Thursday, June 9, 2011

Quick Market Update

Green Arrows! That means we've had pretty much perfect confirmation in the SPY trend thus far today, that's why it's continued to move up. Right now there's the hint of a negative 1 min divergence. It could be an intraday pullback or just a consolidation. The DIA is similar, the Q's have been off all day, they haven't been in confirmation and are relatively negative right now for a probable pullback.

The technology sector (important to the NASDAQ 100) has some decent positive divergences, it just hasn't broken out yet. As far as the XLK goes, a move above $25.26 should kick start the NASDAQ 100. The NASDAQ Composite is performing better.

FAS/FAZ Chart Request...

3C for newer members is a proprietary indicator I created some years ago to see the underlying action of the market. Just because price is moving up doesn't mean the trend is stable. When we have a negative divergence (red arrows) into higher prices, Smart Money is distributing their shares into demand and the trend is likely to reverse when they are done. Likewise, a market moving down may be under accumulation and soon to reverse to the upside-positive divergences occur when price moves lower and 3C moves higher (white arrows). Trend confirmation (a stable trend-will see 3C moving with price-in an uptrend, making higher highs and higher lows and vice-versa).

The name 3C is simple, "Compare, compare, compare" The more confirmation you have among timeframes and different equities with inverse relationships, the more reliable your findings are.

So here we'll compare FAS (Financial Bull 3X leveraged) to FAZ (Financial Bear 3x leveraged). You'll notice I use a lot of ETFs, the reason is because they tend to give faster signals and more reliable signals. If I compare the SPY with the S&P-500 there is often noise in the S&P-500 as stocks within the index are traded in baskets to equalize tracking funds and ETFs, so the actual trading of these stocks often isn't a sign of an accurate signal, but just routine maintenance of tracking funds and ETFs. ETFs will trade with different volume then the averages and usually will more accurately portray demand or supply.

With 3C, the longer the timeframe, the more important a divergence is on that timeframe. 15 min timeframe divergences often reflect swing moves in the market when confirmed with shorter timeframes. The 1 min timeframe is usually indicative of market maker/specialist activity, it's largely irrelevant to a broader trend, but does have implications for intraday moves.

I'll start with FAS and then compare the same timeframe in FAZ in different timeframes so you can see direct comparisons. If there's a good signal we should see similar divergences, albeit inverse (a positive divergence in FAS should see a corresponding negative divergence in FAZ).  For those of you not trading either, this is still valuable information as it will portray the underlying dynamics in financials which are important to broader market action, especially in the S&P-500.


 FAS 60 min. Positive divergence lasting approx. 5-6 days

 FAZ 60 min. negative divergence of the same duration.

 FAS 15 min.  a negative divergence at the close of 5/31, note this was also a false breakout and FAS moved lower on the open the next morning. Current positive divergence.

 FAZ 15 min. Shows the exact inverse behavior with a closing positive divergence on 5/31, again with a false breakdown sending FAZ higher. Currently a negative divergence.


 FAS 5 min. Positive leading divergence


 FAZ 5 min. leading negative divergence

 FAS 1 min. intraday FAS is seeing some profit taking, this may form a consolidation or a pullback.

FAZ 1 min. intraday is seeing some accumulation, again it could lead to a consolidation or a slight bounce.

Overall, there's excellent confirmation between the two, suggesting financials have upside in them over the course of the next several days. This should be positive for the market, especially the S&P which is outperforming the NASDAQ 100 by a 2:1 ratio.

The Miners Trading System

A lot of you emailed me last night and today asking my opinion. My opinion is when a trading system works well I don't like to mess around with the signals too much, but you simply cannot account for divergences in 3C and other factors in a backtested system. In essence, a trading system works well (when you find one that works-I've tested probably thousands and most of the ones that you see in some of your favorite books, you'd be disappointed with the real backtested results) because you are taking yourself out of the trade and are sticking by signals that have been tested and shown to work.

That being said, 3C is a unique indicator and showed us some trouble spots late yesterday. So I suppose the question is, can our intervention help the equity curve when it comes to tweaking the entries and exits. I'd say largely the answer is no, but yesterday we did have some strong signals. My answer to all of you was that I would exit DUST and enter NUGT. The very nature of the system will always put you 1 day behind the signal, there's no way around that, but in this particular case, there was enough evidence to take the NUGT long and thus far it's worked out well. We'll see f trade system #2 gives the same signal tonight as trade system #1 did last night.

Here's what NUGT is looking like so far today
Up over 4% on the day. Still, the answer to trade system intervention I suspect won't be answered in one day's gains.

If I get a little time today, I'm going to run the same criteria that triggers trades in the miners on some different asset classes to see if perhaps I may have stumbled on a more useful system. I'll keep you informed.

Chart Request-BAL

BAL is a cotton ETN.

 To preface this, I view this as a counter trend trade. This looks a lot like a top to me. Also you should be aware of the low volume in this ETN, this is what I was complaining about yesterday. There are some very specific ETF/ETNs that I'd like exposure to, but the volume is so low it would be insane. This isn't quite insane, but very low nonetheless.

 I overlaid my cumulative volume indicator on the top area and it acts like a top, volume shrinks on the rallies, grows on the declines, so once again, any long trade here I view as counter trend.

 That said, there's a pretty large positive divergence on the 30 min chart, accumulation is in the low end of th range as usual. Several days back it ran a bit too high and it looks like the specialist knocked it back down (at the red arrow) and then accumulated the dip again.

 The 15 min chart confirms the 30 min chart above, same action exactly.

Interestingly, the 10 min chart is in a leading positive divergence (the most powerful type) inside the white box so it looks like the recent round of accumulation was quite strong.

If the bis ask spread isn't too wide (what I see right now is about a $.24 spread) it may be worth a crack. I'd watch the position size unless you have a low commission structure and can afford to ease out of the position into demand. Otherwise, it looks like a decent candidate.

I looked at CORN a little earlier for someone else, it had already gapped up and I'm not a fan of chasing gaps. While there may be some more upside in the days to come CORN looks like it's going to faded to the downside today.

Silver and Gold

I just looked at silver and I couldn't even bring myself to grab a few screen captures, the reason? I just don't see a high probability trade there one way or the other. The closest thing I see is maybe a triangle setting up.

GLD, I'm not seeing anything either in terms of short term trades there. I still am sticking with my thoughts from a week or so ago, I think gold is going to pullback substantially and then perhaps offer a very good entry for a move higher. For now, the only thing I'm willing to do with gold is keep a small short on GLD.

As for silver, I don't even want to touch it. Just because it's out there to trade doesn't mean you have to. None of us are running a PM fund and that' our advantage, we don't have to be in that market when there isn't a high probability low risk trade. As I often say, THAT is your edge over Wall Street, it takes some patience to use it, but I suggest you do.

Just so there's a chart with the post, once again, the longer term outlook for gold/GLD.

 A 60 min negative divergence at a false breakout (in the white box), now the divergence is leading negative-the worst kind.

Here's where I get interested in buying gold, around the $140 level on a pullback to the daily 150 sma

Another C&D trade-EEE

A few years ago I'd never feature, well that' a lie, I did feature some, but in general, Cats and Dogs, under $5.00 and with low volume ar highly speculative trade, if you don't have your risk management together, they can be killers. I always reduce my risk in half on these trades, but the fact is, they often produce double digit 1 day returns, WEST hit 100% in 1 day June 1st.

So here's EEE for those of you who are so inclined.

 The downtrend went into a basing triangle which is at it's apex suggesting a very directional move is about to occur.

 The 60 min 3C chart is positively divergent inside the triangle.

 As is the 30 min 3C chart

As is the 15 min 3C chart.

You could take a crack at the trade here or wait for a higher probability breakout around $2.00 which is a nice even number which will probably trigger some limit orders as well.

Remember-SPECULATIVE=RISK MANAGEMENT-no excuses.

XLF Follow Up and XLE

Here are yesterday's two Financials posts

Post 1

Post 2

Clearly yesterday Financials were stirring, as I said, the market isn't going anywhere without financials and energy.

Here's XLF today
 XLF breaking the short downtrend line.

 The 1 min XLF 3C chart, with a nice round of accumulation on the closing dip and throughout most of the day. Thus far this morning we even have confirmation.

And the 5 min which also acted well yesterday, is not only confirming, but in a leading positive divergence!

As for energy...
 XLE also broke the short term downtrend line this morning

Yesterday, accumulation at the lows at  2 p.m. and a bigger round at 3:30. Thus far XLE is confirming the move up of 1.25%

So far we have a pretty good start on the day.

I would guess this one will stick

I'm talking about a bounce in the market. Why do I think it will stick?

After hours TXI lowered guidance-not good news

The BOE kept rates at .50% despite CPI running more then 2x the target rate of 2% (CPI at 4.5%)-signs that our Tea and Crumpet friends are more worried about the fragile economy then runaway inflation.

From yesterday's Beige Book, "added to the view that the economy is experiencing a temporary slowing."
Yet today we hear rumblings from the Obama administration:


 "President Barack Obama’s advisers have discussed seeking a temporary cut in the payroll taxes businesses pay on wages amid economic reports suggesting the recovery is slowing, according to people familiar with the matter."

Obviously if they are thinking about cutting taxes-and Democrats nonetheless, the temporary slowing may not be viewed as so temporary after all. As I said yesterday, all the manufacturing data series suggest the trajectory is toward contraction under 50-that's more then softening.

And Initial claims at consensus of a 419k print  came in at 427k. The previous print of 422k was revised higher to 426k.

It kind of sounds like I'm making a case for why the market shouldn't rally and in a way I am, but as we know, Wall Street sets up these cycles of ups and downs long in advance, damn the economic data, thy've got an investment on a bounce that needs to pay off.

Take a look at the longer term SPY 3C charts

 The 60 min chart is in a relative positive divergence-starting around the $131 level or so.

 Here's yesterday's intraday trade, accumulation in the triangle and then a.... Well as of now, an apparent false break down, one of the best timing signals we have seen lately.

 Here it is on a daily chart. Remember in last night's UUP update, I said a strong zone of support, which is obvious to all, is usually broken on a false break down before a reversal. You don't get much stronger support then an exact tweezers bottom, broken yesterday.

 The 30 min 3C chart, also in a relative positive divergence

And the 15 min chart, again positive and looks like it started around $131, so we can assume an average accumulated price of about $130 or so.

Lets see!


The Cats and Dogs are off to an early start

CBAK and SPEX so far, 3 minute into the day. For new members, when the Cats and Dogs rally, it's a dangerous sign that a big drop is near, but we have a bounce to complete first.

UUP /$USD Chart Request.

Since the Dollar Index doesn't give us real time data to analyze multiple intraday timeframes, UUP has served well as a proxy for the D.I.  There are a couple of lessons that I have mentioned repeatedly about how the market works with regard to reversals and a good timing indicator, you'll see that in the UUP charts. I'll start from the daily (most important timeframe) and work down with the 3C charts.


 UUP daily 3C - In early 2011 we had a Stochastics negative divergence, which is one of two ways I find Stochastics useful. In January UUP made a false breakout above the short red trendline, which represented new highs, 3C did not make a new high with price so we had a negative divergence or distribution in UUP. As usual, the false breakout is an excellent timing indicator for a reversal and that was the ultimate final reversal in UUP . While 3C daily is the most important timeframe, it is the slowest to respond to divergences, it is worth noting though that we have another Stochastics and RSI positive divergence.

 The 60 minute chart gives us some more detail, in late March during a brief counter trend move, we had another false breakout in the little white box to the left of the chart. It didn't make a big breakout, but retail traders insistence on viewing support and resistance as EXACT levels to the penny, make a breakout of a few cents worthwhile for Wall Street. The same thing happened on another counter trend bounce in April, again n the small white box with the red trendline representing resistance. Once again 3C did not make a higher high with price and we had another negative divergence. In May there was a very brief accumulation period and once again, a false breakdown below the red trendline that started the move up. As you can see, these false breaks are excellent timing indications. Note also 3C made a higher high as the breakdown made a lower low-a positive divergence, the stops that were hit during that breakdown were accumulated and UUP moved up from there. Later in May, you guessed it, another false breakout above the red trendline (in the white box) while 3C made a significant lower low, this was distribution and UUP tumbled promptly from there. Recently during June, we've seen a 60 min. positive divergence at the white arrow, I believe this will end up being a bigger divergence, meaning I think there' more accumulation to come.

 The 30 min chart confirms the charts above, with some more detail. That false breakout later in May is quite visible, as is the negative divergence (red arrow). Note distribution had started before that, it takes some time to distribute an accumulated position, but the false breakout was an excellent timing indication of the end of distribution. Note again in June, the positive divergence forming.

 The 15 min 3C chart- a closer look at the May false breakout and the current positive divergence. The part in the large white box is a leading positive divergence and the most powerful type of divergence. It is making new highs on this chart, despite prices being near the lows.

 The 10 min chart simple shows the range in which accumulation is taking place, Every time UUP moves up too high in the range, a negative divergence sends it lower where it is accumulated. There was a negative divergence end of day 6/6 which sent UUP lower on 6/7, today there was another negative divergence in the same price area. It seems whoever is doing the buying (and John Taylor openly admits he' accumulating the dollar), they are pretty specific about where they want to average their position and it seems to be around $21.

 The 5 min chart just confirms what we see on the 10 min in more detail.

 And today's 1 min chart. Note there was good confirmation (green arrows_ with higher highs in price and 3C until the last two hours of the day as we approached that $21.15 level

Looking at the range, it seems for whatever reason, accumulation is pretty low in the range. Big orders are often routed through market makers, in this case a specialist and they often have a specific target they want to accumulate at. So the specialist will knock prices down to fill the order at the customers target range. If they don't, it's unlikely they'll be getting repeat business. I don't know why they are so specific about such a minuscule difference, but they appear to be. As far as how long this accumulation may go on, we have no idea of how big the order was and at what average price so it's hard to say when this will hit mark up, but as usual, look for a false breakdown below a well defined support level as a timing trigger to launch the dollar into mark up.

While as a general rule of thumb, there tends to be an inverse relationship between the dollar and commodities/precious metals/equities, I've noticed that relationship is not as consistent as it has been in the past. of course there are a number of reasons that are outside of the dollar inverse relationship that could be influencing this such as surprise news and statements out of the EU, specifically with regard to Greece, also margin hikes and the recent margin discount of ES (which was strange as it was in the face of rising volatility. In any case, an inverse relationship between the dollar and the above mentioned assets cannot be counted on as reliably as in the past. This seems to work to the benefit of our Miners trading system.

I'll update precious metals in the morning, but generally my recent view has been to look for a deep correction in gold (perhaps that 2 time in a year buying opportunity at the 150 day moving average)  and even though silver is trading at a deep discount to the historical ratio between gold and silver, it seems they are out to get silver. Whether this is in support of whatever may be left of JPM's short on silver or has to do with something altogether different, I don't know, but considering the deep discount silver was trading at, the 5 consecutive margin hikes out of the CME were well designed to halt the rally in silver. The CME's volatility explanation was weak when they published it, it was even weaker when they dropped margin requirements on E-minis in the face of rising volatility, expressly contradicting their margin/volatility paper released after they were widely accused of manipulating the price of silver through a seemingly unreasonable amount of margin hikes (5 in all and 1 about every 2 days on average until the silver rally was stopped in its tracks). For that reason, I'm a bit bearish on silver as the COMEX/CME seems to be taking orders from higher ups-perhaps the treasury or the Fed and those are two entities I'd rather not go up against at this point.