated in the first place? If you don't believe it happens, I'd direct you to this video by none other than CNBC's trustworthy and beloved Cramer, telling you in his best and most honest interview ever, just how it REALLY is in the market. This honestly is one of the best educational bits I've seen dealing with the true realities of the market, I use to start every new class with this video...

Seriously, anyone who has been even marginally following the Troika/Greek negotiations knows that there's no way the Troika is rolling over and giving in to Greece and even had the Finance Ministers done such a thing, it would never be passed through their respective parliaments, it was a bold face lie which we called out the moment it was heard today, Anonymous Source Says EU Will Extend Aid to Greece Without IMF " Denials should be forthcoming shortly as is the pattern..."

However I think this whole week and today's action goes back to our analysis early in the week...

Initially from Monday in a GLD update, this is the gist of the week's action , especially today's.

"The one thing I don't like is the increased market perception and fear, that tilts the ship too far one way and it's very lucrative for Wall Street to rock the boat in the other direction quickly, stopping out or triggering trades, it''s short term maneuvering that has little to do with the bigger picture, but it makes them money."

Tuesday I posted objective information dealing with market perception and "fear that tilts the ship too far in the other direction". Although the fear was palpable in the market Monday when I wrote the above, I only posted this "objective evidence" Tuesday (although it was a snap-shot from Monday) because I had seen it for the first time Tuesday in the Sentiment Flip-Flop post...

(*The following chart and commentary is from Tuesday's post linked just above and is an essential part of this week's market action)

"EXTREME FEAR just yesterday triggering the comments above also from yesterday, What does Wall Street do when the boat is leaning too far in one direction? They take advantage of it."

So the motivation and reason for such a move was there as of Monday, too many people on one side of the boat-bears, fearful and short making it an easy slam-dunk for some quick profits for Wall Street and allowing them to move and open positions in to the price movement.

There are quite a few posts I could get this forecast from, I've found 15 so far this week just looking for the original, this is from Tuesday morning's A.M. Update"

"I suspect the 150-day wasn't tested twice out of coincidence, I think Wall St. knows traders are watching that level as a last stand before the 200-day and I think a bounce off that level ala-last week and a slice down through it would likely catch a lot of stops.

Just to be clear, I do think we get a bounce, internals agreed with a 1-day oversold condition yesterday as well."


The take-away from the above posts/excerpts is that the 150-day moving average was hit twice setting up a support area and a very probable upside bounce. In the April 2nd forecast, not only was a decline to the 100-day moving average envisioned, but that it (as well as the 200-day below) would act as a temporary speed bump, we'd see short term support in the area before slicing through it and to the downside. This week's move is essentially that speed bump that was forecast as early as April 2nd and throughout this week.

Here's where the concept of a counter trend bounce comes in, especially today. As we saw with the $USDX's counter trend bounce, despite it being in a primary downtrend, counter trend bounces are some of the strongest you'll see in any type of market and the $USD's 7-day counter trend bounce was also the strongest 7-day move in the $USD in more than 7 years, despite it having been in a full on bull market, it was the bear trend's counter trend bounce that was the strongest.

I've told you why counter trend bounces are so strong in the past ,  they need to change sentiment and to do that they need to be convincing.

Now we could certainly make a case that it can't be counter trend because the market is not in a bear market, however I'd submit the following for your consideration...

 The move down since the May head fake breakout and failure may not have been large in percentage terms, but for traders watching the market as closely as most do, especially those with long positions, it was a long and painful 3 weeks with Monday morning's price action looking quite bad,  this was evidenced by the Fear and Greed indicator at extreme bearish sentiment Monday as seen above.

It's perception that moves the market, not reality or facts, figures, or valuation and perception was overwhelmingly bearish setting the stage for a counter trend bounce and as I said above, to be believable, to be enough to change sentiment so when the 150-day moving average that now looks like support is tested next time, rather than being at a bearish extreme, traders are more likely to see it as a buy the dip opportunity with stop-losses set at the 150-day SPX ma, allowing price to slice right through it and make the same traders who were wrong on Monday to be wrong again when price moves back to "perceived" support...

Most of all of the analysis from earlier in the week started with the perceived support created by the SPX tagging the 150-day moving average a second time. As I said Monday, this will get the bearish crowd bullish and buying the dip next time price is at these levels and with stops all lined up at the 150-day, it's more than likely that price slices right through the moving average. That was my position Monday/Tuesday, that's my position today.

If you look at the SPX chart as of yesterday's close, tell me if that bounce of 3-days would make you feel bullish or convinced? Better yet, if your short, does this move feel convincing and scary to you? If so, then it did its job as a counter trend rally/bounce, to be convincing.

One other thing to consider , considering how bearish sentiment was Monday, tomorrow is quad witching, today's move may very well be part of causing a number of contracts to expire worthless on the biggest contract expiration day of the year which only happens 4 times.


Moving to sector performance, as far as the talking heads' chant, "Financials benefit", looking at the S&P sectors on the week, it hardly seems like Financials are the beneficiary...

Only Energy and Industrials have performed worse on the week.

As for Leading Indicators, there's evidence of manipulation via HYG for the 3rd day, watch how closely the market follows HYG, HY Credit, am institutional risk asset and the first lever the market usually pulls to ramp the market or give it support, but the bigger picture is something quite different. If you are wondering how they get the market to ramp on nothing ut horrible Greek news like the ECB's comments near the close that Greek Banks may not open on Monday, just watch the intraday HYG/SPX chart.

 Our Pro sentiment indicator again, like the rest of the week refuses to move higher with the SPX, rather it is moving lower indicating what I'd expect, smart money is selling in to the move, this is what I suspected would happen as support was created Monday at the SPX 150-ma as you see above in posts/excerpts.

 Our secondary/confirmation indicator shows the same, in fact it closed lower on the day, not at all tracking the SPX.

5 year yields diverged to the downside or remain diverged to the downside, remember as a leading indicator they tend to act like a magnet for the SPX. To the left you can see where they led the market higher then lower and now are displaced lower again.

Commodities have the same relationship, also displaced lower with a leading relationship as they made higher highs as the SPX was still making lower lows, leading it to the upside, then moving lower as the SPX hit highs, leading it to the downside. Again they are displaced lower/negative.

 HYG longer term is in a primary downtrend, this is the highest probability or path of least resistance as equities tend to follow credit.

 HYG intraday is nearly perfectly in line with the SPX, do you think that's coincidence? This is the 3rd day, perhaps the last though...

Although the near term/intraday HYG charts have been leading the algos, the 3C chart (1 min) which showed a minor positive divergence at Monday's low is leading negative at a new leading 3C low.

 High Yield credit which is not manipulated like HY corp. Credit is showing another leading negative divergence with the SPX, as it has all week, smart money is not buying this week's bout of risk on, rather selling it.

Here's a closer look, HY Credit closed below yesterday's close today.

As for internals...

There was a Dominant Price/Volume Relationship which was solidly Close Up / Volume Up, this is the strongest of the 4 relationships, but oddly the relationship often sees a next day red close sort of like an overbought effect.

Along the lines of an overbought condition, 8 of 9 S&P sectors closed green with only Energy closing red, but barely-0.06%.

Of the 238 Morningstar groups, a whopping 225 closed green, that's about as close as you get to a 1-day overbought condition.

However I would not discount the Quad Witching Expiration tomorrow, typically the max-pain pin is right at Thursday's close until about 2 p.m. and we have stock index futures, stock index options, stock options and single stock futures all expiring tomorrow. Given Monday's sentiment extreme, it wouldn't be surprising for them to have flipped the boat that was leaning (metaphorically) way too far to one side (bearish).

As far as I'm concerned, Wednesday's trade Plan is still the best option with the least risk, Market Update and Initial Trade Plan:

"Everyone is going to be reacting emotionally and moving all around, chasing the market if history is any judge. I think we are best served to stay patient, let the uncontrollable part we have no idea-the F_O_M_C- pass and the knee jerk start if it will be there. Then lets see what's under the hood and let the trade come to us rather than chasing emotional games, again if history is any judge."

With Greece out there, the market could go any way any morning based on something someone said or did, I'd much rather let the trade come to us and have leading indicators and charts with the trade rather than against it.

Speaking of which, the QQQ put position opened today, Trade Idea: SPECULATIVE QQQ
 & Trade Idea: QQQ Put Position Fill-Out was opened in a decent spot. The average cost is $1.52 with a close of $1.41, there are numerous other positions I'm looking at, IBB was posted today and looks very interesting, I'll post it as a Trade Idea when entered, I expect this will be a full size equity short via BIS long. Transports "might" give us enough upside for an entry, but I'd want to see them at least above $153.50 (IYT).

As for futures, even though I always put probabilities on a pin near Thursday's close, they have deteriorated since the close, perhaps Greece is a special factor that needs more consideration, I'll be checking in on them later to see if the post 4 pm close deterioration keeps up...

 ES 1 min the red arrow is 4 pm

NQ at a new leading low

And Russell futures at another new leading low.

I'll check them before turning in, if there's something really out of place that looks like it will effect the open , I'll update them tonight.

Otherwise my gut says that we likely see risk off after 2 pm tomorrow and likely a gap down Monday, although it's too early for the Week Ahead forecast, a Greek bank run a looks more and more probable considering the outflows this week alone.

Have a great night.