Daily Wrap

OVernight futures were not all that exciting and while there are situations like Greece that will cause overnight volatility, last night/early this morning wasn't one of them.

What was a cause for volatility, Quad Witching, that once a quarter event in which stock index futures, stock index options, stock options and single stock futures all expire on the same day. As mentioned, it only happens once a quarter. There's a lot of money to be made in keeping the premiums from writing options (calls and puts) which is by and large an institutional activity whereas retail typically buys rather than writes, which is why we typically see a max pain pin on Fridays as options expire so the once a quarter Quad witching is the mother-load of premiums if you can cause as many contracts as possible to expire worthless.

While I can't prove it, I have had the thought that the market bounce being set up as early as MArch 10th, may have had more to do with Quad Witching. When you consider the F_E_D just downgraded the economy (finally catching up to reality ) on Wednesday and also removed the barrier to a rate hike, "PAtient", would you think a bounce would be the appropriate action by the market? I wouldn't except for the fact that most F_E_D related events are followed by a knee jerk reaction which is almost always the wrong reaction and retraced within a few days typically.

We knew something was up on March 10th as price action and more gut instinct had some red flags going up which is why on March 10th, we closed time sensitive shorts/puts as I suspected some kind of a bounce was coming, Closing Down the AAPL and QQQ Puts for now from March 10th.

However looking back to the very next day, March 11th in this post, Market Update which dealt a lot with market volatility and the increase recently, I also made note that something strange was afoot. From the post linked above on March 11th...

"So far this has not been anything like a normal accumulation cycle even for a very short term bounce of a day or even half a day, it's certainly nothing like the Jan. 29th-Feb. 2nd accumulation cycle, this is much more sloppy with a lot less timeframe confirmation. "

Granted that this was VERY early in the process that lasted  from 3/9 to 3/11 for the Russell 2000 (stage 1 accumulation phase) and from 3/10 to 3/11 for the SPY and once again on 3/13. The same dates apply for the QQQ. 

There were a number of strange events through this bounce which I'd still characterize as counter trend in nature, although technically that can't be applied to the Russell. One of the strange events was the market dispersion which we wrote a lot about as the Russell 2000 saw its best performance on 3/12 since the February cycle started on the second day of rally on 2/3. Yet at the same time, the +1.72% performance was 2.5x stronger than the NASDAQ 100,  that's unusual. Two days later on Friday we forecast that Monday would see rotation with the Russell underperforming and the SPX/QQQ/Dow outperforming. Every Major Index outperformed the Russell that day by at least a margin of 2:1 and we're not talking about a +.20% gain vs a +.10% gain, we're talking about the Russell at +.62% and everything else at least double that or more.

There were also some amazing cross asset correlations over the last week which were so impressive, I'd put them in a textbook if I was writing one.

Strange events don't stop there, they were found in internals like  the Dominant Price/Volume Relationship with severely lopsided readings for all of the averages and no reading at all for the Russell and this happened more than once. There were days in which breadth indicators barely moved when they should have been flying.

Then on Wednesday, there's a sudden and strong signal in gold just minutes before the F_O_M_C which is when this was posted, Trade Idea- UGLD (3x long Gold/GLD) at 1:56 p.m. in fact, just 4 minutes before the F_O_M_C, the position was closed today at an 8% gain for about a day and a half of market exposure.

Wednesday's $USDX Flash Crash was another interesting and strange event...

 THis occurred 4 minutes after the 4 p.m. cash close. Measuring from 2 p.m. until 4:00 p.m. the Dow gained +1.8% while the $USD lost about the same amount. However measuring the $USD from 2 p.m. to 4:04 p.m., the $USD lost -4.6% (almost another 3% just adding those extra 4 minutes and a flash crash.

Here's what it looked like on a 3C chart.

There was a clear negative divegrence in ti the flash crash in the $USD and there has been one since the $USD recouped nearly all losses as of yesterday near the close, you can see what happened since with the $USD losing a good portion of that today. Oddly right after the flash crash, nearly ALL liquidity in $USDX futures fell off the face of the earth.

All currency crosses went haywire at the moment the $USD flash crashed and not just ones that have the $USD as part of the cross.

I'm still not sure what it meant, but it looks to have been intentional with someone front running it as the 3C divegrence shows.



This caused the widest swing in Euro FX futures in more than 4 years.

Euro FX futures at the time of the $USD flash crash, note however even as it made highs for the week, there was no 3C confirmation and came right back down.

As for the tight EUR/USD correlation to Index futures, something went wrong the last couple of days and I suspect that we'll see the market revert back to the mean early next week.

 This is ES in purple vs the EUR/USD (candlesticks).

Who leads who?
 While I wouldn't say that EUR/USD is the only or even the most important leading indication, the question of who came first, the FX pair or the Index future, in red I show all instances of the EUR/USD diverging first and in green ES reverting to EUR/USD.

As you can see, as of the last 2-days, ES has popped way off that correlation and should revert down.

This is the same 60 min chart without all of the drawing...

EUR/USD vs ES (purple).

There have been some questions as to where I think the EUR/USD is heading. Based on what I have to work with as of now with some distortions from this week obviously present in the charts, lets take a look...

 Note the negative divegrence on this SPY  30 min chart at the Feb cycle highs or stage 3 top/distribution which lead to a full retrace of the entire move as well as a break below support. Not a bad place to stage a bounce with several averages hitting 100-day sma support, if indeed that's what this was about. Also note where the positive divegrence on the 10-11th and 13th area and for future consideration, the current leading negative.

Mostly I just want to show the positive divergent area for the EUR/USD charts below.

Euro Futures 60 min...

 You can see a positive divergence in the Euro futures (/6E) right where the market averages went positive as well. Looking at a longer term chart of the Euro, it looks due for a corrective bounce any way, nothing out of the ordinary really.

Monthly EUR/USD chart

After a 9 month decline, it's probably due a bounce.

The $USDX 60 min chart is negative so that would fit with a EUR/USD bounce.

I do have some question about this 10 min Euro chart with a negative divegrence as it's an odd ball.

And the 10 min $USD with a very small positive divegrence, almost as if we see some near term downside and a broader bounce. I suspect this will be cleared up next week with some additional charts either backing this theory up or wiping it clean.

 For now the 5 min Euro chart is where it should be given the moves off the accumulation from the 10th...

And the $USD, well it looks like it's not only where it belongs, but perhaps there's some much better questions emerging with regard to dollar dominance and whether those days are over?

Perhaps a better question is where is the Yen going...

 4 hour Yen Futures

And what does that mean for the JPY based global Carry trade and every asset financed with it?

USD/JPY monthly chart. Is this perhaps a moment that changes FX and market history?

While there are only 4 months of candles, I don't think I need to point out that they are very close to a reversal signal.

Leading Indicators...

 The SPX:RUT Ratio has correctly called more tops and bottoms since we have been using it than I can recall with a positive signal on the 10th through the 13th, the same area of accumulation for the SPX and NDX. Then after confirming, it ends at Wednesday's post F_O_M_C knee jerk reaction and has stayed negative since.

 Our Pro Sentiment is acting as if it were still in stage 4 decline from the Feb. cycle.

Intraday VXX was whacked early on, I wonder why. However at the close it (inverted) outperforms the SPX as there's apparent demand for protection,

The VIX is also whacked this morning (price inverted) and also sees stronger relative performance from the afternoon in to the close.

Oddly bonds are showing a Risk OFf posture vs the SPX intraday which is risk on, which is correct?

I have my opinion which I think you know.

Recall yesterday I mentioned Yields supporting the market intraday (white) which I suppose was useful for today's Quad Witching which I'm sure,  was right where it needed to be to cause the most number ($) amount of contracts to expire worthless, so perhaps when we ask the question, "Which is correct today, Bonds of equities?", we ought to keep in mind Quad Witching, the biggest premium gathering event of the quarter, only 4 times a year.

Today Yields back off with no support.

And once again for the Feb. cycle yields are supportive at the base on Feb 2nd as well as at stage 2 mark up, they go negative in to stage 3 top and are briefly knocked off course by the Non-Farm payrolls on March 6th, but since then, they too have been acting as if they never left the stage 4 decline  and are quite divergent vs the SPX (green).

 Commodities intraday take a turn for the worse, right about the same time VXX sees demand for protection and the market sees...

 Worsening divergences like SPY

 IWM

and QQQ.

Remember TICK fell apart around the same time.

As for the larger picture in commodities, they too look like they never left stage 4 decline

As does HYG, HY Credit. Even though it WAS used to help ramp the market, the lower highs and lower lows remain intact even on a shorter term basis (and primary trend), again, as if they never left stage 4 decline.

 High Yield Credit definitely looks like it never left stage 4 decline.

The problem is, these are institutional risk assets so if the market is risk on, then why aren't the assets that smart money trades?

Perhaps the bounce was related to something else entirely? You know I floated the idea of market perception on the F_E_D knee jerk as price determines perception before anyone can read the full text, but perhaps it had something to do with the 1x per quarter massive premiums of Quad Witching?
Whatever it was, as you can see back as early as the second day we identified something being up on March 11th, I was already seeing strange events that didn't look right and we saw them through the entire bounce area nearly every day in one form or another.

I'll be updating transports which do look like they could be down early Monday, if I had seen these earlier today, I would have entered a position if possible or got some puts. By the way on this year to date chart of the Dow 30 (green) vs Transports (Dow 20), Transports are yet to confirm the Dow.

The red trendline is the YTD area, the Dow has broke above, transports, not quite.

We had a VERY dominant Price / Volume Relationship today with all of the major averages, 90 of the NDX 100, 27 of the Dow 30, 1223 of the Russell 2000 and 412 of the SPX all Close Up / Volume Up. While that particular price/volume relationship is the most bullish of the 4 possibilities, ironically it's also the one relationship with the strongest next day overbought bias, which typically sees the market close lower the next trading day. We had that yesterday, except the R2K had no relationship at all and was almost evenly split between all 4 possibilities, not the first time this week and not usual.

Adding to the 1-day overbought condition, all 9 of 9 S&P sectors closed green led by Financials at +.98% and lagging with Industrials at +.11%.

Of the 238 Morningstar groups, a whopping 224 of 238 closed green.

Taken altogether and we have one massive overbought condition, this is on a 1-day basis and usually has a strong bias on the next day close. It has no bearing at all beyond the 1-day influence unless there are a string of these relationships as we saw going in to the October lows.


Strangely though while most breadth indicators improved on the day, others like the Percentage of all NYSE Stocks ABOVE their 200-day Moving Average haven't improved much at all and in today's case, barely at all.

The indicator in green is just a count of stocks > or < than their own 200-day, usually the percentage in a bull market runs between 70 and almost 800%. In this case, it just broke above 50% for the first time in a while, far, far from the norm though at 52%.

Also the NASDAQ Composite (all NASDAQ Stocks) Advance/Decline line is not only in the negative area and has been for some time, but it has failed to make a higher high the entire year.

The A/D line is in green vs the COMPOSITE in red, as you can see, it hasn't broken to new highs once for the year despite pretty strong internals on the day and the bounce in general. This as also deteriorated significantly over the last year and a half.

The McClellan Summation Index isn't biting either.

Not only has there been significant deterioration since last year, but it remains in the negative and hasn't moved at all with the market and just to show that it can even on a bounce, I put a white arrow where it did before, not this time.

Momentum stock based indicators are also showing very poorly.

That will do it for now, I'll be working o finishing up the new website which is actually ready other than some script I need to add and get your temporary passwords ready, hopefully we'll finally get this out there as I think you'll enjoy the new features and enhancements, it's just hard to find time when my days are typically 14 hours, but we'll have it up soon.

If you have any suggestions, requests or input, nows the time.

Have a GREAT weekend everyone!

The Week Ahead

After taking a quick look at Leading Indicators, not much has changed since they were all virtually negatively divergence yesterday and on the whole. One of the only supportive Leading Indicators yesterday was yields , but only on an intraday basis, I had mentioned it yesterday a couple of times and it makes sense with the action for Quad Witching.

However now that they did their job for a max=-pain pin for quad witching, they are back down again and now at new lows that are around the area of early February when this bounce was just getting started, in other words, they have diverged significantly since the Non-Farms payrolls on the 6th that sent them popping higher briefly.

I already posted the EUR/USd vs ES correlation which is significantly out of place and what I suspect is very clearly the carry trade unwind, I doubt very many people realize how important this is and what it means to prices of equities as funds leverage up their A.U.M. with things like the carry trade so to exit it, you have to close the assets you bought with it, which means stocks before you can unwind the rest of the trade which is getting downright dangerous as the Carry trade is often at insane levels of , well leverage (sometimes 100:1).

The SPY has already ran through its tank of gas on a bounce basis since we first saw signs on March 10th...

 The gas in the tank is already gone now as you can see above and the bounce should start moving back to stage 3 decline this coming week.

On an intraday basis, the knee jerk reaction looks to be exactly that as there was clear distribution in to it and today. I suspect with the way we'll probably close, we should see weakness early in the week, possibly Monday morning, but I wouldn't be surprised if we had a little more of this process leading negative before an actual downside reversal so unless I see something in to the close, I'll wait until Monday to add any additional positions like UVXY long.

The same is the case for the QQQ & IWM, and I might regret not opening the QQQ put position today, but I think I'll be close enough early next week plus the IWM and SPY puts are in place.

 Bounce chart gas in the tank is on empty.

 Intraday charts are worse and worse, this is what I may regret, I wouldn't mind as far as shorts go or leveraged inverse ETFs, but with options I want to be as close as possible.

 IWM 10 min where the positive was, leading negative now.

And intraday falling apart pretty fast.

There's so much cross asset correlation, I can pretty much look at VXX and see that it looks like another day would be a good idea (Monday) before entering.

 The important 10-15 min positives and the head fake move I wondered it we'd get, we did.

The intraday charts are building stronger divergences and migrating to say the 5 min below.

The 5 min chart is positive, but it's still building. I think 1 day or half a day is worth the wait.

Let me get this out to you.

I have every reason to believe we are finished for all intents and purposes with this counter trend bounce in most of the averages, can't call it that in the IWM.

In any case, I believe we should be moving back to stage 4 decline and soon be breaking below the early 2015 SPX range.

Carry Trade Unwind

I was taking a quick look at the EUR/USD correlation with ES which has ben dominant recently, replacing USD/JPY which seemed like it was with us forever, but there was a time when just looking at EUR/USd you knew exactly where the market would be, it seems that has been on the table recently and may continue.

 ES (purple) vs EUR/USd intraday 1 min today

However on a 60 min chart, ES has run way above its correlation with EUR/USD as you can see.

 Short term the AUD/JPY is starting to go negative and I suspect this will probably lead in to next week with the former Carry favorite (one of 3) looking like its in an unwind.

The EUR/JPY 1 min is also showing the initial signs of weakness that should lead to a leg lower soon, probably next week if it keeps up.

 And the $USD/JPY looks like it is already in a leg lower with a small, short term consolidation or counter trend bounce as there's some small intraday strength (3c positive) in the $USD, but likely not enough to do much more than what you see above, consolidate before returning lower.

As to the EUR/USD intraday, there's some weakness building in, although I doubt we see any significant move down before the close, it looks more like it's in the process of building weakness for a move to the downside early next week, keep that in mind with the ES correlation that has run above where it should be.

The 1 day AUD/JPY carry pair since 2015 (yellow arrow) looking very much like a carry unwind.

The EUR/JPY, another former popular carry cross also looking like an unwind.

 Which leaves the popular USD/JPY. This is a 60 min chart, I suspect it's about to make a new leg lower.

The USd/JPY 1 day for the year (at the yellow arrow), also lost all upside momentum and looking like an unwind.

Why is this important. How do you think smart money gets leverage to up their AUM and buy more stocks? Through the carry trade so if they have to unwind the position because even a small loss in these is a huge loss because of the huge leverage of up to 100:1. Thus to unwind it, you must sell the asset you bought, sell the $USD and buy back the Yen. Perhaps this is why the long term $USD chart looks negative and the long term Yen chart is looking positive.

Remember I wrote 2 years ago that when the market moved lower, the Carry trade would be either first or with it.

It appears that's happening now.