As you know on Tuesday when I closed the QQQ and AAPL put positions, Closing Down the AAPL and QQQ Puts for now, there were reasons that were logistical like the time decay, but there was also an updated near term forecast for a bounce this week which strangely we really only saw in the Russell 2000 and Dow to an extent, the SPY and NASDAQ never really left their base area.
As explained with example charts from the September high to October low period, a bounce at this stage of the current short term trend is nothing unusual at all, it doesn't tell us the market is up to a distraction or anything of the like.
All in all though, our analysis wasn't far off.
Only Transports and the Russell 2000 closed green on the week, all of the other averages were in the red. In general this has been the worst 2-week run for the market since early December, why do you think that is? Hint... What stage did we just hit?
The Dow, SPX and Transports are all red for 2015 and NASDAQ and Russell 2000 aren't far behind.
For my part, typically all of my hard work is at stage 1 and stage 3 trying to pinpoint reversals, at stage 2 advance and stage 4 decline, we are already in positions and riding the trend on auto-pilot with little to do other than position management, but something was different for me this week.
As you know on Tuesday when the bounce idea first started taking shape, most of my reasoning was based on price action, volume,etc.; more or less gut instinct that is based on years of watching how the market behaves. The objective data like 3C charts were sparse, a few hints here and there, but nothing screaming.
While we had some intermediate trend 3C signals by Wednesday, there was an odd opaqueness to the market, short term signals were all over the place which is very unusual as the market typically moves together and typically confirms together, that wasn't the case on Wednesday as I mentioned. By Thursday we had a monster move in the IWM relative to all of the other averages, this is like the Dow Theory of Transports/Industrials confirmation, the averages should have moved together much more than they did and it was a red flag the same way Transports have not confirmed the broad market on a larger trend basis.
While the market was a bit more opaque and ambiguous than I'd like, I think our basic trading plan was for the best which should have kept you out of a meat grinder in most of the averages, given you an edge and high risk:reward entry should the market have made a reasonable bounce (otherwise not putting on any risk unless the position came to us) while booking some shorter term trade gains:
+22% in AAPL March 20 puts, +48% in QQQ March 20 puts and +9.5% in the March 2nd UVXY position.
Don't be nervous about what I'm about t tell you. There was something in market trade in underlying trade that was unusual, I'd call it "unfamiliar". I thought a lot about this, looked at many different charts and indicators and even considered creating a more basic version of 3C which is just tweaking the settings a bit to remove noise and expose trend, however in the end I scrapped that as I don't believe in fitting indicators to specific circumstances, it's over-fitting and it does not produce a robust indicator and carries the danger of cognitive biases with it.
It was actually today in which I thought about the possible answer to the short term chart anomalies. First I thought that maybe it was F_E_D leak related, lets face facts, they have done it several times before and have even been questioned as recently as the last Congressional semi-annual testimony a couple of weeks ago about a leak from 2012 that has not been investigated or acted on and we probably all remember the early (1.5 day) release of the F_O_M_C minutes by email to 154 big banks and private equity firms, not a single one of which reported receiving the minutes a day and a half early and strangely receiving them by email when this information is supposed to be released to everyone at the same time.
No, rather I ended up with a different theory. I have grown use to the market and underlying trade with the F_E_D's nearly $4 trillion dollar balance sheet expansion since 2008 when it was less than a trillion. I have grown use to how the charts look in QE periods and even since QE ended, but the one thing that I haven't seen in more than 7 years is how the underlying trade/3C charts look like in a true bear market, those are memories that I have, but are over 7 years removed. I do know and remember that assets and underlying trade act differently in different market stages and they do even more so in a bear market vs a bull market, it has just been a long time since I've seen it in the broad market.
The degree of cross asset correlation is pretty spectacular and as I said earlier, a MACD histogram on price simply won't cut it anymore, you have to work for the message of the market.
The EUR/USD was a big mover and influence for the market as today it broke the $1.05 support as sell side firms are quickly changing their forecasts for parity, moving them up of course.
Pretty amazing correlation and it needs to be watched as there are clues everywhere to near term action.
Take the $USD component of the pair...
As for that strength...
As for the other half of the FX pair, the Euro (FXE as a proxy)
As for the VIX or VIX futures...
Although I did close the 2x long VXX at the close today, I still like it, just short term I'd rather take the gain.
There's strong data for early strength in to next week as was our forecast from Wednesday, a bounce in to the F_O_M_C, but the caveat may be that the Russell rotates out which I'll show you.
As long as we are still looking at near term leading indicators,
Yields on the long end lost 11-14 basis points this week which means all of the losses since the Non-Farm Payrolls have now been erased.
However just as VXX was distributed this afternoon above and HYG accumulated, TLT saw short term intraday distribution to send yields higher and help with the afternoon bounce and probably in to early next week.
TLT 3C chart leading positive at Friday which sent it higher and yields lower this week, pressuring the market as well, but you can clearly se the negative divergence short term.
The correlation is amazing, this alone would have been reason for me to close UVXY despite the different asset classes because of the amount of correlation.
As for the stronger TLT chart and the bigger picture for the market beyond early next week...
Even commodities which are likely acting as well as they are as a leading indicator not only because of economic (global) weakness, but because the legacy $USD arbitrage is starting to work again now that the F_E_D isn't printing trillions.
Gold is one that's starting to get more interesting and we'll be looking at it more closely early next week as well as miners, I haven't covered GDX, NUGT and DUST in a while, but with GLD starting to get interesting, it's time to take a closer look.
As for oil/USO, you know what we expected earlier this week, we got exactly that, if you need to catch up with forward expectations, check out today's post, USO Update.
As for some of the divergences in the averages, I tried to cover as many as possible today, here's an interesting look at the divergences in the Index futures and particularly how it relates to our proposed rotation out of Russell 2000/small caps and in to the SPX/QQQ for early next week... Pay attention to the different Futures in the same timeframe. (*I've used ES or NQ vs TF in most cases rather than both just so we don't have 20+ charts)...
Every timeframe ES and NQ look similar, TF is the direct opposite leading negative.
Thus the rotation out of small caps and in to SPX and QQQ early next week seems high probability, there are several trade ideas I have in mind, we'll just see how the intraday charts act.
While volatility "could" run over these divergences, I think there's so much cross asset correlation, it's literally a thing of beauty if you take the time to make all the connections above.
there's clear evidence that this is a bounce and that it fails, I suspect it runs (as you know) right in to the F_O_M_C Wednesday at 2 p.m. or thereabouts, I'll be looking for distribution in to any price strength to confirm.
The only other possibility I have considered is that this is a perception set up as no matter what the F_E_D says, no matter how hawkish, people follow price for their perception just like we saw on NFLX's crappy earnings, however that only last so long as there's a purpose, in NFLX's case, to let middle men out of losing position in a sharp earlier gap down. This I feel is the least likely probability, but if it is a probability we should know early in the week as we should be seeing distribution as soon as we move past the "W"W base, something the SPX and QQQ didn't do this week, only the R2K gave the market something to sell in to and they did as you can see on the charts above so I suspect the second possibility re: F_E_D perception set-ups is a distant second, but again, we'll have a clear idea as soon as we have price gains in the market.
There's no Dominant Price/Volume Relationship today. As for sectors, 9 of 9 S&P sectors closed red with Health care performing the best at -0.19% and Utilities performing the worst at -1.02%.
As for the 238 Morningstar groups, only 35 of 238 closed green.
THIS IS A 1-DAY OVERSOLD CONDITION and as such a bounce in to next week (early) is right in line with these readings.
I don't think there's much surprise as this is what we have been forecasting since Wednesday, however the Russell 2000 rotation which was more theory now has some solid evidence for relative under performance, maybe even red.
That's going to be it for today, I'll be checking futures Sunday night and post anything interesting, but I think we have a good opportunity here to let the trade come to us, reset those put positions, the VXX/UVXY long positions and even core/trend short positions.
Have a GREAT weekend!
