"I believe we will see early weakness on Monday. HOWEVER THIS PART OF THE FORECAST IS NEAR MEANINGLESS COMPARED TO THE REST SO I WOULD NOT GET TOO HUNG UP ON THAT.
I'm still expecting a $USDX led bounce in the equity market as well as the bond market, certain stocks are going to be shorts before others, but this gives us a chance to open or add to any positions we may want to tweak a little.
As I have tried to make clear, it doesn't look like smart money is even participating in this move, thus my own participation level is so low at present having closed VXX puts today.
In comparison to what comes next, this bounce is nearly meaningless like Monday morning's forecast."
As you probably have gathered recently, this isn't a new idea to us or a new correlation. We'll still get individual signals that give us ideas or insight on an asset, but the same singular asset is moving just about everything now and you can probably tell by the way I highlighted the "Week Ahead" forecast's first few paragraphs above.
To be sure, there are a lot of interesting things going on, but this is like that ballet that I wrote about several weeks ago, the closest thing to beauty I've seen in the market... The two posts I'm talking about are here if you care to read them, Important Market Update Part 1: The Forecast and Important Market Update Part 2: The Forecast Plays...
I can show you a few things we expected such as a Bond pullback since entering a half position last Thursday, Trade Idea: Long Bonds / TLT and the follow up charts, Bond Rally / Swing. Both expressly said that the initial position was a half size position because I suspected we'd see a pullback in bonds / Treasuries and we'd add the second half of the position once that had occurred and we had good confirmation on the charts.
Take our expectations near term for the market. Friday I closed 2 sets of VXX puts at a gain Taking Both VIX Puts off the Table and then turned around and entered VXX calls later in the day, Trade Idea-EXCEPTIONALLY SPECULATIVE...VXX Short Term Calls which was in large part, based on the Week Ahead's expectation of early weakness this week in equities. We saw "some" yesterday and the Call position was at a double digit gain as of yesterday's close, but the expectation that we'd see deeper weakness early in the week is why I left them open yesterday and didn't close them until today, Closing May VXX $20 Calls From Friday at a larger gain, VXX Call P/L which was exceptionally timely.
While the market did see some positive divergence today, it was clear through nearly every update this afternoon that I was looking for the market to come down, accumulation to occur on the move lower and the charts to look a lot better for a potential position for the next trend we forecast on Friday which is the bounce and that is followed by...
"In comparison to what comes next, this bounce is nearly meaningless like Monday morning's forecast."
Again these are all connected by one asset that seems to have unusual high levels of relevance right now for a particular reason...
Here are some of the correlations I captured, as you'll see almost all are nearly interchangeable or inversely interchangeable because there's one asset they are keying off of which I highlighted above in the except from the "Week Ahead" forecast from last Friday...
*The $USDX is in purple and the comparison symbol is the green/red candlesticks*
Although we entered VXX puts and calls and exited them based on the 3C signals, with this kind of correlation if you understand what is driving the NASDAQ futures, you understand what is driving the VXX short term futures as well as Treasuries above.
Or how about today's GLD/Gold Trade Set-Up, GLD / Gold Long Trade Set-Up ?
Remember yesterday's call, USO/Oil Update, for a bounce in USO today?
"I suspect a near term (as in a day or so) bounce off support/resistance of the base, that "loitering" in the area and likely has to do with $USDX expectations and some very near term weakness, but I fully expect a strong pullback to follow so I suppose we could call any short term bounce the minor trend, the pullback , the swing trend and the eventual breakout to stage 2 the primary trend."
And what did we get in USO/Oil today?
The point is really the same one made at the top of this post in the form of the excerpt from Friday's "Week Ahead" forecast,
"I'm still expecting a $USDX led bounce in the equity market as well as the bond market"
"The Dominant price volume relationship today was in all of the averages except for the Russell 2000 and it was closed down / volume down, which I have nicknamed, "carry-on" as in keep doing what you're doing, meaning the market is likely to move down tomorrow as it did today as there are no short-term internal imbalances."
The laggard today was transports in salmon, the leader that actually closed green was the 20+ year Treasury Bond Fund, TLT.
Even though I think we get a bounce across the entire treasury curve, since last Friday's Non-Farm Payrolls the 5 year bond is above the level when payrolls printed, the 10-year Treasury is just about flat and the 30 year is down; this in addition to a very thick short presence in Treasuries making a short squeeze very probable. Remember though, like the our wheel hub asset, I expect Treasuries to put in a strong COUNTER TREND BOUNCE/RALLY... NOT TO REVERSE THE TREND!
This is our Wheel Hub" asset which everything else has some kind of correlation to, even if removed by an asset or two (LIKE THE KEVIN BACON GAME).
I have expected what in the $USD recently as we have come to the area just below support (Think about the 3 places I'll short a H&S top and the 1 place I WILL NOT), the concept here is EXACTLY the same as 3C leads to a new negative low... The "Volatility shakeout" as a bunch of new $USD shorts have entered on a lower high and lower low as well as a break to a new closing and intraday low just below intraday support... a Perfect area to run a shakeout of the shorts and squeeze them.
Taking a look at some of the important charts for the $USD, you may recall exactly what I have expected near term for the $USD as well and why... Hint: the 30 min $USD 3C chart...
Lets compare it with one of the averages on the EXACT same timeframe...
This 1 min chart of $USD is longer than the charts of the averages intraday, but what were we expecting today in the market, that being the reason I left the VXX calls open yesterday in to today (or as last night's internals told us)? We were expecting a move lower which is what the $USD did after putting in a negative divergence, then bounced off that this morning much like the market as we were looking for the early morning flameout/short term capitulation, Opening Action.... (from 10:15 this morning) and then we were looking for a pullback so the charts could right themselves as you can see this 1 min $USDX chart put in almost the exact divergence we were looking for in the major averages.
Take a look...
The same is true of Index futures...
I could almost look at the 3C charts of the $USDX alone and have a pretty good idea of where the entries and exits are in most assets as they are so correlated, although I'd never do that because above all, the market is dynamic and things change. Being lazy never made anyone money.
However I thought I should point out just how important the $USD is and obviously this hasn't been news to us as the first paragraph of our Friday "Week Ahead Post" talked about it specifically...
"I'm still expecting a $USDX led bounce in the equity market as well as the bond market"
Quickly touching on a few assets, oil was expected to bounce today or as I posted yesterday (see above) bounce today for "A day or so". After the close the API inventories were released after last week's largest draw since 9/2014 at -3.88 mn bbl , tonight's consensus was for a much more modest draw of -250k bbl., but instead came in at a 2 mn bbl draw and a draw of 827k bbls at the Cushing storage facility. This sent crude futures knee jerking higher...
There's another Saudi increase in production and we have the DOE's EIA inventories tomorrow morning at 10 a.m. which could be a catalyst for what are turning in to negative divergence since this bounce higher was posted for very near term trade. Also remember the correlation (inverse) with the $USD as a dollar denominated asset. I'll be looking for a very specific put entry if anyone is interested in the trade, I'll post it if I see what looks like an excellent entry/position. In the meantime, the charts...
And the 5 min chart with today's churning even intraday at the exact high of the day on significant volume with a leading negative divergence after.
As for Leading Indicators, I see two things and they are right in line with our forecast from the Week Ahead, the important part of the forecast are the highlighted areas and that's what I'm seeing in Leading Indicators...
"I'm still expecting a $USDX led bounce in the equity market as well as the bond market, certain stocks are going to be shorts before others, but this gives us a chance to open or add to any positions we may want to tweak a little.
As I have tried to make clear, it doesn't look like smart money is even participating in this move, thus my own participation level is so low at present having closed VXX puts today.
In comparison to what comes next, this bounce is nearly meaningless like Monday morning's forecast."
*All indicators are compared to the SPX/SPY in green. I may invert SPX prices from time to time so you can see what the normal correlation would be and any differences in relative performance, these will be noted as "SPX Inverted".*
The red arrow on the indicator is a leading negative signal, the recent white is in line with a counter trend bounce or the bounce in the "Week Ahead" forecast.
This speaks to the big picture for the market as the internals and structure have been all but eviscerated.
TLT v SPX on a larger scale with some hint of the normal correlation to the far left, but since it has just completely fallen apart. This however makes treasuries very interesting as a counter trend long on a short squeeze as we have been getting recent signals.
NYSE TICK Internals did not keep pace with the averages today, given the divergences and other indications, it makes perfect sense as far as our pullback in the averages to fill out the shorter term 1-5 min charts with divergences reasonable enough to trust a long trade.
SPY vs. TICK intraday, this is actually exactly what I'd hope to see.
Speaking of internals, yesterday's Dominant Price/Volume Relationship was right on. Tonight's Dominant Price/Volume Relationship is a bit scattered. Like yesterday the Russell 2000 has no dominant relationship, instead almost evenly split between the 4 possibilities. The Dow with 12 and the NDX with 40 are the closest thing to a Dominant relationship with both at Close Down/Volume Up which suggests a 1-day oversold condition or a near term bottom, although not overwhelmingly dominant. The SPX has about 200 in Close Down/Volume Down which is the same relationship as last night and essentially says the market will act in similar fashion as there are no internal forces that are moving strongly short term toward a directional pull. All in all, I'd say it's a net positive toward a bounce developing.
As for the 9 S&P Sectors, this was much closer to a near term 1-day oversold condition with only 1 of 9 sectors closing green...Energy at +0.46% with the laggard being Materials at -1.05%.
Interestingly of the 238 Morningstar groups I track, only 72 were green of the 238.
Both of these sector readings suggest a near term 1-day oversold condition from which the market typically closes green the next day.
As for Futures...
The near term 1 min $USDX looks like it will see some overnight weakness which would fit with the scenario that we were looking for to set up today for a reliable bounce that can be traded. Otherwise as seen above on the $USDX charts, we are seeing more positive near term divergences to go with that larger 30 min indicative of a counter trend bounce in the $USD's daily trend (down).
Gold looks like it will pullback a bit as we were looking for in today's trade set up, GLD / Gold Long Trade Set-Up
However, perhaps most interestingly as you can see my earlier capture of crude futures and you know I only expected a short term bounce, is this updated chart of 1 min Brent Crude futures just captured ....
Look at the leading negative divergence that has developed since the last capture taken earlier as I put this post together, Here's the earlier capture...
As you can see, there has been significant deterioration in line with our expectations of a short bounce of a day or so followed by a decline in crude. THIS IS BY FAR THE MOST INTERESTING FUTURES CHART THIS MOMENT.
As for Index futures, I have no reason to believe the scenario I was looking for to unfold today which actually started unfolding today, won't continue and this should give us some nice short term trade opportunities such as the double digit trades we have been hitting .
1 min ES/SPX futures distribution suggesting the small pullback we need for the charts to right themselves and take new trading positions at better entries, lower risk and the best timing we can get.
Everything looks according to our analysis.
In conclusion when a carry trade fails, many things change including the legacy arbitrage correlation of the $USD which is the "normal" correlation whereby US dollar denominated assets like oil which are traded the world over in $USD's rise as the Dollar falls to make up for the lost buying power or oil /gold/commodities in general fall when the $USD gains as it has more buying power.
The simple view of risk-on/risk-off rotation whereby bond selling=stock buying or stock selling = the flight to safety bond buying does not exist in a carry unwind world as there's no rotation from one asset to another as it is all repo/carry funded, not real cash. There are a great many signs that the carry trade unwind is on, but one of the first we saw was something I wrote about over 2 years ago that said (paraphrased) "When the markets are in decline, expect the Yen to be on the rise".
Now as I said, one of the first things we noticed before the $USD failed to make a higher high and made a lower low was some strange price and 3C action on the long term Yen Futures and $USDX, here are the charts which still look similar to when I first posted them, just much bigger now...
Speaking of which...
1-day Yen futures. Again, the price trend amidst an ongoing QE program (Japan's QE-Zilla) would not normally suggest any kind of strength and holding laterally in a base-like price pattern is strength, not to mention the daily 3C positive divergence, again, the Yen have to be returned(purchased) to finish unwinding the carry.
These alone have been significant clues, but the falling bond prices with stock prices, the rising commodity prices, etc. are all hallmarks of the carry unwind. I suspect this is why we are seeing so much correlation.
Have a great night!
