Essentially the increasingly tight range of the last 7 to 8 weeks as represented by these triangles, is similar to a Bollinger Band pinch in which volatility dies down or coils up like a spring and then energy is unleashed. The same concept is true of triangles when they reach maturity and the two trendlines converge to form an apex, this is how last Thursday's near term forecast was so close in the actual move expected early this week (yesterday).
Although I already went over the various market averages and how the triangles differ (some being symmetrical, some being right angle triangles) as well as how sloppy they are (they don't make for nice trendlines), the pinching range and volatility can be seen with the naked eye without the help of trendlines.
For example, the SPY...
What I was trying to demonstrate with the last Market Update and AAPL in particular was a corrective pullback today which is right in line with the textbook Technical Analysis concept of breaking resistance (the top trendline of the triangle) and re-testing it (they pullback at the yellow arrow above).
Whether this was meant to be or just happened, I can't say for sure as the 3C divergences are moving along a trend rather than the intraday steering divergences and they did not look good yesterday and in almost all cases even worse today as demonstrated in the Market Update.
Below is an example of the pinching volatility of the market using Bollinger Bands, it's not a perfect demonstration, but close enough.
I was asked why I used AAPL for Thursday's post, IMPORTANT: AAPL Set-up & Market Movement, as a market proxy. Honestly if you recall that day, I was going through a watchlist of numerous stocks as well as market averages looking to see if there was a trend or pattern among them as last week was so difficult to extract any meaningful information from the market without torturing the charts.
The fact is, I could have used any number of different stocks or market averages as an example, I had just seen enough to realize there was a pattern by the time I looked at the AAPL chart and it had a better formed triangle as an example with strong 3C charts for multiple timeframe analysis (multiple trend analysis).
Looking at what the market has really done since the triangle's axis at the apex which is a period of 37 days, or just over 7 trading weeks, you can see why it has been increasingly difficult for short term traders to stick with any move for very long.
before I leave the subject of triangles, there's a small tightening triangle in the spot VIX just under the 50-day moving average, that looks like it could be a mover to the upside not too far off which fits with our broader analysis beyond this week's head fake triangle breakout or expected failed breakout based on the charts.
As you probably saw again today in an excerpt from Thursday's IMPORTANT: AAPL Set-up & Market Movement in today's And There It Is, Less than 2-Market Days! post, our expectation or suspicions about what would not only happen on Friday morning with the Payroll data, but after with F_E_D comments...
"The NFP tomorrow could be the catalyst for such a move (the breakout of the triangle I was pointing out),especially if it comes in on the light side and even more so, if the conspiracy minded crowd is right that the F_E_D could use that as an excuse to kill $US Dollar Strength by mentioning something DOVISH like, "We probably won't hike rates this year" or something mentioned about QE4.
Was right on with Kocherlakota's comments at a pre-arranged speaking engagement today, not only mentioning "Not hiking rates this year", but mentioning a case to be made for "Asset Purchase" which is the same as saying QE4, without giving it the title.
Last week you may recall not only a gut feeling, but the 3C charts I posted that showed that these triangles in the market are NOT coincidence, they were purposefully formed. Mu guess at the time was that it had to do with a VWAP/Stable Order Filling scenario. While this may or may not be the case, the one thing I had been thinking about last week, but didn't want to mention as I don't want to be part of the conspiracy minded crowd without objective evidence, but as you can see from yesterday's A.M. Update I was thinking about this last week, was the following...
I thought the Whisper Number that leaked from Wall St. to main street last week, a number that was ridiculously low seeing as consensus for Payrolls was a gain of +247k with the previous month being a gain of +297k and the somehow leaked whisper number of mid 100k (around 150k) which is ridiculously low with the actual print coming in even lower than that at 126k all seemed to me to be too accurate and too far outside the realm of believability to not have been purposefully leaked.
The question then became, "Why would that be leaked?" I first doubted whether or not the actual BLS data and the huge miss was even truthful or creative tinkering. This theory may not be far off as yesterday, THE F_E_D HAS SPOKEN...NOT EXPECTED..., when the Philly F_E_D posted on their website that the data revisions to the BLS employment data was so far our of whack for their state, that they weren't even going to post them anymore until further notice. Additionally the post on the website mentioned there's an investigation in to all 50 states.
I thought to myself that if we were to see such a weak print (even at 150k), there would be market perceptions that the data would put a June rate hike on hold. This was just exacerbated yesterday when Yellen's favorite overall employment Index, the F_E_D Labor Market Conditions Index, one of the F_E_D's main indicators for employment hit 3 year lows and this on TOP of Friday's NFP!
Something just didn't feel right and now that all of this has actually taken place and worse than the tin-foil hat crowd anticipated, it just stinks of something rotten even more.
A miss would change expectations and also allow the F_E_D to come out with some of what suspected we'd see on an NFP miss and some of what we've already seen this week, extremely dovish talk which started with the F_E_D's favorite Wall Street bank, Goldman Sachs. Monday morning in a note GS put out using the F_E_D's own modeling systems (for increased credibility) it boiled down to the assessment that rate hikes should be put off until 2016. Today we got the upped ante from noted dove Kocherlakota which if it had just stuck to delaying rate hikes until 2016, it would have had some credibility as that's pretty much his position, but the added the "Asset Purchase" talk, which I think we all know by now is VERY unlikely to happen as the F_E_D seems and has seemed dead set on tightening policy for over 2 years now, slowly moving in that direction at nearly every policy meeting.
However, what it does do is changes the strong dollar dynamic and the bottom line is it has been my opinion that all of this was leaked to create fear in $USD longs, carry trades and the like to essentially put the notion of losses on the table and then to back it up with this show we have seen since Monday morning in a well choreographed effort to kill any remaining $USD strength without actually having to resort to policy action. It's essentially a Mario Draghi stunt of talking down the Euro, but much more creative, even though the actual prints in data are bordeline UNBELIEVABLE in the literal sense of the word.
My thought process is very simple as to how this goes and the chain reactions it causes:
1) BLS data is manipulated (it would be far from the first time) creating a perception that the F_E_D will not only put off a summer rate hike, but may engage in further loosening policy measures such as the talk about additional asset purchases today from Kocherlakota.
2) This weakens the $USD enough that carry traders with a $9,000,000,000,000 (trillion) $USD carry position on are forced to close the carry. To do this, the $USD has to be sold and the Yen bought which causes a stronger downside cascade in the $USD and larger carry trade losses. Remember carry trades are often at huge leverage and 100:1 is nothing unusual, 300:1 leverage is common place so even slight losses can be catastrophic.
3) While it is common place to invest in higher yielding quality bonds with carry trades, the profits flow in to equities as well. I noticed something about TLT late last year after it outperformed the SPX on the year, the long term 3C confirmation had suddenly declined and was no longer offering the support that it did in 2014 when treasuries outperformed equities, that has changed, hinting that the Carry trade position has and is changing.
This is one possible and probable sign that the carry trade is unwinding.
4) While I confess I don't know exactly what would be scarier to the F_E_D than hiking interest rates and damaging the economy, it does seem there is something that scares them more than that they've seen coming and have been consistently creating scenarios in which they can tighten monetary policy, but you don't have to take my word for it, QE 3 could be alive and well right now as it was open ended, they CHOSE to tighten monetary policy by ending QE3, that's fact, not hypothesis.
I suspect I can think of several scenarios that would cause this fear, one being highlighted by the BIS in their annual report in which they say Leading Central banks have balance sheets so overstretched that they doubt they have the ability to respond to even a garden variety recession and this is coming from the Central banks central bank. Perhaps the F_E_D sees the same thing we all do, deteriorating economic conditions and sitting at ZIRP policy, they have no room to maneuver as the BIS pointed out.
Tje end result of the F_E_D's unprecedented experiment in monetary policy finally ends with a market collapse, which I've written about in terms of the business cycle to at least open people's minds to the idea that wealth transfer means the F_E_D can't only be a Plunge Protection Team, but must instigate market corrections, just look at the interest rate hikes that popped the housing bubble and created one of the largest wealth transfers away from the middle class and to the ultra-rich. Between the F_E_D's monetary tightening and the carry unwind, the punchline is it doesn't end well for the market and no matter how hard the F_E_D may try to create a soft landing scenario, they have been consistently wrong on everything from QE1 to inflation forecasts and didn't do a great job in 2008's market decline, but what we have now is so far above and beyond the scenario in 2008, it easily rivals the 1929 market.
It simply stands to reason that a $USD/JPY carry unwind sees the Yen appreciate and the Dollar drop. Whether this is one of the factors the F_E_D needs to see before hiking rates as the Euro and Yen have been devalued via QE while the $USD has gained and stopped QE and hit multinational (exporting) corporations hard because of the currency war the ECB and BOJ are waging, is a possibility as they likely would not want to cause a stronger dollar via interest rate hikes and a greater US multinational disadvantage during a time when the economy is certainly "cooling" at best.
I suspect an unwind of the $9 trn $USD carry as laid out above would cause a snowball effect in the $USD to the downside, again, this would not end well for the market. Apparently managers like Soros and Tepper must have similar feelings given their positioning in Q4 2014.
When a carry trade goes south, you have to remember a simple 1 pip loss in the trade amounts to 100-300 pip loss on average because of the leverage, thus this is not a far fetched idea by a long shot.
I have said for several years that I believe the Yen will appreciate as the US equity market enters a true primary bear market.
You've seen this chart before, you don't even have to buy in to the 3C signals, just look at the price trend alone, what does this tell you?
And the wildly strong $USD which also had 3C confirmation most of the way up is also giving signals suggesting the carry unwind is already in play, but again even ignoring 3C, just look at the price trend in the $USD with the first significant primary trend pullback.
Now that you have a rough vision of how I see the endgame unfolding and some very strong evidence that we are well in to that end game...
Onto today...
I think you probably have a pretty good idea of what I expect. Trannies and small caps are both red now since thursday's close and yesterday's "breakout" from the triangles. I have been seeing unusual activity in Small Caps/Russell 2000, from no Dominant P/V relationships, to being the only average with a negative 15 min 3C chart which was the basis or a large part of last Thursday's forecast for this week.
Treasury yields were mixed today, the short end as you might have figured by the Leading Indicators post and the 5 year yield vs the 30 year yield indications, as well as today's strong 3 year Treasury auction sent the short end up by 2 bps and the long end down by -3bps, this was what I was talking about earlier in Leading Indicators today.
Tomorrow's 10 year treasury auction should be an interesting one. Today's strong 3 year obviously tells us that the bond market believes the employment data will delay a rate hike.
I posted that the VXX underperformed the market correlation in to the close as well as spot VIX, but spot VIX strengthened in to the end of the day and was in line as it should have been with VXX still at slight under-performance in to the close.
Everything else posted in Leading Indicators stands as posted in to the close which is why I think this move is not over, but it may need some outside assistance (F_E_D) as the 3C charts ended the day horribly, much worse looking than the percentage decline on the major averages, which was anticipated in Thursday's forecast for this week's triangle based breakout/bounce.
While the SPY 15 min chart is still intact and able to support a move, the 10 min chart, as suspected yesterday when I said I think we'll be posting negative 10 min divergences today the way things are going, has fallen apart, it's a small leap from the 10 min to the 15 min at this pace.
Oil which I posted an update for today, USO Update as recently it has been in line, showed a change in those divergences and I thought it would be coming down soon.
Tonight's API Oil inventories after market came in at the largest build in 30 years at 12.2 mn barrels vs. consensus of 3.4 mn barrels, which did this to crude as the charts were suggesting earlier today...
Index futures are just about in line, but only after posting an intraday negative divegrence that was posted here earlier today, Quick Market Update which warned of the divegrence that took over afternoon trade.
Finally, internals...
The Dominant Price/Volume Relationship wasn't great and as usual didn't include the Russell 200, but it had 12 Dow stocks, 52 NDX 1000 and 231 SPX 500, they were all Close Down/Volume Down. Other than being the thematic relationship during a bear market, this is the relationship with the least next day influence, I have nick-named it, "Carry on" as in keep doing what you were doing as it doesn't have a strong oversold or overbought bias, allowing the market to carry on in the trend it is usually in, however that trend is just about flat right now so it's not of much use.
As for the 9 S&P sectors, these were closer to a 1-day oversold condition with 7 of 9 closing red. The leader was Health Care at a mere +0.24% while the laggard was Utilities at -1.15%.
Of the 238 Morningstar groups, only 69 of 238 closed green.
Again, both of these sector/group readings imply a short term 1-day oversold condition, although slight which is in line with the forecast for the week or at least the start of the week moving forward until the 15 min charts are all used up. We still need to see the Index future charts deteriorate too so I don't think we are there, I do think we will have VERY clear signals and Leading Indications and I don't think we'll miss the trade.
I still feel introducing long risk generally in this area probably is much more risk than any reward and I'd prefer to let the trade come to us.
That will do it for now.
As always, I'll take a look at futures before turning in and let you know if anything is standing out, but I haven't changed Thursday's forecast for the triangle breakout move, we have just seen the anticipated distribution in to the move occur much faster and stronger than anticipated.
Have a great night
