The Week Ahead

It will be interesting not only to see if the Concept of 3C charts picking up where they left off holds up over a 3-day weekend as it usually does, but with the wild cards of Ukraine and the Euro-Group meeting Monday as the US markets are close, holds up.

If it does, here's the implications...

 SPY opens negative

IWM opens negative

The move higher in the averages above the SPX's range was a probability raised a week ago, but it was also something needed to pullback TLT, VXX to be accumulated and allow distribution of HYG.

HYG...

 5 min

HYG 15 m

TLT 10 min with a reversal process in place as price drifts more laterally from down.

VIX Futures...

 5 min

VX futures intraday

However I suspect the biggest wild card that hardly anyone is catching is the JPY based carry trades, they're on an unwind, this is what I posted 2 years ago , to look for as a primary bear market begins.

Financials / XLF Update

Financials are looking interesting just as AAPL was looking interesting and still is.

This is one of the most common top shakeouts, usually defined in terms of a H&S top, although this isn't a textbook model of a H&S top. Even without a chart, the concept of the 3 places I'll short a H&S and the one place I will not are easily laid out and you can look at the chart after ad see the same pattern playing out.

The first area if we are lucky to identify it is the top of the head, the second area is the top of the right shoulder, however under no circumstances (unless it's for a quick trade, like a day trade)  will I short the break below the neckline, this is where most technical traders will enter a short and as such, it's almost ALWAYS shaken out as their stops are usually just above the neckline or former support, now resistance.

Wall St. knows this pattern which is in books nearly a century old and is still considered the optimal shorting strategy for a H&S so Wall St. runs a shakeout of new shorts by pushing price back above the neckline (former support, now resistance until price breaks through and takes out the new shorts' stops).

Thus the 3rd and last place I'll short a H&S top is on the shakeout move back above the neckline as it starts to roll over. I have posted this concept hundreds of times so it's nothing unique to XLF/Financials...

 While not a textbook H&S top, none are, it does have the break below the neckline (yellow box), the one place I WILL NOT SHORT a top pattern as the new shorts create an easy to shakeout bear trap, as soon as the neckline resistance is hit, buy to cover stops are triggered causing a squeeze and upside momentum which is not accumulation or support, thus when it's near its end, this is the last place I'll short a H&S top, exactly what we did with HLF for a 50+% gain at the July 2014 head fake.

The top formations tend to be real, it's the shakeout/head fake that is the manipulated part so as the shakeout runs its course, it's the last place I'll enter a short on a H&S top, which is where XLF is now.

The 6 hour chart shows this as not just another sideways consolidation/congestion area, but deep leading negative divergences, thus the top looks absolutely real and they usually are despite the games played around them.

On an intraday basis, XLF is seeing much more negative tone.

On a 5 min chart, it is looking like the end of the short shakeout is complete.

As for the January cycles (6th, 14-16, 29-2/2) you can see the last two and the distribution on a stronger 15 min chart, again suggesting the shakeout of shorts is complete and ready to round over.

FAZ (3x short Financials) is my personal favorite, take a look at its 6 hour chart vs XLF's (they are mirror opposite except for FAZ's 3x leverage).

FAZ 6 hour long term.

As for the intermediate 15 min, also compare vs FAZ and the base area of Jan 29-Feb 2nd remembering this trades opposite XLF...

FAZ pullback divegrence at the market base of 1/29-2/2 and leading since.

Market Update and Monday's Closed Market Considered...

One of at least two wild cards occurring over the weekend or on Monday when the US markets are closed, the Ukraine cease-fire (the other being the second meeting of the Euro-group leaders regarding the Greek situation which has since seen conciliatory tones by Germany overnight shot down by Euro-group President Jeroen Dijsselbloem today) looks to be dead in the water before it even began, which would not be the first time.

I wondered why the market would cheer the reaffirmation of a cease-fire that never took effect, which was negotiated by parties that are not party to the events (except in Russia's case perhaps), how can someone like Angela Merkel declare a cease-fire speaking for the radical pro-Russian separatists?

Even if the European and Russian leaders negotiating a cease-fire supposed to be in full effect by Sunday were possible, it would only show the extent to which this is a proxy war between the West and Russia which we already knew, it's just not that clean and simple.

Earlier today there were reports of heavy fighting and the cease-fire not looking very promising, this is the same cease-fire, regurgitated and actually just a reaffirmation of the last one that didn't hold if it ever even started.

As for the participants, just a little over an hour ago, Reuters reported that the Ultra-Nationalist Right Sector leader Dmitry Yarosh said his radical movement rejects the Minsk peace deal and that their paramilitary units in eastern Ukraine will continue “active fighting" according to their "own plans."

In other reports, Ukraine government troops are not backing off or toning anything down either as it is reported that "Outgoing fire from the Ukrainian side was visible on the road between Kiev-controlled Kramatorsk and rebel-held Donetsk and rebels at a checkpoint near Donetsk said they had been hit by mortar strikes.

As for the understanding of a cease-fire from boots on the ground perspective, rebels manning checkpoints in Donetsk  mocked the impending truce.

"What sort of ceasefire? Don’t make me laugh. This is already the second or third ceasefire," one said.

Apparently they did not get the memo, however, whether you believe the market was responding to the news or just a clear and east target of a head fake in the SPX, one thing seems clear, if the market had pinned any risk on moves to cease-fire hopes, they have been dashed as should have been expected, well before they started. You simply cannot control and enforce a ceasefire without a demarkation zone and boots on the ground enforcing such an action with repercussions from each sides's respective sponsors (the West and Russian), none of which is even a thought at this point.

This only increases the chances that US traders take risk off the table before the long/extended holiday weekend approaches as of today's close while the market otherwise had been in typical op-ex max pain pin form judging by earlier TICK until just several minutes ago when this happened...

 NYSE TICK's pin range busted up to downside extremes.

Custom NYSE TICK/SOY Indicator declining all day

And a decline in the entire cycle.

SPY drops on volume

Intraday charts lead deeper negative intraday

QQQ drops

Stronger 3 min intraday charts lead negative intraday

IWM drops

IWM intraday charts lead negative intraday.

Someone has not been comfortable going in to the weekend, the a.m. action in to the early afternoon has been increasingly negative.

MCP Update +15%

I'm glad to see MCP took out the $1.00 level as well as former intraday highs. There's still a problem on the 5 min chart that is "suspicious" right now, not necessarily an imminent threat because there's very little confirmation for the chart, but it is there and needs to be watched.

Ideally I'd like to see MCP close toward the upper end of its range today, near a +15% or greater gain, what we don't want to see is a close in the middle of the range around the $1.00 area as volume looks to be on track to be heavier than yesterday which is good if we get the close high in the range, if we get a close in the middle or lower, that's indicative of churning and that 5 min chart will start to make more sense. I've also updated stop levels for those who are using the Trend Channel for stops.

 The Daily chart with the next resistance zone coming up and it's a heavy one, a breakout above this area and MCP is golden.

Note the volume trend and today we are on track for a new high in volume for this leg, that's why the closing position is so important.

 Intraday charts are in line and confirming price action as they have been.

Another intraday chart, but like yesterday and the day before...

 The 5 min chart made perfect sense, a negative (small) for a pullback/consolidation, a positive on the pullback, but after heading higher, another negative in to higher prices which doesn't fit the overall charts, but is still there and this chart has been right 2 of 3 times so far with the 3rd time not yet resolved so it is a bit of a concern.

 The longer term charts like 30 min have large positives. At the white box to the right, I show the concept of price surpassing the first area in which a 3C positive divegrence was spotted, broadly speaking, that means you "could" buy an asset like MCP at the site of a first serious divergence and even with additional draw-down and accumulation with a lower average cost, price will almost always surpass the level at which the first divergence was seen so if you bought that early/high, you'd still be likely to make money, this works on the downside as well.

 As for the Daily Trend Channel Stop, it has locked in additional gains from $.60 yesterday to at least $.70 now  and likely more before it would be broken with an approximate +145% gain off the lows.

The 60 min Trend Channel that has tracked the rally moves has locked in gains as well from about $.80 yesterday to $.93 right now and rising for about +230% off the lows.

If you need updated Trend Channel stops, just let me know.

I still believe the longer term charts reflect a lot of gas in the tank, but that 5 min chart is bothersome, just not bothersome enough to take any action unless a Trend Channel is broken.

USO Gap Fill Likely

Looking at USO as it approaches resistance that marks the start of the next leg up and the previous leg's consolidation highs, it looks like it wants to fill today's gap or at least some portion of it.

 USO Daily Chart...

The 1 min intraday looks like a pullback/gap fill.

Beyond that, there's not much and USO still looks good for a move to a new leg higher soon.

This is the 2 hour chart, this divergence didn't develop in a few days and they don't reach this far without having some real strength, although this is still not what I'd consider a bottom, but counter trend rallies tend to be stronger than stage 2 mark-up bull market rallies so just the same, it still should be a decent position as long as it lasts.

Quick AAPL Update

This is an update to yesterday's Trade Idea: Short Term Options) AAPL Puts and the following post, AAPL Charts Follow Up.

The AAPL put position is already in the green , even with 5 weeks of time left on it which is a pretty long expiration to be green so soon, but there were several things I liked not only about AAPL, but the market and of course AAPL's influence on the market.

As you can probably imagine, not too much has changed in the brief time since yesterday's AAPL Charts Follow Up update, but this is what we have so far and a few things just happened to work out after these posts in to the close which are still worthwhile concepts that can be used on any timeframe.

 Yesterday when the above linked posts were published, I was hoping for AAPL to close with a Doji or Star candle, a loss of momentum and typical reversal candle set-up.

While this wasn't a big part of my analysis and decision with AAPL, it is a concept that works, the difference in the rate of change in AAPL's price.

I almost always say that the increase upside Rate of Change is "SEEMINGLY" bullish, but in fact like an upside Channel Buster, more often than not, it's a red flag that the trend is about o change. The stock has entered a manic phase of chasing prices higher which is the perfect set up for professionals with large positions to sell in to. As Appaloosa said in 2013, the market was priced to perfection and they were selling EVERYTHING not nailed down, simply because a find that large needs time (15 months in this case) to unload all of their positions in to demand and strength. While it's not something most of us deal with unless you are trading a large position in a very illiquid asset, the fact is they need to be wary of not only dumping too much at once and sending the supply/demand equation against their position, but more importantly over the last 5+ years is avoiding the High Frequency Trading "Iceberg Hunters", which are HFT's that specialize in "pinging" the market, looking for signs of an iceberg, the visible potion of a much larger order, so they can frifrontont-run the order and force the seller (or buyer) to pay up, which has become one of the most expensive execution costs for large funds, thus they have to feed out large orders in small pieces and need higher prices and demand to do it while trying to avoid detection of the Iceberg seeking HFTs'.

I digress... The closing Star candle yesterday on heavier than average volume was what I wanted to see and the change in AAPL's price ROC is an added bonus.

Thus far today, the gap up looks like it may provide a bearish engulfing candle on the close which is the downside reversal confirmation candle.

 On the 1 min chart late yesterday there's a VERY small positive divegrence, but as we commonly see, 3C charts pick up the next day where they left off and the late day positive divegrence picked up with a gap up, which already tells me a bearish engulfing candle is a probability not just because of the gap up and the small positive divergence that can't hold much more than a gap up open, but the context of the 1 min chart which is inline with today's downside...

This is the context of that same 1 min chart, leading negative so the probable outcome is not bullish, in fact the opposite, so although I didn't plan the position based on these charts, but hoped for the closing star candle, they worked out nicely so far.

While this may not be the most useful concept in very short terms like this, the concept works on any timeframe, thus the very short divergence has to be judged against the larger context with the short divergence likely to fire, but the linger term divergence likely to be the highest probability resolution.

I'll update AAPL again as the charts develop beyond yesterday's set that were posted.

Opening Indications

Thus far on the open, we're not too far of from a Friday op-ex max pain pin, typically an open and range around Thursday's close.

We have a long weekend in the US with the markets closed Monday for President's Day/George Washington's Birthday.

The Fundamental catalysts include the second Eurogroup meeting on Monday and as suspected there's confirmation that not only have Greek banks burned through all of their ECB Emergency Liquidity, but even the recent hike yesterday to $65bn in ELA funding available to Greek banks doesn't put a dent in the $90bn in obligations. It's likely traders will take risk off the table later today with the Euro-Group meeting Monday and the US markets closed.

The Ukraine Cease-fire which officially goes in to effect Sunday Feb. 15th, is off to a bad start as mere hours after the announcement, Pro-Russian Separatists staged a large scale attacks across Pro-Russian eastern zones of Ukraine, the possibility or even probability of the cease fire not taking hold as the last one did not, looms large, another event the market can't respond to on Monday as it is closed.

However the Black Swan, at least of the FX markets that few are talking about is the Japanese markets, both stocks and bonds and most importantly, the Carry Trade financed stock positions that are already being unwound in the face of Bank of Japan doubts about more asset purchases (QE) and several horrible bond/JGB auctions in Japan. Here's the USD/JPY carry's reaction to two events...

 YSD/JPY 5 min at the red arrow showing the BOJ's policy statement that additional asset purchases are likely to be counter-productive and in that statement, just about nullified the entirety of the basis of Abe-enomics.

The second "yellow" arrow is a poor JGB auction.

Carry traders are de-leveraging or reducing exposure to the carry trade, the carry trade effects stock prices, it's essentially leverage of a fund's AUM that is usually applied toward risk assets like stocks, an unwind has the opposite effect.

This is just this morning's USD/JPY move on the open, looking at the Yen...

Note the large spike on volume, this looks like carry traders unwinding their positions, to do so they have to sell $USD (in a USD/JPY trade) and buy back the Yen which is why you see the move up on volume.

The net result has been for the first time since Abe-enomics was introduced, the CFTC Nikkei 225 Futures have seen their first net spec short position, meaning essentially since Abe was elected.

I'm having trouble scaling my comparison between FX and futures, but here's the US/JPY this morning in the cash market (orange) having an effect on the SPY (green).

In fact, the unwind of the Carry trade and rising Yen were the two things I wrote about almost 2 years ago to look for to occur concurrently with a major market (bear market) decline in US equities.

When times are good, things seem stable as they did with the BOJ's QE, the risk of the carry trade is very small, the reward can be large as some are run at 100:1 leverage which is then usually applied toward risk assets like stocks, but that leverage is a double edged sword and can turn in to monumental losses in a blink of an eye, thus carry traders are obviously reducing leverage and or exposure to the Carry pair which usually means they have to sell the assets they financed with it, typically stocks.


Watch for this story to become a bigger and bigger issue now that the BOJ itself seems to have lost faith in its QE program, the world will lose it a lot faster.

As for this morning, while we are in the range of an op-ex pin, there's so,me volatility, see IWM, it appears to be connected to the USD/JPY moves early on.

Keep an eye on oil/USO which has gapped up at +3.5% and is nearing the breakout level for the next leg higher after having completed a downside head fake move which we had anticipated 24 hours earlier, giving us a great opening position at low risk and good timing.

MCP is another making big moves or important moves this morning, up +15% at +1.07 , the $1.00 psych barrier has been broken, I'll update these soon.

As for yesterday's AAPL put position, it's very early, but initial price action looks like it may create a bearish engulfing candle over yesterday's star, a strong downside reversal pattern.

I'll have updates on all of them out soon.