The Week Ahead

This is a bit of a tough one for a couple of reasons. First as for GLD, I see it moving lower, continuing the pullback it has been giving strong signals for. As for crude, it looks to have a solid bounce in front of it.

As for the averages, if we can say, "There's relative strength" in an environment that's largely very weak, then it would be in the SPX this week rather than the Russell 2000, but there appears to be significant weakness.

The Leading Indicators have a few hold outs, one HY Credit asset is leading negative, one is still positive, HYG is in line, but has shown severe deterioration this week so I'm getting the feeling that we are still not done, perhaps there's some fussing around the SPX 100-day and 200-day moving averages, but on the whole, the Index futures look quite negative, nearly a full house of negative divergences.

It's Treasuries that are throwing me. The longer end looks like it will come down this week and the shorter end rally, however, that may be because the charts are not yet reflecting the most recent news. It would suggest that bond traders are pricing an interest rate hike out further in to the future, but I'm not so sure and I'm not so sure that the assumptions that have been acted on, showing up on Treasuries' 3C charts, aren't in the middle of a possible change as new information comes to light.

This is where I'm struggling with understanding the market, bonds, but as of now, it looks like 2 year will rally, 5 year will see some weakness and the further out , the more negative they look, for example TLT looks like it's on the verge of a sharp decline, but again, this data has been there and I'm not sure if a couple of days since the F_O_M_C is enough time to reflect a change in attitudes, but it's something I'm going to be looking at very closely.

Except for the SPY, it looks like weakness Monday on the cash open, in fact it looks like weakness most of the week. I'll try to get more specific in a follow up.

Uber-Dove San Fran F_E_D President, John Williams, Says what All Uber-Bulls Didn't Want to Hear

So we have the hawks circling around rate hikes, we have the Sunny California, Glass is half-full Uber-Dove  Williams circling around rate hikes. The F_E_D is worried about something that goes even beyond their very machismo targeting of 2% inflation, the gold standard of Central Banks' pride.

This has to make you wonder what they see on deck that would cause them to make such ridiculous economic upgrades in the face of a deflationary environment, a missed GDP, the worst start to a year for Macro-Data in a decade, just about everything they need to be in place to raise rates, which is not and they have not had a good track record in forecasting any of it to start with, they are claiming in a very sunny way, it is in place, paving the way for Rate Hikes, which Williams just told CNBC he could see mid year which is quickly becoming a recurring theme among F_E_D speakers, but consider this is the uberest of doves and while he wouldn't say, June, he would say mid-2015 which means that hawks are probably looking a bit earlier.

While I may touch in the details later, there's no translation required, the market's face says it all.

 SPY

QQQ

IWM

All are at or moving toward new lows on the day since the CNBC interview...

USO Slamming

I know that the Financial media will have some 30-secomnd or less soundbite as to "Why" crude oil rallied today, their viewers need to make sense of a market that they don't understand, even if they are making "sense" of something that's already happened and is simply hindsight and fallacious hindsight at that.

The truth is, the market is smarter or at least has the money flow to move assets, we may not know why at the time for sure, but this is the most recent update to a long list of USO updates saying, this is going to make a counter trend move and likely force a short squeeze. I DO NOT believe this is a primary trend change, but that won't standing the way of a potentially devastating short squeeze. Here's yesterday's update, USO Update & Effects and we have had a USO update nearly every day.

Right now, USO is up +8%, it's starting to effect a short squeeze. I hope some of you got to take advantage of this set up that we have been tracking for probably a month or so now.

Here are the charts, some forward looking, some right now, some lessons we can apply to any asset class and any timeframe.

 USO's change of character in price from a downtrend to an accelerated downtrend and exhaustion gap to a lateral trend most often associated with a base in this circumstance. At the yellow arrow we have the kind of head fake move we look for, this can be stops hit, new shorts entering, but it's generally selling (short selling is selling) on the cheap and in supply which smart money needs to put together positions, cheap prices and abundant supply so they don't drive price against themselves.

At the green arrow we have a bullish inside day, sort of like a Harami (bullish) candlestick reversal, the increased volume makes it about 4 times more effective than a Harami without increased volume and in white, the bear trap is set with former support/what was resistance being the area most stops will be set at, triggering short covering and in some cases buying, but most new buying will be on a breakout above the resistance zone of the top of the range... confirmation/breakout buying.

 Intraday the yellow line represents the head fake move, we want to confirm with 3C positive divergences telling us the lower prices and increased supply are being accumulated. The lift in volume to the right is the start of short covering above a technical level (former support/resistance).

 The 1 min chart is confirming price action, no distribution in to higher prices which is good.

The longer 3 min chart is doing the same as price crosses a head fake level (below the yellow trendline).

And the 5 min chart is leading positive, a great sign for the initial move.

 The 15 min chart, as we have been updating has shown increased accumulation as of late, the leading positive divergence on such a strong chart is no joke and not to be ignored.

Here, even a 30 min chart is leading positive after downside confirmation, Changes in character lead to changes in trends.

However as I have said, the 60 min chart is still in line with the downside move, this is not a big enough base to assume this is a trend reversal, but rather a counter trend move, which can be some of the sharpest rallies you'll ever see.

 As for stops, the 1-day Trend Channel has a stop on a closing basis of $17.87, although for psychological reasons, I'd use $18.

The 2-day Trend Channel which held the entire move down without one false cover signal has a stop at the psychological whole number level of $19, once these are hit, on a closing basis, the short squeeze should intensify.

One thing I addressed in the post from yesterday is the effect on the broad market as oil services start to rally as well, this will likely cause short squeezes and benefit the market, although it didn't on a 1-day move earlier this week, I suspect it may this time, we'll be watching.

Congratulations to USO/oil longs.

Another Update

My appologies, this is why I have been keeping intraday updates short and by themselves, they just move too quickly to look at anything much broader, but at least you get to see the process.

So since the last 2 updates with price moving as anticipated, we have some new and very different tone in intraday charts. I'm not saying at this point whether I believe they are part of a larger negative move lower,  however with treasuries acting the way they are today and yields pressuring the market lower, it only makes sense that we are seeing downside in the market intraday being the op-ex max pain pin is usually pulled around 2 p.m. 

With the pin no longer a concern, I suspect yields and their gravitational pull are likely the main influence of intraday activity since the last update and price move.

Here are the charts, intraday they have seen some pretty significant deterioration which if nothing else should tell you how important the max-pain op-ex pin is, how much money they stand to gain by causing as many contracts as possible to expire worthless and then how the market can take on a totally different tone once the pin is over.

I absolutely prefer when all of the averages and Index futures are confirming each other, but as you may recall last Friday in our The Week Ahead post, this wasn't the case, the IWM had clearly better looking 3C charts which led not only to the Monday forecast which was correct, but the IWM outperformance in the first part of the week, which was as correct as it could be. We have a little of that, but these are still very short term intraday charts and they are starting to take up too much time (I just know several of you are trading intraday) so this will probably be the last intraday update unless something is screaming on the charts.

 SPY is one that has a better looking relative chart, still a 1 min, the a.m. lows and poisitive divegrence are clearly visible.

At the 3 min chart, we move to a more neutral tone intraday and keep going, at the stronger, more important 5 min chart below...

We are still very much in line with the negative trend we have sen in the SPY since last Friday.

This doesn't suggest any real strength/accumulation of lows in a meaningful way.

The Q's look a bit worse intraday, at two relative areas of price highs today that are nearly identical, 3C is clearly lower at the second, distribution.

And since yesterday's positive divegrence and bounce as we expected after morning weakness, we are seeing a continuation of the negative divegrence from late yesterday as the Q's seems to be hitting resistance of some kind.

 QQQ 2 min

The IWM looks to be closer to in line intraday which is a downgrade to earlier action, it actually as a slight leading negative component if you look at the two intraday lows at the same relative area and where 3C is at the same two areas.

 However on a stronger 2 min chart, there hasn't been as much migration of the 1 min's more negative tone, at least not yet, but there is some.

Again, near term the IWM has a better looking set of underlying charts which would suggest near term better relative performance.

As always, the NYSE TICK (intraday) is a great early warning to an intraday trend change, just draw the channels and look for the breaks 

Op-Ex Market Update

Since this still seems to be the prevailing price theme , at least until around 2 p.m. as per our normal experience, this is what I'm updating for the moment, after 2 p.m. as most contracts are closed, I know my broker is calling me every hour around 2 p.m. to ask what I'm going to do, price can make some random move, but the 3C data of the last 2 hours has been some of the best of the week in my experience.


Since the last Intraday Market Update , things don't look to unusual...

 QQQ 3 min intraday with yesterday's positive and price today largely in the area of yesterday's close as is often the case with op-ex Friday's (weeklies included).

The IWM trend from the end of the small bounce base from 1/14- 1/16 and the bounce that I suspected we'd see aggressive selling in to higher prices just as the previous bounce attempt from the 6th of January until the 8th when charts were unusually negative, ending that bounce prematurely.

In any case, near term, the point here is a positive divergence to the far right as the IWM was sitting a bit low in the range for today. Here's a closer look at the exact same chart.

IWM intraday positive today, the negative is from late yesterday afternoon.

And the anticipated intraday SPY bounce as it looked to be sitting at the bottom of the max-oain pin range, since the last update and positive divergence, it has bounced and do you remember the lever that I said would support the bounce? HYG? I showed the intraday positive in HYG which tells me it was being used to help push the SPY/et. al.

This is the SPY in green intraday (part of yesterday afternoon seen to the left, but notice at this morning's intraday lows HYG (red) makes a higher low. leading the SPX higher as HYG is one of 4 assets in the SPY Arbitrage.

And NYSE TICK (intraday breadth), from negative as prices seemed to be getting a little too hot yesterday afternoon judging by the late day negative divergences and the downtrending TICK (I highlighted yesterday afternoon in the red rectangle on the time axis) and this morning's stall and trend higher in intraday breadth as the SPX bounces, pretty much what we expected.

However, in about an hour the op-ex pin should be finished and released, so we'll see what we can find out about that.

Did you notice what treasury yields are doing today? Getting CREAMED! So I'll be taking a look at Leading Indicators, as Treasuries rise and yields fall, this typically has acted as a magnet, pulling equity prices lower, but I want to investigate these closer, look at the Treasury Futures and see if this move looks supported and stable in T's and yields, if so, we may have a new dynamic in the second bounce attempt of January that has effectively been cut short, not quite as short as the first one, but still cut short as our minimum bounce targets from almost 2 weeks ago as the bases formed have barely been hit, I believe in at least one of the averages, the minimum bounce target has not been hit yet.

St the same time I don't want to be too myopic in getting "Lost in the Lines" of short term trade.

Thus while this isn't a full update, I do want to remind you what the Chats look like as we are really still in the October cycle (off the October lows which were also a pretty significant base), which would put us right in the stage 3 top area of the cycle, you may recognize a familiar price pattern for stage 3 tops on this chart and you may notice one thing that is missing....

 This is an example of a smaller cycle to the left, the August cycle with its 4 stages and the larger October cycle and thus far, 3 stages. I tried not to draw too much on the chart in pointing out divergences, it's the cycles I want to emphasize and the current position of the long term (2 hour) 3C chart. As the August cycle is smaller, it's not going to have the same size signals that will show up on a 2 hour chart, we'll look at it closer below in an more appropriate timeframe.

In any case, as was posted on July 31st in an almost emergency Daily Wrap, breadth in the market was deeply oversold, I expected an oversold bounce, a few days later as we entered August HYG gave away the market's plans with positive divergences and the August lows formed a positive divegrence or stage 1 base. Then at #2 we have "Mark-up" or what Dow Theory might call, "Participation" , then at stage 3, distribution and top. We already expected and forecasted a head fake move which gives the stage 3 top the look of an igloo with a chimney, which directly precedes the transition to stage 4 decline. In yellow is the head fake move of September, which happened to see a Bullard "Hawkish statement " about a week after we suspected the head fake move, that transisitoned us to stage 4 decline when Bullard stepped in with a suggestion of it being "resonable" to extend QE as we had already seen a monster stage 1 base at the October lows leading to stage 2 mark up and stage 3 distribution in which Bullard flip-flopped in less than a month and said inflation since mid-October had improved, how you can measure that in a month is beyond me, but it was what the market needed in all 3 circumstances as Bullard went from hawk to dove to hawk, but only after we had already identified the base or tops, which is why I posted the article about the F_E_D not just being a Plunge Protection Team, but The Plunge Protection and Market Correction Team.

Currently in his cycle, the rounding top is there, not so much the chimney / head fake though. I am not specifically forecasting it, just pointing it out and pointing out that the possibility of the last 2 bounce attempts in January might have been trying to establish such a head fake, but saw extremely aggressive distribution.

This is an hourly chart of the August cycle that ended with the September head fake (Chimney on the igloo) highs which coincided not only with our distribution signals, but Bullard's hawkish comments to the day, sending the Dow over 1200 points lower to the October lows.

A typical market cycle progression of the stages.

In any case, this post is a bit longer than I planned so we may have some slightly different looking charts than what w=was captured above.

I'll be looking at some more important indications and updating as well as some specific assets. I just had to make sure we are not stuck staring at an ant hill and miss the train heading our direction.

Intraday Market Update

It looks like yesterday's afternoon bounce that was tempered toward the end of the day on the suspicion that prices were moving a bit too high above the Friday Options Expiration Maximum Pain Pin, was probably correct.


From what I see, prices are right about in the range from yesterday afternoon before the negative divergences intraday toward the closing hour looked to be in place to halt further price gains as the ,max-pain op-ex pin is most often in the area of Thursday's close.

There are some small steering divergences right now that would suggest this continues to be the case.

 SPY in the area of yesterday afternoon's price range, just before intraday negative divergences were seen , apparently trying to slow price or even knock it down a bit.

Te SPY intraday looks to be near the bottom of that max=pain pin range and looking to move a bit higher in to it as this 1 min positive right now shows.

Also, HYG is being brought in to help intraday.

 HYG which is in the red, has the same intraday 1 min positive divegrence as the SPY as it (the SPY) has probably reached the lower boundary of the max pain op-ex pin range.

 Otherwise HYG charts like  this 2 min are still deteriorating as we saw yesterday. In other words, it looks like HYG is being used on an intraday basis to help out in moving the market off the low end of the op-ex pin range.

The SPY 5 min shows nothing more than in line with the move down

This is the QQQ2 min with the positive divegrence yesterday morning after the forecasted a.m. weakness and afternoon strength, but it looked to get a little too hot toward the close, a bit too far from the max-pain pin, thus the late day negative divegrence as the Q's remain right in the area of where it looks like they were trying to keep the Q's yesterday.

The same is true for the IWM as the SPY, except it looks to have fallen a bit deeper out of the range and has a bit stronger of a positive out to the 3 min chart.

I suspect the SPY and IWM will move up and back in to the max-pain pin range at least until 2 p.m. or so. The Q's seems to be right where they need to be.

This is all pretty much exactly as we expected yesterday afternoon after the morning and afternoon forecasts played out, but maybe were getting a little too hot on the upside.

Remember, you can't even tell where the apparent "Yellen" walk back comments were made, there's probably a reason for that having to do with the max-pain pin.

F_E_D Case Study

A number of you have written in this morning with regard to Jim Bullard's (St. Louis F_E_D President) latest comments.

I've put my view out there as far as the flip-flopping, good cop/bad cop scenario the F_E_D is constantly engaged in and how it's not just "Plunge Protection", but rather whatever the market needs at the time depending on which way the cycle is set up.

The post on the broader subject is here, The Plunge Protection and Market Correction Team.

One of the recent posts documenting the absurd flip-floppoing of a single F_E_D official and how he says what is needed (by Wall Street) at the time when a cycle is already fully in place (either a base or a top), all of the comments are lined up with previously known base/top cycles that we had already tracked in most cases a week before the comments. That post, again dealing with 1 F_E_D President alone, Bullard, is here, Beyond Ridiculous!

I think all of you know that the last bounce-base we tracked was put together around 1/14 through 1/16, the very same day (the 16th), Bullard did another about face with the comments, 

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

There's absolute 'plausible deniability there", he didn't say QE would be started again, in fact for a normal conversation he didn't say anything even close, but for a market that hangs on every word including the placement of a comma between 1 policy statement and the next, this is akin to the Gospel and it lined up right with the base for a bounce we had been tracking, here it is (which you've already seen dozens of times since it developed...

The positive divegrence across the entire market (major averages) at the same place- January 14-16 and Bullard's comments from above, on the 16th, the day before the base launched in to the bounce expected of it.

Despite the history of flip-flopping and in some cases like on inflation expectations, the flip flop was so fast, from the October lows (which we had tracked  a base we said would produce a "Face ripping rally" with Bullard's comments at the very lows of Mid October, "A logical response at this juncture is to delay the end of QE" to 1 month later, "Inflation expectations have rebounded since mid-October".

The obvious question is how can something like inflation expectations have such a dramatic shift when there's at best 1 month of data, 1 data point since the previous comment. With inflation, any 1 month change would be considered noise, not a trend, but the market needed what the market needed, just as it has always been my firm belief that QE was nothing more than a stealth bank bailout because the real bailouts in 2008 were so deeply unpopular with voters.

However, my point today on Bullard's comments, interestingly the day after Yellen's rumored comments from a luncheon with Senate Democrats which was a day after the F_O_M_C (previously I've never heard of any Yellen luncheon/private meeting leaks from meetings with Republicans and Democrats until yesterday) contrasts Yellen's "most current views", which are being spun as 180 degrees the opposite of the last press conference and of this week's hawkish F_O_M_C policy statement.

Will the real James Bullard Please Stand Up?

You may recall the very next market open, the 20th because of the long Martin Luther holiday for the markets, Bullard came out again with something completely different, which was what I have subsequently gone on to research and believe is his real position, possibly the F_E_D's real position for reasons I describe in a post I'll link to.

The comments of Tuesday January 20th from Bullard were, 

"I still think we should get off zero (interest rates). The kinds of things we’re observing now, it is not the constellation of data that would be consistent with a zero policy rate. I think it is important to get started and to start normalizing policy...

The thing about the funds rate is it is 400 basis points below normal. We’ve really got an emergency setting for the policy rate right now and we don’t have an emergency constellation of data anymore."

The same day unofficial F_E_D mouthpiece, Jon Hilsenrath of the WSJ write in an article that the F_E_D would not be deterred from moving forward with interest rate hikes...

I made the argument that this is the actual Bullard opinion, which may indeed be the F_E_D's plan, which is being communicated by members piece meal as the F_E_D likes to do to avoid an SNB scenario.

The argument for that case was posted here, Comedy Central Bank and is entirely based on the fact that Bullard's Jan. 20th comments were nearly identical to a little known Bloomberg radio interview from April1 of 2014, with 9 months of "Data Dependency" between the two comments, they are nearly exactly alike, looking for the same rate hike of +400 basis points by 2016 with the rate hikes to start the first quarter of 2015. You'll have to read the post for the case, which I think is strong, it was probably strengthened today with Bullard's comments this morning to Bloomberg TV...

Via Reuters:

"St. Louis Fed President James Bullard, speaking on Bloomberg TV, said the U.S. central bank risked getting "behind the curve" if it delays an interest rate rise too long later this year. "We will have to move more aggressively at that point - instead of 25 points go 50 basis points, and that kind of dynamic is not a good one," he said."

Additionally from the WSJ:

Keeping interest rates near zero “is not the right interest rate for this economy. We are much closer to our goals than we have been in a long time. Inflation is a little bit low, but it is not low enough to rationalize the zero interest rate policy,”

“As long as we feel confident that inflation will go back toward target, and right now that is my baseline projection that inflation will go back toward target, I think we are certainly able and willing” to raise rates, Mr. Bullard said.

Mr. Bullard shrugged off the underwhelming U.S. growth data reported earlier in the day, in which the fourth-quarter gross domestic product was reported at an under-expectations 2.6% rise. He said the number was “fine,” adding that “there are a lot of good things going on in the U.S. economy.” The official said that he expects what is currently a 5.6% jobless rate to fall to under 5% in the third quarter of this year.

  The European Central Bank's planned bond-buying program is an "unmitigated good" for the U.S. economy, which is enjoying "a lot of bullish factors" right now.

THIS IS EXACTLY IN LINE WITH THE COMMENTS FROM APRIL 1 2014 AND JANUARY 20TH 2015, while that may not seem like a big deal or smoking gun, when you consider how many contradictory things Bullard has said in the interim period, he's back to being right on point with policy that hasn't changed one bit in timing, scope and size of the rate hikes in 9 months, the exact same dates, interest rate, etc despite the fact US data has changed considerably over the last 9 months, especially over the last quarter and this month more specifically.

As Yellen had once said, they are communicating what they will do and if the market is not listening, she washes her hands of the market.

What I find most interesting is the fact that inflation is not at the F_E_D's target, yet Yellen has said that they'd hike before the target for inflation was hit, so long as they "feel" inflation is moving toward the target. In the meantime, we are seeing deflation, especially in Energy (oil/gas) which has been dismissed as transitory or near term. THE F_E_D'S INFLATION GUIDANCE HAS BEEN DEAD WRONG FOR 2.5 YEARS. 

I suppose the point is, saying you feel comfortable that inflation is moving toward the target is a VERY arbitrary statement that the F_E_D has already shown they will make even when the evidence is moving in the opposite direction. I suspect there's something much scarier the F_E_D is worried about, perhaps something like the US economy being closer to the next economic downturn than they are comfortable with while sitting on zero rates s the BIS warned of months ago.

Whatever all of this is about, my guess is that by the time this is over, we'll see that the F_E_D is going to hike rates despite where the economy or inflation are at and the reason may be the most worrying thing of all. In my view, something has them very worried about having painted themselves in to this corner and they seem to be moving quickly toward getting out of the scenario soon.

Bullard is back on his thematic talking points, the one he comes back to between flip flops of market cycles.

A.M. Update

Good morning, you are probably looking at a gap down this morning.

Last night I mentioned a negative divergence in the Index futures, it did take prices down a bit, but not that much, it looked like this...

 Last night's negative divergence to the left pulled prices down a bit, but the biggest decline was on the European open @ the green arrow as they saw the largest deflationary move in the Euro-area since 2009, printing at -.6% vs last of -.2% for December, again the worst since 2009.

Then came US GDP at 2.6%, way below Q3's revised, Obamacare pumped 5% print and lower than consensus of 3% (annualized basis), this didn't seem to move the market as much, but seems to be more proof the market did not deserve an F_O_M_C economic upgrade, that's something the F_O_M_C needed to get to where they need to be which is out of the corner they've painted themselves in to.

In any case, my thoughts are this gap down will be faded to the upside and likely fill a portion if not all of the gap.

This is NQ since the European open with a couple of positive divegrences, ES has a smaller one and TF has one as well, thus I suspect we'll be headed back to the area of yesterday's close early on in the cash market.