Daily Wrap

On a day in which the F_E_D had very little to say, except that Q1 weakness was transitory, exactly what the market did not want to hear, we ended the day just as last night's Dominant/Price Volume relationship suggested with small caps and transports underperforming.

There were earlier divergences pre-F_E_D, but my opinion was that they were not nearly enough to support a knee-jerk move or at least not very long which worked out well as we did not get one.

I would say the divergences pre-F_O_M_C , we're nearly perfectly suited to the post-F_O_M_C price action or lack of it.

The major averages with a tiny move post F_O_M_C. Transports lagged the worst -1.24% followed by Small Caps/Russell 2000 -.99%.

For some STRANGE reason today, Bad news wasn't taken as GREAT news on the Q1 MASSIVE GDP miss at +0.2% vs consensus of +1% (pre. 2.2%). This is what the F_E_D considered, "Transitory" weakness. Ironically for as often as the F_E_D's forecasts are wrong, the Atlanta F_E_D's GDPNow real time GDP forecasting model had forecasted a GDP print of +0.1%, much, much closer to reality than consensus.

Leading Indicators are taking some abuse as they have been mildly supportive the last couple of days, I wonder what would have happened without their support... I think we'll find out shortly...

 Our custom SPX:RUT Ratio indicator that had been supportive (mildly on a short term basis at white), just fell apart today.

Not sure if I need to remind you of the big picture, but since things changed today...

 SPX:RUT was leading the market (positive) in to April 2nd and was one of many indications leading to the April 2nd forecast, since then though it has deteriorated badly, I didn't expect it to get this much worse (in yellow). The indicator "would" follow price (green) if there's confirmation of the trend.

 High Yield Corporate Credit (just as 3C forecasted almost 2 weeks ago), fell apart today as well. It seems institutional traders are even less interested in risk assets than equity traders which should be a red flag.

 VXX saw a lot of volatility, but underperformed the SPX (green price inverted to show the normal correlation) today on a significant scale.

VIX volatility is picking up, remember volatility increasing is a hint that a change in trend is near, this is on an intraday basis, suggesting the larger trend expectations we have to the downside look to be moving toward that point on intraday charts.

 And the Daily SPT VIX which we saw and suspected would make a Crazy Ivan / head fake below its triangle's apex, a break out above the apex and its 50-day (yellow) should be hard to recover from. (Remember the market trades opposite the VIX).

And yields which have been supportive this week as I've shown each day so far (white), turned after the F_O_M_C and reverted down to price. I suspect we will see this deteriorate more in the next day or so.

The Dominant Price/Volume Relationship which was Close Up/Volume Down yesterday, the most bearish of the 4 possible relationships, was Dominant in the SPX, R2K and Dow today with 196, 854 and 13 stocks respectively.

The Dominant P/V relationship was Close Down/Volume Down, which is the least biased relationship and ( as an aside) the most common relationship during a bear market. Since there's very little next day bias unlike yesterday's that suggested a close lower today, I have nick-named this relationship, "Carry on" as in "Keep doing what you were doing" as there's no near term overbought/oversold condition and often stocks /averages will do the same thing the next day (down).

However, Sector Performance is in the realm of 1-day oversold with 8 of 9 S&P sectors closing red with only Energy green at +.78%, lagging was Health Care at -.91%.

Likewise, of the 238 Morningstar groups, only 53 of 238 closed green.

This does denote a 1-day oversold condition. 

EUR/USD was very interesting (strong) today, considering a possible counter-trend bounce in $USD (it's a little too early to say with high confidence, but it makes sense), so I'll likely update EUR/USD tomorrow.

As for futures, we are seeing a fast move in the 7-15 min charts which were all over the place yesterday, today I'd say they are 2/3rds there. However, as I posted several times earlier, I believe the rounding top and head fake move (The Igloo with a Chimney) price pattern are already in place, meaning trade positions are of utmost importance right now as we want to be as close to the pivot as possible for risk:reward purposes.

As you probably know , generally speaking, I believe the next move lower (unlike the last two "U" shaped tops without head-fakes and without a head fake above 2015 triangles) is a primary trend move to stage 4. I am expecting the October lows to be taken out (not all at once of course), this will change the entire trend classification of the market since 2009.

In any case, I mention that because long term futures are showing signals that would be in line with that tend expectation.

 ES Daily distribution on a huge scale.

Overnight, as suggested earlier, NQ and TF have a positive divergence like this which fits with a 1-day oversold condition and makes trade entries a lot easier.

However as I said above, I'd say the 7-15 min charts are about 2/3rd there, considering they weren't even close yesterday, that's quite a move. Remember, they need price strength to sell in to.

To give you a baseline...

 NQ 7 min

ES 7 min

NQ 10 min

ES 10 min...

TF has the most work to do so I suspect in any upside move, it will be the best relative performer, you can see the "Blah" nature of the TF 10 min chart.

Both ES and NQ 15 min charts look like this NQ 15 min so they are almost there.

That will do it for tonight, I think there's a lot more to the F_E_D's rather simple policy statement, I don't think the removal of dates means the hikes will be put off further and I do think there's something they are more afraid of if they don't hike than what a rate hike will do to the economy, housing and not to mention the market.

I'll see you in the a.m., hope you had a fantastic day.

PS-Thank you for all the inquiries about my mother's surgery, it was tough for her, a lot more complicated than thought, but she came through just fine, just a lot of pain as the incision is near her diaphragm making breathing painful so keep her in your thoughts, I REALLY DO APPRECIATE IT MORE THAN YOU KNOW!!!

USO / Oil Update, the Carry Trade ($USD-Broad market too).

Yesterday after the close API oil inventories came out with a 4.2 million barrel bill versus consensus of 3.3 million barrels and a Cushing Storage facility draw of -162,000 barrels. This was a new record, Being the 16th consecutive Weekly build. Crude futures saw a dip right after the API data and some further weakness overnight.

This morning's Department of Energy EIA petroleum report showed another record build, again at 16 consecutive weeks with 1.9 million barrels, coming in below consensus of 3.2 million barrels. Cushing saw inventories decline buy -514,000 barrels last week, still the total inventories set a new record with 16 consecutive weeks of builds.

USO tried to break out above its base's resistance level today on the lower than expected build and Cushing draw. I wanted to update this earlier but was too busy with the other market events.

Before I get into USO specifically I wanted to show the correlation between the $USD and Brent crude futures (some as WTI), as my earlier post today, $USD Update dealt with the probability of the $USD primary trend breaking as it has posted a lower high and now a lower low both on a closing and an intraday basis.

In the $USD update, I mentioned the probability of a corrective countertrend bounce. I intend to show the $USD correlation to oil as part of this USO update, but while I am at it I figured I would also show the correlation with the broad market given very near term analysis.

There is some confusion about the $USD correlation to dollars denominated assets. The historical "Legacy Arbitrage" correlation is like Newtonian law. It's very simple, if the US dollar rises then US dollar denominated assets fall (gold/precious metals, oil, even equities). Likewise if the US dollar falls, oil producers have to charge more to make up for the weakness in the dollar. That is the simple historical correlation. However, when a USD Carry trade is in effect such as current (near $Trillion USD carry) carry trade, then often you will see the market move with the USD as we have so many times in the past via USD/JPY. As you know, whenUSD/JPY has risen, market has followed it in near lockstep. This is because the carry trade is in effect. 

Without getting into too much detail, an investor sells a certain currency with a relatively low rate of interest and uses the funds to purchase a different currency yielding a higher interest rate and captures the difference between the rates. Since the USDJPY is the granddaddy of carry trades currently, here's an example:

A trader/Institution borrows Japanese yen from a bank at near zero interest and converts the yen in to $USD and buys the equivalent amount of an asset, typically a high quality bond. Monetary stimulus in Japan creates a cheaper yen, and thus a stronger dollar. The bond's interest rate is more than the cost of borrowing the yen producing a positive carry due to the interest rate differential. The buying drives up $US bond prices as we saw them outperform equities last year. Typically this is done at 100:1 to 300:1 leverage so profits can be huge assuming the Yen doesn't rise. Additionally the rise in the $USD  and/or US Treasuries contributes to extra gains, creating a self-fulfilling feed-back loop.Money is made on the positive carry, the rise in the $USD/fall in Yen, rise in US treasuries.

Gains are (or have been) reinvested in the stock market chasing the highest yield, thus the carry trade, while not specifically material to oil (although there are obviously effects such as commodities tend to fall), has a very specific magnetism on bonds, equities and Emerging markets (more on that below) given so much of the approx. $9 trillion in $USD carry has been invested at some point in the US equity markets. 

So long as the differential remains fairly constant and the yen is yielding less than the USD, the trader captures the difference between the rates. This is often done at 100:1 to 300:1 times leverage and many funds use the carry trade to leverage up their AUM (Assets Under Management)

Emerging markets have benefited from the carry as well. Lower-interest currencies of countries like Japan or the U.S. are borrowed and invested in the much higher-yielding bonds of emerging market countries. Of course as we have seen over the years with hedge fund holdouts with past Greek debt deal reconstruction, the danger is that when one of these countries has trouble paying the interest on its debt, there is a huge unwinding of this trade and an emerging market crisis produces a world-wide market crash. This is precisely what happened in 1997 and 1998. The emerging markets carry trade is estimated to be at least $2 trillion and as much as $5.7 trillion in size.

So we know that the $USD, bonds and equity prices tend to gain in a carry on environment and the same tend to fall in a carry off environment. Throw Emerging Markets in there as well.

What do you make of this?

 The daily chart of the $USDX with a leading negative 3C divergence. The two yellow trendiness denote the first time in this primary trend the $USD has failed to make a higher high and has now made a lower low. Does that tell you anything considering what I just wrote about the carry trade and what the symptoms of its unwind are?

 Since we know significant carry profits went in to financing stock purchases, how about this daily chart of the SPX? Note any changes in character or trend?

You might recall toward the end of last year I expressed concerns that the long term strategic 3C charts were no longer confirming TLT (20+ year bond fund) and since it has made a lower high and is very close to a lower low as well.

You know which currency is a favorite as a pair for the USD carry trade, the Japanese Yen so what about this daily chart of Yen futures and the 3C signal being given currently?

 Not only has the Yen's trend changed from down to sideways, just as we see when stage 4 decline ends and a new stage 1 base begins, but 3C is showing a positive divergence on an extremely strong 1-day chart.

Or as we have been talking a lot about 2015 triangles, how about this bottom triangle in the Yen, remembering it trades nearly opposite the market and that large triangles are not consolidation/continuation price patterns, but rather most often tops or bottoms depending on the preceding trend, this would be considered a bottom..

So just why is the $USD falling apart and the Yen gaining strength?

Well I don't want to make any definitive statement here, but to unwind the carry trade, bonds, equities, etc (that were bought with carry trade assets) are typically unwound, then the original currency that was borrowed has to be repaid, in this case the Yen. This is VERY simple supply and demand dynamics and likely on a scale in to the trillions.

As for those triangles, this is the SPX.

I don't like making assumptions, but in this case I would say it is fairly safe to assume that the $USD global carry trade is being unwound which is often a dangerous, destructive process as the leverage is so high. He who sells first in this case, most definitely sells best, otherwise just as it snowballs up, it snowballs down with more velocity.

As to the $USD correlation with oil and the broad market.

 This is the 15 minute USD futures chart. Note the positive divergence from earlier on a 10 minute chart is now clear on a 15 minute chart, implying a strengthening divergence for what I suspect to be a countertrend bounce within the USD's larger decline as we have already seen once .

 This is the one minute USDX chart, while I typically would not suspect to a move up off such a small base area, the positive divergence does suggest a larger base area may follow; one capable of supporting a counter trend move.

Again, for more comprehensive charts and commentary on the USD and counter trend moves, See today's post, $USD Update

This 15 minute chart of the USDX (purple) versus ES (SPX futures) in candlesticks, shows the recent leading correlation the USD has had versus the market.

Thus, if we are to see a bounce in the USD, It would only make sense that the market sees some near-term support. However that's support may be greatly diminished due to the chart below.

 This 60 minute chart of the USD in purple versus ES shows the failure of the USD to make a higher high and is leading the broad market significantly lower as we expected at this point in the April 2 forecast (and what comes next).

 This is the $USD versus SPX futures(ES) on an intraday one minute chart. The correlation should be quite clear.

All of the above suggests that at a significant inflection point in the market in which the carry trade appears to appears to be in the middle of an unwind. Those caught on the back foot could see significant losses. If you haven't read about Long Term Capital Management, now might be a good time as the carry trade did not help their situation. As such I'm not very concerned about any near-term upside and if that is what you got out of this post, I would suggest looking at the chart just above this one once again.

As to oil...

 Brent crude oil futures are represented by the candlesticks and the $USD is in purple. Note the inverse relationship between the two and the more extreme downside move in the $USD, which oil failed to take advantage of on the upside.

 This is today's daily chart of USO hitting resistance as depicted with today's candlestick with a long upper wick on high-volume which typically denotes churning at resistance.

 I do like oil longer-term and this daily chart of Brent crude futures(CL) shows the negative divergence sending it lower as well as 3C's confirming Price/Trend signal at the green arrow as 3C makes lower lows with price. Finally the lateral trend change in oil on a leading positive 3C divergence and this on a very strong daily time frame.

You can see why I like USO as a long-term primary trend Core long position as we have been watching this develop all of this year. However I do believe that USO/oil can be had at better prices and lower risk.

Ironically one of the signs of a carry trade unwind is increasing prices in commodities such as oil.

 This is the hourly 3G chart of USO showing an initial divergence at resistance (the two red Xs) and a leading negative divergence since.

There is an excellent price trend confirmation otherwise and I have little reason to doubt this pullback signal especially as USO tries to gather a head of steam to break out of the base.

 This is a one hour chart of Brent crude futures showing the same negative divergence.

 USO 10 min at resistance (yellow).

 And the one minute chart showing the concept of 3C picking up where it left off as it formed a positive divergence in to yesterday's close, followed by a move higher on today's cash open. This is a concept that we have seen work time and time again, even over three-day weekends.

 The two minute chart shows a slightly weaker relative positive divergence yesterday as it was not strong enough to lead on a two minute chart. However the negative divergence in to today's gains is significant and showing the concept of migration or a strengthening divergence. This is also showing resistance at the trend line such as we saw above at the daily candle.

 And finally migration to the three-minute chart at trendline resistance. I still believe in the USO swing short position as well as May puts.

I believe once we get a pullback in USO. We should see accumulation at some point during a pullback confirming a constructive pullback and offering a low risk, lower entry price for what I believe will be a stage two break out from the 2015 base.

 This five minute crude futures chart is largely in line, But I suspect it will see migration from the one minute negative below.

Today's intraday one minute chart in crude futures showing distribution int o higher prices at resistance.

I know this is an odd post with a lot to take in, but I hope you find some use in it.

Post F_O_M_C Update

** Quick update, I expect some near-term upside volatility in to tomorrow**

While quite a bit of attention is being paid to the FOMC's policy statement word count, I'm reminded of Mark Twain's

"It's better to keep your mouth closed and that people think you are a fool Open it and remove all doubt"

For today, perhaps it would be better said, "It is better to keep your mouth closed and let people think what they like rather than open it and remove the market's doubt".

I think there was a very good reason for the low word count and it seems that the talking heads are so wrapped up in the details that they cannot step back and see the bigger picture as well as the continual bias that the Fed has shown which has led me to believe that rate hikes are much closer than the market anticipates. I know we are all supposed to believe that everything is data dependent. However if you owned a large business and we're making plans for a large change, perhaps expansion, perhaps downsizing, I doubt very much it would be on-the-fly. This seems to me to be the kind of thing that you prepare for long in advance and make sure you have the proper structures in place to deal with it. How much more show for the Fed in a move that will affect all businesses via the economy broadly?

Put more plainly I think the decision had been made quite sometime ago but until we get to it the F_E_D will try to maintain an image of the impartiality. This doesn't change the fact that they seem to be much more afraid of the consequences of not hiking rates than the very obvious consequences to the economy of a rate hike, especially in the housing sector which has been extremely in rates.

The bottom line is Q1 GDP missed in a big way at 0.2% versus consensus of  1% and the Q4 previous of 2.2%. I would think this would be an alarming development to a truly data dependent F_E_D. Instead, they dismissed it as transitory conditions which has only one possible translation, rate hikes are absolutely on the table. In fact the Q1 GDP weakness didn't even so much as justify a brief comment suggesting, "PATIENCE". That's all you really need to know, everything else is largely subterfuge. 

If you've been with us for a while, then you know we have expected policy tightening since the same day QE3 was launched as the F_E_D first suggested changes that would make it much easier to tighten policy regardless of economic conditions. Then the F_E_D made the actual changes from the suggestions such as the change from qualitative (date based) guidance to quantitative (data based) guidance which sounds reasonable. However they followed that up with the pre-emptive doctrine that allows them to justify policy tightening even when quantitative data does not agree..."So Long as we feel..." XYZ will move in the correct direction. 

Now they have created a situation in which they can literally hike rates or further tighten policy no matter what the economic reality is as they have this very ARBITRARY, "So Long as we feel confident the data will move in the right direction over time". Other then the AtlantaF_E_D's GDPNow, when was the last time aF_E_D economic forecast was correct? If they had been, we would've never seen QE2, Operation Twist, Operation Twist Light and QE3!

Try to stand back and look at the bigger economic picture and if you have kept up with F_E_D guidance/yardstick changes, compare both and it is little wonder to me, that we were forecasting the end of quantitative easing on the very same day Q E3 was introduced.

As to the market so far, I find it exceptionally interesting that the weak intraday positive divergences as posted here, Pre-F_O_M_C Update (which I said I suspected were nowhere near strong enough to support anything more than a very short knee-jerk move), are nearly perfect in size to support the price action we have seen Post policy statement.

I also saw this in leading indicators just before the 2 PM policy statement, although only short term:

Tino

 Yields have been leading the market for a "near term" supportive move,  thus I suspected it may be part of some initial knee jerk reaction to the upside, but considering the signals, a weak one as per, Pre-F_O_M_C Update

 A larger view of 30 year yields, again after weakness leading the market lower, the past 2-days they have been in a supportive position for the market in the very near term.




We cannot confuse near-term price action with the larger term trend  (this is why there is multiple time frame analysis and why our trades should suit the timeframe we are dealing with) which is showing up on high-yield corporate credit as a negative divergence and now at a leading negative divergence. As an institutional risk asset, high-yield credit should move with the market, it is obviously in a risk off position after supporting the April trend and triangle breakouts.

I suggested in today's, $USD Update that we would see a near-term countertrend balance or correction within the larger downtrend.

 The $USD 60 min chart and the April 2nd forecast quotation acknowledging "current" (#1) $USD weakness, but it would be followed by a "larger bounce" (#2) and then "An even larger decline" (#3).

At the yellow arrows there is a simple, corrective, countertrend bounce. I have recently said and posted in today's $USD update, that I believe we will see another countertrend balance and the catalyst for that would likely be the F_O_M_C.

While it is still very early, This 10 minute chart of $USDX shows why I believe we will see a countertrend balance as well as the initial start to a move up right after the 2 PM policy statement. This also has something to do with primary trend intraday support in the area.

Please try not to get lost in the lines which can be easy to do in a lateral trending market such as we have seen in 2015 in which we are looking for any indication that the market is about to make anymore volatile, especially for those of us that watch the market day in and day out. Remember delivered your trend that was forecast on April 2 as a result of head fake moves about the triangle and is now standing as confirmation of that forecast (as posted earlier)....

 Note the difference between the SPY rounding tops and the igloo/ chimney top

 QQQ

 IWM

As for very near term, you already saw the 3C charts and some of the leading indicators intraday. The daily candlesticks also look supportive for tomorrow.

 SPY daily on volume with a Doji Star.

QQQ daily with a Star on volume, still above support. I suspect some lingering or loitering in the area.

Pre-F_O_M_C Update

I have to abbreviate this update to get it out before the 2 PM policy statement. It's pretty rare for us to catch an FOMC/ FED leak, However we have done it before. I'm not so sure that I would call this a leak and I'm not even so sure in the outcome otherwise I would be putting out larger positions and more ideas. However just like earnings, we really have no edge into the F OMC even if our longer-term scenarios or bigger picture charts do you have a strong edge, the immediate volatility and knee-jerk reactions can create opportunities or they may call for our patience.

So far the best argument I see for a short term market bounce based on Dovish FOMC comments is the USD update I put out just before this, Specifically the 10 minute chart looking like a countertrend bounce in the USD. If this were indeed the case that would suggest a near-term knee-jerk bounce in the market, followed by a larger move to the downside, as it looks like our igloo/ chimney Price formation is in place. I wish we had seen more extreme moves like the QQQ last Friday but we'll see where we go from here.

Any additional evidence would be on the 3C charts and those that do show the possibility of a bounce on volatility into the FOMC, however like the USD, contained

Even if the market has no idea, and I don't think that's the case, although I'm not saying there's a specific leak, remember perception drives the market.

Even if the FOMC where extremely hawkish, Wall Street can get a short-term bounce by setting up the move in advance just as we saw in Netflix over the last two earnings. For less sophisticated investors, price action drives their perception of the policy statement regardless of how incorrect they may be.

Here are a few charts showing some very short-term positive divergences on intraday time frames, which appear to be FOMC related. Also note where they end.

 DIA 1 min positive.

However it stops there, 2 min is in line so it's not a very strong divergence at all, even for an intraday. This brings up the chance of a knee jerk move that ends quickly.

 SPY 1 min positive.

SPY 2 and 3 min positive, still not much more than support for a knee jerk and a quick one at that.

At 5 min, where the charts really start to count, NEGATIVE, not even in line.

The 30 min trend for the larger picture, VERY negative, VERY ugly. The market looks ready to break from this wide, lateral range to the downside.

Beyond the $USDX charts in the last post which I think are the best argument for a bounce, although I am not making any such call as it would be pure guessing, these are the Index futures.

The IWM/TF charts are the most mixed with no real edge wither way, but they are not as negative as the ES/NQ charts which would suggest a degree of relative strength over the SPX/NASDAQ.

 ES 1 min intraday with a small positive.

TF 1 min intraday with a small positive

ES 7 min leading negative

NQ 7 min leading negative. This is where TF has no edge as just looks like slop.

ES 10 min leading negative

NQ 10 min also leading negative clearly. , again TF shows no edge and look sloppy, but because it is not leading negative like these two I would interpret that as relative strength. However, the charts are not positive for Russell 2000 futures, just sloppy.

 This is an example of TF/ Russell 2000 charts, 10 min. You can see how different it looks compared to ES and NQ. This is essentially the same for all of the lower time frames posted above.

And both NQ and ES 15 min charts are turning more negative by the hour, which is something I wanted to see.

During the policy statement I will be in radio silence, watching how the market reacts to each specific moment. Often we catch very quick glimpses that we would never see if we were not watching in real-time. I'll also be looking for any opportunities and volatility may cause that.

The market will be looking for the feds posture as to Q1's weakness. Obviously they must acknowledge it to retain any credibility, However it is to the degree that they believe it is transient but the market will be most interested in and their outlook on inflation

 Remember once again, beware of the knee-jerk reaction it is often spectacular but almost always wrong whether up or down. However a little common sense goes a long way in interpreting whether or not a knee-jerk reaction something more than that, For example if the market knee-jerked to lower on a policy statement that said"We will take rates in June", you can bet that's a real move. If the market knee-jerked higher on an FOMC statement saying, "In light of recent weakness we are considering a new QE program", you can pretty much bet does that is not a knee-jerk move. It's just common sense.

I'll be back shortly