That's a Wrap!

This is going to be short for a couple reasons (I know I can't make anything short except my account); first and foremost, you know exactly what the short term forecast is, market up in to underlying weakness which we will confirm and use to our advantage to enter new positions or add to positions at the right time which is when we have confirmation on the charts. For those of you who are long, I'll have my normal intraday updates and you should have plenty of warning. I expect that we will hit the last week's intraday highs as a bare minimum for an upside target. Usually we don't want to overreact too soon, usually there's a reversal process and a head fake move to sell in to. The one thing you want to be on the look out for and I'll likely see it before you, is selling in to price strength, that has been a very aggressive theme since the last bounce off the January 6th/short term oversold lows.

The second reason I have to keep this short is I need to get on the road for a minor family Emergency (actually Andrea's family, an unexpected surgery) so I have a good 4 hour drive ahead of me and lucky me... We'll be flying back down as Andrea will be bringing one of her company's back-up helicopters back down from the area we are going to so while I've been up numerous times, I've never flown several hundred miles, I definitely feel like a big shot!

Remember the market is closed on Monday (US) for Martin Luther King Day. I'll probably write something more detailed Monday.

The concept of 3C picking up where it left off, even over 3-day weekends will be tested on Tuesday as we did have positive divergences late in to the day and close, right along the lines of the bounce I expected to start today after the 2 p.m. op-ex pin is pulled.

 SPY 1 min extreme leading positive divergence in to the close, this should pick up on Tuesday morning (cash open) where it left off at today's close, meaning the market should be strong Tuesday morning. Of course it's a long weekend, very volatile and as this week evidenced, surprises are everywhere as the SNB's decision was one of the top 10 currency moves eve and put numerous FX brokers out of business in 24 hours.

The ECB will have their policy announcement the 20th, next Thursday and everyone is expecting QE, we'll get more in to that before that time.

 QQQ intraday positive at the close

IWM positive at the close.

The lever HYG to ramp the market, positive at the close

The lever VXX/VIX short term futures negative at the close (to ramp the market) and...

Real VIX futures negative in to the close, again to ramp the market.

Even 30 year Treasury futures seeing a negative divegrence. If you saw my evidence of a leak of the SNB decision last night, then you'll remember 30 year T's were also accumulated, it's likely those positions are being cashed out.

Even XLF which I showed earlier as stalling the bounce , closed with an intraday leading positive.

My custom indicator, VIX Term Structure has been giving a buy signal the last 3 days, it also gave one on the 5th and 6th when we last bounced.

All leading indicators are in line with a bounce and are reset to zero for new divergences to tell us when we are approaching the end of the bounce.

Interestingly the only thing I see a bit out of line is High Yield Credit. HY Financial credit is way out of line and it seems that there has been a reemergence of counter party risk among financial institutions, this is what caused so much havoc in 2008, who had what exposure to subprime and since everyone lied, no one would lend to anyone which totally locked up the financial system and led to failures like Lehman, even GE was within a week of not being able to make payroll, that seems to be reemerging  since we have seen just what Financial earnings look like once you take away the F_E_D's QE program. Every major financial that reported this week came in rotten, as I have maintained for years, QE was a stealth bank bailout and perhaps the F_E_D misjudged just what condition they are truly in or perhaps they no longer can afford to care, the F_E_D has share-holders too.

Crude was back up 5+% (USO) today so I still expect that bounce to continue and be part of the broader market bounce. I suspect UNG will also move higher.

The gist is, BOUNCE and with the SPX having the worst week of the last 5, it's in a short term oversold position to bounce like the last one the first week on January.

I'd urge patience and not chasing the trade, but let the trade come to you. We already know what the probabilities are and we are in a great spot to just let it come to us on our terms, the rest is your own issues specific to your trading style (risk tolerance, etc.).

So have a great weekend (3-day for a lot of us) and look for additional details on Monday  as I'll be back and have little to do than look at the market and post a nice long wrap.

All my best wishes for a great weekend!

Financials

I haven't had a chance to confirm among other industry groups yet, I will look, but I would have expected our bounce to have started soon after 2 p.m. when the op-ex max pain pin typically ends.

Financials are showing a few reasons intraday why it maybe hasn't begun yet and there may be other groups, as I said, I'll check in to them.

Larger picture, what have I been saying for years about QE? I've been saying that the initial , very public bailouts including AIG, GM etc. were not popular with voters, if I was the president I'd likely have called Bernanke and said, "I understand we need to prop up our banks, but more importantly, we need to prop up my re-emection chances... Give me an alternative to the public bailouts"

Thus QE was put in place. If you don't know, then I'll tell you in a nutshell, the F_E_D started fooling with open market operations in the 1920's under NY F_E_D president, Benjamin Strong. He started it, he introduced it, he oversaw it and saw the roaring 20's and initial success, he dies in 1928 so he didn't get to see how it ended shortly after his death in 1928, although many Germans still remember how such operations ended in the Weimar Republic and still have disdain toward QE to this day.

The point is, I have long maintained that QE has been nothing more or less than a stealth bank bailout. Banks had quarters that didn't have a single day's trading losses, it put money in their pockets and the general public had no idea what any of it meant.

What has happened to Financials' earnings since the end of QE3 on October 31st? Look at JPM, Goldman Sachs, Bank of America, it hasn't been pretty so it tends to lend some credibility to my long held belief that QE was a stealth bank bailout.

That in mind, Financials (FAZ long) are one of my favorite shorts.

 intraday XLF hasn't been looking too good since about 12:30 with negative 3C intraday divergences and a leading negative. I can see how it might be difficult to start a bounce with a major industry group like Financials not looking great intraday.

This is XLF's 2 min chart with the most recent divergence, negative, probably passing, but for now, negative.

A closer look at the 2 min intraday.

And even the 3 min intraday.

I suspect this is one of probably several reasons we haven't seen the market start to bounce yet.

 The 5 min XLF looks like it will bounce, although this is one of the weaker positives on a 5 min chart and one of the groups I like the most on a short sale trade, as long as you let the trade come to you.

 As for the big picture, XLF 60 min...

FAZ is 3x short Financials, you buy it long for 3x short Financial coverage.

 On an hourly chart, it's the opposite of XLF, so good confirmation, I like this one a lot and hold it personally.

The 15 min chart looks great.

The 5 min chart looks as it should, negative to the broad market's 5 min positive, the bounce in the market, pullback in FAZ which creates a nice opportunity to buy FAZ in to price weakness, underlying strength.

 The 3 min chart looks like FAZ is ready to pullback and the bounce in the market ready to start, but like XLF's 1 min intraday chart...

FAZ is putting in a small, weak, but positive divergence, like XLF's negative on the same timeframe.

This would partially explain why the market hasn't begun a bounce yet.

More importantly, this shows why I favor FAZ long/XLF short moving forward. Earnings since the end of QE verify what I have suspected for some time.

Beyond Ridiculous!

In yesterday's Tomorrow Monthly Op-EX   I warned,

"We also have 3  F_E_D speakers tomorrow, the recent Kocherlakota and Williams (Doves) who have come out against raising rates this year and James Bullard who has moved the market at least 3 times up and down and has ZERO problem turning from a dove to a raging hawk in less than a month as he did in September with "We should be willing to remove accommodation" at the September highs, then   "A logical response at this juncture is to delay the end of QE" at the October lows and 30 days later to a 180 degree about face with "Inflation expectations have rebounded since mid-October".

Really? The F_E_D's forecasts for inflation are so liquid they change every 3 weeks?

 I believe Bullard is one of the finest examples of my theory which I think he proves, The Plunge Protection and Market Correction Team".


The point of my article, The Plunge Protection and Market Correction Team is not that the F_E_D just works as a "Plunge Protection" team, but pushes the market in any way Wall Street has set a cycle for.

For example...

These arrows on the SPX daily chart are the dates James Bullard has spoken and moved the market. In EVERY CASE, there was already a cycle set up just like now, in every case Bullard said what smart money needed him to say to make their cycles profitable. At the far left, we had called September 19th's highs a head fake well over a week in advance as distribution was in place for a move lower and Bullard comes out as a hawk with,

"We should be willing to remove accommodation" (talking about ending QE3 at a time when some where suggesting the F_E_D might extend it). This sent the SPX lower by almost -10% (-9.85% at the lows), the Russell 2000 -10.5%, the Dow just shy of -1500 points.

At the white arrow at the October lows, suddenly Bullard is a dove, with the statement at the white arrow on October 16th,

"A logical response at this juncture is to delay the end of QE" . You may recall this is the base set-up that we forecasted was going to produce a "Face Ripping Rally", the base was set up a week in advance of October 16th. The SPX moved +11.5% higher just on a closing basis alone.

At the next red arrow as we were entering a stage 3 top and already seeing distribution, and about 4 weeks later, suddenly Bullard is once again a hawk and the inflation expectations that worried him so much that he thought the F_E_D should delay the end of QE, had suddenly shifted 180 degrees... I didn't even know you could make inflation projections in so little time as there's not much data available over a single month. Bullard says,

"Inflation expectations have rebounded since mid-October".

NOW WE KNOW THE BOUNCE CYCLE IS SET UP, I'VE SHOWN IT A GOOD PART OF THIS ENTIRE WEEK, BULLARD SPEAKS TODAY AND CAN YOU GUESS WHETHER HE'S A DOVE OR A HAWK?

Let me help you...

• *BULLARD: FED COULD RESUME UNCONVENTIONAL POLICY IF NEEDED
• *BULLARD SAYS LESSON OF QE IS IT WORKS `FAIRLY WELL'

Translation: Without saying anything about the F_E_D re-starting QE (and while Yellen seems to be clearly telling the market to get ready for rate hikes, not policy loosening, Bullard "suggests" without ever having said it, that the F_E_D could re-engage in QE.

I know you can say, "He didn't say that", but what he did say is exactly how the market will interpret what he said, it's called plausible deniability, the Bush administration was excellent at it during the Iraq WMD episode- giving the impression of supporting something, while being able to absolutely deny you said anything of the sort. Even "fairly well" can be taken either way!

...And JUST AS THE OP-EX PIN IS ENDING AND THE MARKET IS FREE TO MAKE GOOD ON THE BOUNCE IT HAS SET UP!!!

Perhaps we need to add a 5th lever to our list, JAMES BULLARD! He's certainly the most effective lever.

 

2 PM - Post Pin Update

It looks to me like we are still in an op-ex pin as there seems to be some control being exerted over intraday moves like the SPY, however it looks like after the pin, the market is ready to bounce.

There are also levers that have already been engaged.

We can also see where all of this stops and this continues to suggest like the last bounce from the 6th of January, that we will see a move higher, but it will almost certainly be a move we want to short in to and there's evidence of that before we have even really gotten under way.

However keep in mind the one thing I'm most concerned about which is the rising volatility and the potential for surprises. We just saw a surprise yesterday that put many traders and quite a few brokerages out of business overnight.

 On the custom TICK indicator, you see the capitulation area in red and the base building area in white for our bounce.

The 1 min intraday SPY seems to be trying to keep SPY within the op-ex max pain range, but...

zoom out a bit and the 1 min chart is leading, this is a timing signal, it's ready to get started on its bounce, I'm guessing this happens after 2 p.m.

 The 3 min chart is similar with a leading positive divegrence, looks ready to go.

And SPY 5 min

QQQ 1 min also is leading positive with a small inverse H&S intraday, but managed to stay within the range that I suspect is the max pain op-ex range.

 QQQ 5 min over the period shown above on the custom TICK of where base building occurred.

IWM 1 min also looks to be trying to steer intraday for the op-ex pin , I'd guess until about 2 p.m.

 And the IWM 5 min. Interestingly the IWM 2 and 3 min. charts don't look very good.

HYG 3 min looks ready for this lever to lead the SPX, however in what I'd expect to see on a bounce we can sell/short in to...

The 10 min HYG is leading negative.

As is the 15 min and so on. In other words, there isn't a large amount of support for the HYG lever, just enough to kick start a bounce.

 The VXX lever is also being engaged, intraday 1 min negative

And 3 min negative

The 5 min chart is much closer to in line.

TLT is interesting.

 It appears TLT is seeing some stabilization today rather than negative divergences to knock it down. Although I'd usually expect TLT to be pushed lower to lift stocks, it wouldn't be surprising to see bonds move higher with stocks which would be confirmation of the bounce and the bounce failing as we'd have a negative signal right from the get-go of the bounce via Treasuries/Yields.

You can see the 2 min TLT also looking like it is repairing the early a.m. downside. We have seen Treasuries move up with stocks numerous times recently , all in bearish circumstances in which stocks have given up their gains.

The Custom VIX Term Structure Indicator is giving a buy signal which I have show the last 2 days, we have it today as well. The SPX:RUT ratio is not telling us much and otherwise in line with price right now, it is not leading.

Both Pro sentiment indicators are leading positive, but not sharply, just slightly better than the SPX's flat range the last couple of days.

Yields and the SPX are perfectly in line intraday, however that may change for the 30 year if TLT manages to repair this morning's damage.

There's not much more to tell.

My trading plan is the same as the divergence from the 6th of January and expected bounce, I'll continue to hold core short positions, especially in this market's volatility and look for areas in which we can sell (for any who try a piggy back long trade) and short as well as the assets that are in the best position to do so.

This should also be taken as the early "Week Ahead" forecast.

Once we get a bounce underway, we'll be able to tell what kind of underlying action/confirmation or distribution) there is. We have seen aggressive seeing of any price strength all of 2015 so it will be interesting to see if that remains the case going in to Thursday's ECB announcement.

Important Market Updatee

As of yesterday, I was trying to figure out whether the 5 min SPY chart was showing 2 separate events or 1 larger base, the implications would be pretty dramatic as to what kind of bounce a larger "W" base could support.

I think I've pretty much cleared up the question and it appears that it's not one larger "W" base, but rather two separate events...

 This is the 5 min SPY potential "W" base I was looking in to yesterday, whether there were two separate bases or one larger which could obviously support a much bigger move.

Just looking at this chart, there appears to be too much distribution from last Thursday (the day we saw some very strange activity in the market ending the bounce prematurely). Typically when building a larger double bottom base, the distribution to send prices back toward the lows is very small, just enough to get the job done as they are accumulating, so they don't sell more than they have to. The distribution event at first left gas in the tank for the Jan. 6th base, but subsequent negative divergences are pretty much on par with going flat (emptying the tank).

The second bottom, if it were part of a larger "W" base would be stronger and leading positive well above where it is, so this appears to be a second and separate scenario. At both bottoms the market had oversold conditions, the first was worse then the second, but after 5-0days of selling, we could see oversold conditions in last night's internals.

Still this wasn't a strong enough answer which is why I kept looking.

If the 5 min base were a stronger "W" bottom, it would have migrated to the 10 min chart and 3C would be much higher (where the orange arrow is).

Also the distribution wouldn't be so big as to show up on a 10 min chart for something that is meant as a steering divergence.

Looking a the detailed 2 min QQQ, we see two accumulation events and a distribution event, but as to whether they are one event or two...

 We have the same issue with the 5 min QQQ chart, but even more pronounced. The second divergence would have all of the accumulation of the second divergence as well as that of the first as well, leaving 3C much higher at the second bottom, it's really no higher at all.

 The same is true of the IWM, but this makes the case even more strongly. The accumulation from two bottoms would accrue to make a much stronger current divergence.

 On the 10 min QQQ chart, there's not even so much as a relative positive divegrence between the two bottoms, in fact it's still leading negative suggesting any bounce we see has the highest probability of a failure, thus the reason we want to short in to price strength and underlying negative divergences at the right time.

The IWM 10 min chart shows the same thing. There would be enough accrual of the accumulated shares between the two bottoms that we'd have at least a relative positive divegrence.

The ES chart also shows the same thing.

I think that puts that to bed.

A.M. Update & Postmortem

Good morning.

I read an interesting piece from overnight by Jim Reid of Deutsche bank. Here are a few excerpts to put yesterday's stunning Swiss National Bank's (Swiss Central Bank) move in perspective.

"The main story (yesterday) was the SNB's currency play which led to a once in several generation move for the Swiss Franc... Indeed as a one-day upward move in a major currency its had few peers through history and is firmly in the top 10 of daily upward moves for any currency (vs the dollar) that we have data for which in many cases goes back into the nineteenth century. Most of the others in this top 10 are EM (Emerging Market) countries."

"What makes this move shocking is that just last month the SNB committed themselves to preventing their currency appreciating beyond 1.20 to the Euro and vowed they would enforce the policy with "the utmost determination". The risk for the global financial system is that if the SNB can make such a dramatic u-turn could other central banks follow at some point....The ECB might actually look at the wider market moves yesterday and be scared to disappoint."

"Once you artificially impact a market, changing course can be very painful. The other fear we have is with such volatility recently (and big declines), particularly in Oil and FX, will there be someone holding very bad positions and steep losses that will seriously impact their business and cause dislocations in other markets as stressed liquidations are forced upon them? Experience tells you there's a chance but its not easy to anticipate. One to consider though and already people are looking to Eastern Europe where there are many Swiss currency mortgages (Hungary). Also Bloomberg is reporting this morning that a NZ FX broker is shutting down its business and the largest US retail FX broker is facing some risk due to client losses both as a result of the move."

As a result, numerous FX brokers are going belly up literally overnight, how's that for a surprise move that ruins your business model/business?

Alpari Limited (UK) had so many client losses that as a result, the losses are transferred to the company and it has entered insolvency overnight with a statement from Alpari's CEO,

"I'm sure this isn't the last we'll hear on the subject and the SNB are going to be heavily scrutinised in the coming weeks for what appears to be a horribly irresponsible move on their part. For years central banks have tried to avoid days like today by being transparent and making moves like this over time while drip feeding their intentions to the markets. The SNB have shown themselves to be amateurs today and there is many people that will suffer considerably as a result."

You'd do well to remember Yellen's recent statements warning of F_E_D moves, the F_E_D telling the market what they are going to do and if the market doesn't listen, she washes her hands of it. The most recent statement that traders are mistaken if they think the F_E_D will have their backs on wrongly placed bets, obviously a warning to the "Buy the dip" crowd who think the "F_E_D has their back".

Also New Zealand brokerage Excel Markets is discontinuing operations, saying, "The majority of clients in a franc position were on the losing side and sustained losses amounting to far greater than their account equity. When a client cannot cover their losses it is passed on to us.".

FXCM (Forex Capital Markets) may have to shutter as they are seeking a way to stay afloat, 

"Due to unprecedented volatility in EUR/CHF pair after the Swiss National Bank announcement this morning, clients experienced significant losses, generated negative equity balances owed to FXCM of approximately $225 million.

As a result of these debit balances, the company may be in breach of some regulatory capital requirements.

We are actively discussing alternatives to return our capital to levels prior to today's events and discussing the matter with our regulators."

Global Markets Limited has sustained a total loss of operating capital.GBL can no longer meet regulatory minimum capitalization requirements of N$1,000,000 and will not be able to resume business.

As Goldman Sachs recent earnings confirmed, they had their worst FICC quarter since Lehman, thus their admission overnight that they too were short the Swiss Franc, certainly doesn't help, especially as it was one of their "Top 10 trades for 2015"...

"In our portfolios with currencies, we have been short the CHF on the grounds that it was an expensive currency which we expected would experience capital outflows as European growth normalized. We were surprised by the sudden removal of the peg. Although the CHF real effective exchange rate is lower than during the European crisis of 2011, it has actually appreciated in recent months. We exited a substantial portion of our CHF short today and are monitoring the situation closely."

As many have speculated, especially in the wake of the SNB action (Jim Ried above), the ECB continues to drop hints that QE is coming next week, this morning the  ECB’s Coeure provided some insight into the main event next week and said that in order for QE to be efficient, 'it would have to be big'. 

Gold moved higher last night and this morning, but I'm not concerned about yesterday's speculative put GLD position, it looks like GLD is in a reversal process.

 Yesterday's GLD bearish "Shooting Star" reversal candle on higher volume should prove a reliable reversal pattern. Thus far we have another shooting star on GLD's daily today. I would look for more intraday distribution and perhaps even a bearish engulfing closing candle with this morning's gap up.

The 1 min GLD chart did not confirm this morning's gap up.

In the US, Industrial Production missed after a strong November. Remember the negative surprise index for the US since Thanksgiving, it has been virtually a one way street with macro data coming in weaker than expected, which makes you wonder about the dichotomy between the F_E_D's data dependency and Yellen's continual hints of an impending rate hike.

The EUR/USD lost ground overnight, quite a lot...

 EUR/USD 1 min overnight and this morning...

USD/JPY 1 min

USD/JPY vs ES (purple).

While the market opened near yesterday's close for the typical op-ex open, it does look like we are going to finally get the conclusion of the oversold bounce we have been looking for after 5 days of losses.

Right now this is a rough guess, but a reasonable one. I find the market's moves are rarely reasonable...

 Based on this "W" base alone, I'd say last week's highs are a reasonable target, but again, market moves are rarely reasonable.

This is the TF 5 min positive, recent lows look to be the head fake that got this move started.

 The same is seen on TF 7 min

And ES 10 min

As well as NQ 15 min. Most of the positives are right at the head fake/stop run lows and small rounding bottom.

I'll be looking in to this a  bit further, especially the larger SPY "W" base and if that is indeed 1 or two separate events. In any case, it looks like we have our bounce, what is important now is how the charts respond to higher prices, whether there's confirmation which I expect to see early on or whether there's distribution which I expect to see once wwe've cleared some local resistance.

More to follow...I'm sure much more as the spider-web cracks of the SNB fall-out are just beginning...

Remember Lehman Contagion....