CREDIT / RISK ASSETS / FX

 Starting with commodities in brown vs the SPX (always green), they are a bit less excited at this point where the sPX is correcting in a flag-like formation.

 The long term daily chart shows commodities in lock step with the SPX during 2010 and then they started to diverge at the top, they have been much less enthusiastic then the SPX as of late, for newer members, we spotted the early divergence in commodities and speculated that there were problems in China which were confirmed over the next two weeks when both their manufacturing and services PMI came in below 50, in other words, in contraction.

 Intraday High Yield Credit refused to post a higher high with the SPX yesterday and early today.

 The Euro in orange is bouncing a little, I'm sure it's the correlation that is giving the market a little bounce as well. Speaking of correlations...

 On a daily chart going back to 2008, you can see the Euro or rather more appropriately, the EUR/USD pair had excellent correlation with the SPC, that correlation fell off dramatically during QE2 as nothing mattered in QE2 except the mantra, "Buy the Dip" as Primary Dealers flipped bonds from Treasury Auctions to the F_E_D making billions in nearly risk free money, in some cases only holding an issue for a few days before flipping it at a huge profit, those profits went in to the market within 30 minutes of the POMO being concluded.

 More recently, the correlation started coming back and the Euro diverged with the SPX which led to the late July market decline, as of now, there's a deep dislocation between the Euro and the SPX. Some people think it is of little consequence, I think people will look back at this period and wish they had heeded the warning.

 Here's 3C on the Euro/FXE showing the accumulation after the Euro broke $1.30, this was a rally that we anticipated, not only because of 3C, but because of the concept of volatility shakeouts after a major support area is broken. We are now in the distribution and have been in a negative divergence in the Euro on the 15 min chart. Essentially, that is the 4 stage cycle, accumulation, mark up, distribution, decline.

 Intraday on a 2 min chart, the Euro is seeing a strong leading negative divergence, suggesting it will see downside shortly.

 The 1 min chart confirms the same, it is also leading negative here.

 High Yield Corporate Credit appears to be in lock step, it even showed a small positive divergence to the left at the white arrow, it is slightly negative at the time of this capture.

Looking out a little further and Credit has also failed to make higher highs, it's lower then it was on the 25th of January.

The Sewing Circle includes the ECB

At this point, the rumor/denial cycle in the sewing circle known as the European Union is worse then the bank rumors of 2008 in which the banks said they had no more exposure to toxic mortgages, only to write down a massive amount a month or sometimes weeks and even days later.

So first the ECB will possibly... probably contribute to the Greek debt write down via the EFSF, which as you probably heard in my earlier tone, seemed to be very odd to convert the EFSF to a storehouse of junk bonds from it's original role as a potential gather of funds. Surely transferring Greek bonds to the EFSF would destroy any chance of garnering foreign investment, not that it was likely to happen as they pulled an Austin Powers/Dr. Evil, "We will leverage the EFSF to a trillion, gazillion-billion dollars", yet had to have the ECB send in the clean up crew on a failed $3 billion dollar offering!

In any case, German Bunds are cutting losses as the safe haven move has started as Reuters reports:


 two euro zone sources said European Central Bank policymakers were still divided on whether to contribute to a restructuring of Greek debt.


And thus the Germans going home to vote sometime next week. It is the IMF pressing the matter, Germany has never indicated a willingness to see the ECB participate and Draghi has completely ruled it out, although this was a new and novel idea, I suspect their opinions haven't changed much. At this point, as we all know the EU can't see past their noses as Papademos demonstrated this week when he ordered a report of the impact of a default-something that should have been done months ago, I suspect the Germans will start discussing the possibility of letting Greece go and using any funding to build a firewall around the other PIIGS, which without Greece will be PIIS. The Euro-zone serves one vital function for Germany and this is why Germany would like to keep it intact, it is a FREE TRADE ZONE for their exports. With Greece being broke, Greece doesn't much matter anymore to German exports, with the exception of the military weapons Greece was buying from germany, including a u-boat and a few other odds and ends, interesting that Greece is and was planning on spending bailout money on Frigates, Apache Helicopters, tank ammunition and U-Boats.


Some in the US might call them right wing extremists.


Time to check what credit is doing...

Market Update

From Sunday night's post, you already know I'm not looking for a correction...

Also, don't forget the oddity of the C&D rally on the lowest volume seen on a non-holiday in decades and what my experience has told me about the market when the Cats and Dogs rally...

Here's another example of traders REFUSING to adapt to Wall Street using Technical Analysis against them.

 The DIA stops being hit at support from late yesterday

 IWM stops, being placed right where the market knows they will be placed, intraday support, intraday lows and yesterday's close.

 The Q's seeing stops being hit early on a break below yesterday's close (often the first area of support traders look at intraday, followed by a morning range if it develops and intraday support/lows). The second round of stops being hit was larger and at both intraday support at a small hammer as well as yesterday's close.  I believe the reason the stops being hit are much larger in volume on the second break is because of the SPY below...

 The SPY didn't break yesterday's close early as the Q's did and as such, traders in the Q's saw that as bullish (SPY holding first support), however later when the SPY did break below yesterday's close, we see the other averages that hit earlier stops, pick up on volume at this one. Also note the little H&S looking top today. I haven't taken the time to do volume analysis and see if it is real or just a random pattern, but most traders never confirm H&S tops with volume as they should, that happened early in the 2009 rally, a H&S top showed up on the daily chart, but if you did the volume analysis you would have seen it was a random price formation, volume DID NOT confirm. Of course with all the newest indicators, traders have totally forgotten about the second most important indicator on the chart, volume.

 Here's 3C opening trade on the SPY, it was negative as the SPY tried to make a higher high in early trade.

 The 5 min chart shows us that a negative divergence has been in place for sometime, actually longer then this, suggesting a large distribution cycle in to price strength.

 Here's a close up of the 5 min chart, also negatively divergent today at the highs.

And a close up of the 15 min chart showing a trend of distribution.

GLD/SLV Update

In yesterday's GLD/SLV post, I showed you early distribution on yesterday's move, which was a move up after that channel I pointed out broke. Here's what the 3C chart looks like for GLD and SLV thus far as well as some potential entries.

 GLD's daily chart today, although it has lost some ground since this capture a few minutes ago. As I pointed out last week, the consolidation in the channel is pointing the wrong way and as such, was suspect for a break down, as well as GLD being near the large triangle's apex. As usual, after a break we always see the volatility bounce/shakeout, which is rooted in the fact that Technical Analysis books for nearly a century would have you short GLD (at least on a swing trade basis) on the break of the channel and traders do exactly that, so no matter how big the break (whether small like this small channel or a multi-year top), we always see this volatility shakeout as Wall Street uses technical analysis against its practitioners. I really don't understand why traders refuse to adapt as this has been going on ever since cheap online brokers became the rage, it has just been getting worse and worse every year, but if you know what traders will do, you pretty much know what Wall Street will do.

 Here's GLD's distribution on the 1 min 3C chart pointed out yesterday, as I said yesterday, it looks like a bounce from the break of the channel and not much more. If you didn't see the timeline below, you might be inclined to think this was a major rounding top-again the fractal nature of the markets.

 The 2 min chart looks even worse and is leading negative.

 As is the 5 min chart, you already know what the 60 min chart looks like.

 Although the trendline is broken, I do prefer a break below the Trend Channel as a very high probability entry. The stop depends on how you treat the trade, a swing trade, a position trade, etc?

 If you are using the swing rules and the layout some of you have already downloaded, I drew in a candle to the far right which is below GLD's pivot candle's low of $169.67, that would be the swing entry, but it needs to be on a daily candle that's high does not exceed $169.67.

 Here's SLV's daily chart

 SLV is also breaking a trendline and saw the same bounce, although the break is not as defined as GLD's

 Yesterday's SLV 1 min 3C chart going in to today's open, it is now leading negative. Note the negative divergence right off the open that looked like it was going to move higher, sucking in some longs as it moved above yesterday's close.

 The 2 min 3C chart shows a sharp negative divergence on the opening strength.

 And there's a large relative negative divergence on the 5 min chart.

 Again, I prefer a break below the Trend Channel as a high probability trade, but as always, so long as you figure out your risk management before entering, the trade can certainly be phased in to with a portion entered in this area, giving you a better risk profile and the remainder entered on the break below the Trend Channel, giving you a much higher probability trade.

Here's another candle I drew in for a Swing Entry based on the layout some of you downloaded yesterday, the daily candle needs to see a high that is BELOW the pivot candle's low at $32.70.

Swing Layout Progress

Some of you have already downloaded my initial Swing Layout with the colored candlesticks which denote long/short entries and exits as well as what is noise within the trend.

I'm still working on the chart and making some progress with the addition of two new indicators, a volatility stop and my Trend Channel which is another form of volatility stop. Furthermore, there will be underlying conditions to define a high probability market in terms of direction and in terms of the stocks that show the most promise as swing candidates according to how long their swings last and how often they give good signals, when completed, the idea will be that a watchlist can be created with first, the best swing stocks as represented by a measure of their "swing-ability" and then it can be sorted to highlight both long and short candidates that are giving signals or close to it.

Here are the stop components thus far, hopefully later tonight I'll have an updated layout you can download, remember these are for members only.

 First the volatility stop in pink, lets call that fuschia. In this case there needs to be a set up first (a pullback that creates an overbought/oversold condition), the candles still represent the entry as you can see a short trade to the left in the red box on a random symbol, however the stop becomes the volatility indicator which would have stopped the trade out at the first noise candle (yellow arrow), rather then wait for the higher stop out two days later. The next long trade in the green box is also stopped out by the volatility indicator on a noise candle (yellow arrow) rather then the swing method red candle that appeared a day later at a lower level. Last, the long trade in white would not have been stopped out by either of the two red candles as the volatility indicator is the stop, this keeps you in the long trade.

 Using my Trend Channel, which represents a set standard deviation to create the channel, which is based on each stock's individual volatility, the entry system is the same, although you are trading with the trend of the channel. The first short swing trade to the left enters on the first red candle, but rather then wait for the green candle stop out, the stop would come at the first white noise candle BELOW the Trend Channel, as it is making a move that is unusually volatile, beyond the channel's already set standard deviation, this allows maximum profits on shorter trades with less opportunity cost.

Finally as mentioned, this can be used on any time frame, for longer term trades, this weekly chart would have slightly different rules, the entry would still be long on the first green candle, but in this case the stop would function as the Trend Channel stop normally does and all subsequent swing candle signals would be ignored, only a break of the Trend Channel would force an exit of the trade, which will allow you to hold longer term positions and trends.

I'll be working on it more after hours, when it is available, I'll let you know.

Greece getting close or further away?

Right now, it's more difficult then ever to understand exactly what is going on with meeting after meeting being rescheduled. All we know for sure is the PSI debt restructuring is not done, the coalition ruling government in Greece is deeply divided and now Germany murkies up the waters even more.

As I have talked about time and time again, the bailout of $130bn euros, agreed on in October, is already too small as the Greek economy has contracted faster then anticipated in October, leaving it $15 bn Euros short (needing $145 bn Euros), but the second tranche being discussed is still $130 bn euros.

There is no deal with private creditors as of yet and as the IMF has been pushing the ECB to take a non-private sector write down on their Greek bond holdings, this violates their mandate as they are expressly forbidden from financing sovereign debt. So the new talk is that the bonds may be transferred from the ECB to the EFSF, which is as strange as it gets as the EFSF was supposed to raise cash to buy bonds, not become a store house for some of the most undesirable bonds in the world, it remains unclear what effect that would have on the EFSF's ability to raise capital as it seems like it is being transformed before our eyes.

Talks again have been delayed, this time it is Germany. Initially it sounded encouraging, the ECB may actually participate in Greek debt restructuring, however, the German delay is a signal that this is far from a done deal.

First the Germans will be voting on whether they will back the next tranche of aid, $130 bn Euros which is very unpopular domestically as Der Spiegel's article pointed out yesterday. Second they will be voting whether to allow the transfer of th ECB bonds to the EFSF, and lastly, a vote regarding guarantees on new Greek bonds should the debt restructuring get done.

There are a lot of "ifs" here. First whether Germany supports any or all of these measures, secondly, it seems to me that the PSI debt deal on Greek debt is not being finalized as private sector holders wait to see if the ECB will get involved, there's no point in agreeing to a 50-70% haircut if the new bonds are just as unworthy as the old ones. There's a clock ticking on this deal as it will take time even after an agreement is potentially reached. For the Troika's part, they seem to be waiting to see if the PSI deal gets done and whether the coalition government will agree to the terms being set out and changed weekly by the Troika. Everyone seems to be waiting to see what everyone else will do first. The fact that Germany is voting on the matter itself is a bit scary for the deal as the ECB/ESFS transfer seems to be a logical solution to ECB involvement without violating their mandate, the fact Germany is dithering on it is not good, but Germany has never supported the ECB being involved in the debt restructuring.

In essence, there are now more players then ever that are in a position of, "Making up their minds". The clear cut draft that was supposed to have been penned yesterday of what is needed for Greece to get the next tranche, is no longer so clear cut as Germany now becomes a wild card in 1 day, whereas just yesterday their stance was well known and understood, today not so much.

The issue that most investors least understand and where the media coverage is the weakest, is the real ticking time bom.. which is the clock itself. Even if everything falls together, it takes time for the debt swap to be effected and Greece is already way past the deadline of what was considered a reasonable amount of time to get it done. Now Germany won't vote on these measures until next week, so we and Greece won't even know what they are discussing until then.

Until then, tick, tick, tick; every tick brings Greece closer to the title of "First developed nation is 65 years to default on their debt'

DIS Misses on Revenue, something a little fishy

Disney (DIS) reported right after the bell, the beat on EPS and missed on revenues.  Interestingly (coincidentally?) the miss that has DIS trading down 1.81% in after hours, erasing all of today's gains, just so happen to occur on the very same day that DIS broke out to end the primary downtrend, an enticing breakout to buy.

If you are familiar with the dogma of technical analysis, a breakout is something that is coveted and to be bought, a breakout that ends a primary downtrend even more so.

Here's DIS today breaking the Primary Downtrend with a breakout above the July closing highs on about a 1/3 increase in average 200 day volume.

 As you can see on this chart of the last 2.5 days, volume surged on the breakout, leaving buyers at a loss right now. Coincidence or just a well planned head fake move?

 The daily 3C chart shows DIS moving up in confirmation of the trend in 2010, then distribution takes place during a topping formation in the first half of 2011, DIS falls 34% from the top's highs, quite a fall for such a large cap that is not typically associated with beta.. From June 2011 through the October lows we see a strong 3C positive divergence and DIS gains 41% through today's close, but on a negative divergence at today's breakout.

 On an intermediate 15 min timeframe DIS sees a negative divergence sending it lower in to an accumulation zone for the move through resistance and an important breakout, yet there's no 3C support as DIS breaks out.

 A 10 min chart shows a little more detail of a negative 3C leading divergence in to the breakout

A 5 min chart shows a steep leading negative drop today, just around the time the breakout started.

I wouldn't think a company as big as DIS would have a leak in earnings and of course we can't ever know for sure, but a breakout with buyers stepping in that would have ended a primary downtrend with all the 3C charts above in agreement, something is definitely a little fishy.

AEO Follow Up

This was another trade idea (short) from Feb. 2 that we were just waiting for the set up

I think we are pretty close to where we want to be on this one.

 The last two days have broken below the pivot, although the highest probability trade is on a close below $13.70, I think it probably doesn't make too much difference as you have a little advantage here on placing a stop just above $14.50, an even tighter stop can be used with a close above $13.95 or so.

A break below the red trendline should send this one on the next leg lower and with a breakaway gap in place, this is a very bearish chart. My personal preference would be to treat this as a swing trade just until we see what the trend looks like on the downside and see what stops would work best in a trending situation, thus far we just have a nasty break, but no indication of what the down trend would look like.

Again, you can either wait for a break below the trend channel and have a higher probability trade (although I like the probabilities here) or enter around this area and have a tighter stop with less risk, or you can split the difference. Either way, that's a nasty break from the uptrend and a rare break away gap, very bearish looking

Trade Idea PPO (Short)

Use your advantage over Wall Street with this one, PATIENCE! Let the trade come to you. This is also a trade that I consider to be in a Primary downtrend, but I think it is best treated as a Swing Trade, I think if you do so, you'll get quite a few decent trades from this one.

 This is a really beautiful head fake move out of what appeared to be a bullish descending wedge, then they took EVERYONE to the cleaners in 1 day, every long who had bought, no matter where was at an instant huge loss in a single day, now they are enticing the longs again...

 Although if you look at the long term chart, it is not immediately clear, the 150 day moving average is what this trade is all about. If you look at the areas I have highlighted, that has been where breaks of support have gapped down hard, there has been resistance and breakouts have failed, it's also where they took all the longs to the cleaners in a single day.

 So I would not get greedy and look for a few extra percentage points trying to jump in early, let this come to you, but you need to set an alert for when this breaks below $46.25 and be in the trade really quick, you never know if you'll get another massive day down and waiting for the close, you may miss it.

Here you can see this wasn't a random price pattern that looks like a head fake, they set this up way in advance with accumulation near the wedge's apex and then dumped it hard. Like I said, treat this as a swing trade, keep your stops on the tight side and this should offer you many opportunities as they bleed this one in a primary downtrend.

GALE/QCOR Pair Update

Gale was brought up on Feb 2. as a pair trade to a QCOR short. At the time GALE was at $.88.

Here's the QCOR Trade Idea...

The idea is to buy GALE long and short QCOR, they are both in the biotech sector, it's kind of a hedged trade.

GALE made up to 58% as of yesterday at the intraday highs and is at a profit on a pullback today of 24%.

I liked the idea of a phased entry in QCOR on the short and GALE long, of course GALE is much more speculative so the position size should be smaller and treated as a speculative trade.

 Here's GALE's daily chart, as mentioned earlier today, biotechs are pulling back, so if you didn't take the trade and maybe are interested, you may get a chance to buy GALE on a pullback, just remember that unlike QCOR, it is a speculative position.

 As you can see, the first pullback is usually to the 10-day m.a. in yellow, subsequent pullbacks tend to be deeper, probably between the 10 and blue 22 day, but possibly as deep as the 22 day, much beyond that and we need to re-evaluate the position.

 This is the stop I'd suggest, a 1 day Trend Channel which on a pullback with it still rising right now, would probably be in the $.80 area, but it rises more each day and tomorrow it will be even higher.

 The daily GALE 3C chart seems like it can support a bigger move in GALE, although how you chose to manage the trade (trade around pullbacks are just hold) is up to you and your risk tolerance. When market conditions change, that will also have an effect on long positions so stops may need to be tightened in that scenario.

 GALE is pretty much in line on the short term charts so I would expect the pullback /consolidation to continue, it has had a big move in a few days and those gains need to be digested and the weak hands need to be shaken out.

 This is the long term daily QCOR chart, there's an obvious problem here that can be seen in the changes in volatility, tops get very volatile. There's also an RSI divergence in place. The long term target for QCOR is around $20, but they often overshoot those targets so in the mid to high teens is realistic.

 We wanted to phase in to QCOR and add on strength and then add the last part of the position on confirmation, a break below the 150-day moving average would be pretty good confirmation to add the last portion, whether it be in 1/2 , 1/3 or 1/4 entries. Today looks like a decent day to add or start phasing in if you didn't already on yesterday's strength.

 The daily QCOR 3C chart also shows problems with QCOR, thus the basis of the long/short pair trade, although either trade can be taken independently.

Looking at QCOR's volatility and hoping to capture a trend to $20, I think a 2-day Trend Channel which is a bit wider is a better stop then a 1--day.

 If you have any questions of either, just shoot me an email.