Market Update

I believe the Euro is moving on 2 things, 1) the volatility shakeout after $1.30 was broken in the wee hours of the morning and 2) the announcement that the ECB is in some way, getting involved in a Greek Bond swap, but that story is VERY unclear as it mentions the ECB would distribute profits from its GBG (Greek bond) holdings to national EU Central banks. The problem that has everyone scathing their heads is the question, "Where exactly are the profits coming from" given this chart of GBG trade...

Thanks to Peter Tchir for the Bloomberg terminal chart...

And as you might suspect, the ECB, when asked about this 'newest rumor", declined to comment.

It's clear that the market is moving strictly on the EUR correlation and nothing much else..

Today's intraday trade between the Euro and SPX.

As for the Euro itself...

The early parabolic move has only intensified and parabolic moves tend to end badly in the same fashion they went up.

As for the market averages...

 The DIA is not confirming, so it looks like algos and dumb money/momentum chasers.

 The Q's have a possible negative divergence developing

The SPY hasn't confirmed either and is leading negative with a recent move down as well.

So the question of the market intraday really boils down to what is the Euro likely to do.

Here's FXE...

 The recent sideways action is seeing a leading negative divergence.

The next timeframe is seeing that weakness bleed over.

ES is also negative, both longer term relative and leading...

It's still early in the day considering most of the important action won't come until after 2 p.m. and increasingly in to the close.

 High Yield Credit went up a bit, but is not willing to go any further and has declined since.

 Financials did come in to rotation a bit, but still lagging far behind.

 High Yield Corporate Credit is similar to high yield, there was a little upside, but it refuses to go any further and is under-performing significantly on a relative basis as measured by the white trendline on the SPX.

Sectors have seen some change from early this a.m., financials are doing better, tech really hasn't moved much at all. The other sectors doing better are doing so because of the FX correlation to a weak dollar (strong Euro) such as Energy and Basic Materials. Industrials have declined a bit and discretionary (as mentioned earlier hasn't moved up or down in weeks) is continuing its downward slide.

Financials Update

 XLF's bearish ascending wedge and the typical head fake move. Wedges are "supposed" to break down at the apex, if you look at the last candle in the apex it even hints at that, but as we have seen so many times before, a breakout causes a lot of havoc for traders expecting a breakdown. The breakdown almost always comes as the wedge is for real, it's just the manipulation of the pattern between the apex and that actual breakdown that has changed.

 XLF 60 min chart has reached a new leading lows and quickly. The majority of the downside 3C action took place at the breakout area, which makes sense as that is what the false breakout is used for the purpose of distribution, whether selling or short selling.

 The 30 min chart shows the same, especially in the breakout area.

 The 15 min chart is more detailed and really shows the 3C deterioration at the breakout area in yellow.

 The 1 min chart shows some price strength today, although 3C remains on a downward trajectory. Shorting in to strength is not easy, but it is usually the lowest risk entry and the probabilities as you can see above look good.

 FAZ, the 3x bear financial ETF looks similar to XLF, just the mirror reversal.

 The 30 min 3C chart is very positive.

 Again the 15 min chart shows the detail of accumulation in the false breakdown area.

As well as the 2 min chart.

FAZ if good for leverage and especially swing type moves. Some of the Financial shorts I have mentioned recently and others that look pretty good include:

JPM, BAC (although I favor trading this with in the money Puts a month or two out and on a swing basis), MS (this is another I would favor Puts for the leverage), GS looks decent for a swing move for the next leg down, MBI, although not a true financial in the sense of the others, it's close enough,WFC also looks interesting.

Although I mention "Swing' trades, I'm a believer in taking what the market offers, this means I would not set a swing target, but let the market tell you where the trade is going; it may very well turn in to a nice position trade. I just prefer to view the initial trade as a swing trade, especially for risk management planning. While we are on the subject of risk management, on initial entries, I prefer to phase in to the trade; entering a short position on strength is like a gift, although adding to the position as it moves in your favor is also a good idea. I would go for the widest stop that is sensible for the initial trade entry, the way I use risk management, this means taking on fewer shares, but you can always add.

The Likelihood of a Top Rolling Over

Back to our Credit/Risk Asset indicators. I have recently said and will repeat, I think this layout combined with what 3C has been showing, will prove to have been very valuable when we look back, so I would urge you to consider its value now while it still matters.

 While I have most timeframes set to look at the probability of a top rolling over, I did want to see if High Yield Credit was moving with the market at all this morning, as you can see, it wants nothing to do with any move up. This is important because the credit markets are much larger then the stock market and they are played almost exclusively by the professionals, as they say, 'credit leads, equities follow).

 The market is as I suggested earlier, perfectly in sync with the Euro/USD.


Now for a look at the timeframes that should answer our question...

 The Euro is severely dislocated longer term, but intermediate over the last several weeks, we see it peeling away from the SPX.

 Even though rates are near all time lows (rates act as a magnet for the market), when looking at the last several weeks, they too are rolling over flashing a warning sign.

 Even financials which have had a good run since the end of Q4 are rolling over and the market can't get far without them.

 High Yield Credit...

Commodities...

All rolling over. The market shouldn't be far behind, but as I mentioned late last night (or very early this morning), keep your eye on the trend, the intraday and daily gyrations right now have little meaning compared to the trends you see above. I personally would be using any strength to initiate or add to short positions.

Euro Catches a Bid

 Any early market strength is almost certainly attributable to the Euro moving up since the 9:30 open (green arrow) and although this looks impressive...

It's almost certainly technical related then anything else as the Euro did break the important $1.30 mark last night. In this light, a technical bounce is to be expected, we see it almost 95% of the time when an important technical level has been taken out. In fact, the action in the Euro over the last 3 weeks is directly attributable to the original break of $1.30 in which we expected a bounce even while the Euro was still moving down.

 Here's a daily chart of the last break of $1.30 and the subsequent bounce.

This is a much longer view showing a top formation in the Euro and the break of $1.30.

This is all part of a much larger, multi-year downtrend. Here's a weekly chart.

The bigger picture here doesn't look good for the Euro or any correlated assets.

Early Market Update

 All of the major averages put in bearish engulfing candles yesterday, some more powerful then others, but all on high volume. The Dow trapped about 7 days worth of longs yesterday .

 After yesterday's negative divergence at early strength, today thus far is relatively quiet, 3C is lagging the DIA a bit in early a.m. trade.

 The NASDAQ 100/QQQ saw huge volume on a the same engulfing candle, catching about 3 days of longs.

 This has the look of a false break or head fake move in yellow, 3C is still leading negative here.

 The SPY caught about 5 days of longs.

Since yesterday's distribution at the highs, the SPY is pretty much in line this a.m.

We want to see confirmation of yesterday's bearish candle, it usually comes the next day, but as long as a new high is not made, it can come within several days and still be valid.

Early Sector performance breaks down like this..

So far sector rotation is also pretty quiet, the only standouts are the defensive Utilities and Staples, the somewhat defensive Industrials (move toward blue chips typically) and I note discretionary just because it hasn't done much over the last few weeks, remaining very even, not jumping up or down and this a.m. its down for the first time I remember in a while.

USO Update

 USO's brief foray in the sun and out of the darkness of its down channel seems to be ending. This channel was simply too well formed in one of the biggest markets, it was too obvious and a shakeout, too irresistible, it was bound to happen and that's the reason I favor wider stops on initial positions as USO, while in a downtrend, still hasn't broken below its 3.5 month trading range, although it was very close to it before the break from the channel, which makes a shakeout look even more sensible.

 Volume near yesterday's highs was large, the moves were small or non-existient, looking a lot like churning or upside capitulation.

 The 1 min 3C is turning down, however there's still a small bit of retracement possible in the yellow area.

 The 2 min chart with the original accumulation for the last swing up from the bottom channel is now leading negative and has passed that along to longer charts.

 Like this 5 min chart...

And the 15 min chart is leading negative, which is really the perfect timeframe for a move of this length, or a swing. I'd be looking at opportunities to short USO at these levels, there's a natural stop close by at $39.20 0n a closing basis.

Overnight Indications

Our dominant Price/Volume relationship today was Close Down/Volume Up. Volume is not needed to confirm a bear market, in fact low volume is the hall mark of a bear market, but increased volume early on in a break is certainly more bearish, after a trend down it can be bullish for a bounce.

Most of the volatility we have seen recently has come overnight in the form of a gap, the intraday or daily ATR as I have shown you has collapsed in the averages, the same happened on the first bear market rally of the 2008 decline. The ATR for the major averages is down by about 50% even though prices are higher, so we still want to watch for overnight rumors, but we had several last night and as I pointed out, the half life of each passing rumor is decreasing.

 Since the 4 p.m. close, ES is down a solid 7 points with 3C confirmation as of 1 a.m. the 16th.

 The Euro started the week with a gap up, again on news that was later refuted and quite quickly, the Euro has moved close to the $1.30 level, which is what we expected (remember after the first break of $1.30 we expected a bounce back above, which we got and then a move back below $1.30 to make a new leg a down and a new low. The red arrow is the 4 p.m. close on Wednesday.

As I pointed out a few days ago, the Rate of Change in the SKEW was picking up again and now the SKEW Index is back near the recent highs. The Skew measures the probability of an improbable event such as a black swan or sudden market crash. $115 is the average, $131.78 is the high since being introduced, the higher SKEW moves, the greater the probability of a crash.

If you haven't really paid much attention to our Credit/Risk Asset layout, it may be a good time to look at the long term implications of it as the short term has been very predictive. Th layout is severely dislocated with the market and eventually the market reverts to the mean which is far, far lower then where we are now.

It feels like we are on the ledge that could break any moment, we've seen the Cats and Dogs come and go, just about every metric is breaking down, but those who just watch price are going to be in for a big surprise. I think if you look at the layout mentioned, you won't be among that crowd.

As I try to anchor expectations, just remember even in the worst bear markets, we typically see as many up days if not more then down days, the difference is the down days are much stronger, so keep your eye on the larger trend and don't worry too much about intraday and daily gyrations. The only thing that is moving the market right now has been hope based on false rumors and when you get to this level of dumb money bullish sentiment and a market that can only move on hope and can't even hold those gains, the market structure has broken down bad. I fully expect to still see days that will challenge your emotions and cause you doubt, that is what a bear market rally is supposed to do, that is why I say, keep your eye on the macro situation.

Tomorrow I'll have to cut out around 3:30 p.m. as I have a funeral at 4 .

See you in the a.m.