Market Update

 DIA 2 min looks pretty nasty here.

 DIA  30 min has been negative for some time, this is why I believe this entire run has been a bear market rally, but the recent downside momentum has increased dramatically as I have been pointing out and as the market has been lateral, which as you know is the time we see the greatest moves in accumulation/distribution.

 Look at the recent downside momentum in 3C on  60 min chart!

 The 1 min chart has a slight positive divergence, we all know that the market is very volatile intraday and doesn't usually hold early downside breaks without bouncing. The character of today's trade will be important, but I think a bounce is certainly possible-we haven't lost that much ground yet.


 IWM 2 min also looks like an intraday bounce could be coming.

 Note the recent downside 3C velocity in the 5 min chart.

 IWM 15 min

 IWM 30 min

 QQQ 1 min shows the break and a positive intraday divergence.

 The 2 min chart isn't as generous , at least not yet, but the market could bounce before I even finish this post.

 Note the change in the QQQ 15 min chart


 SPY 2 min longer term.

 SPY 2 min close up


 And the 1 min chart shows the positive divergence for an intraday bounce.

ES looks horrible.

USO also struggling

This may create a bearish breakaway gap, I would tend to look at this as a shorter term trade initially.

Keep an eye on WMT...

VXX Trade

Other then the 3C leading divergence, this is what triggered my trade...

The triangle here looked like it was a high probability break out.

VXX Trade

Unfortunately I don't have access to the VIX so I just placed an order for the WOWS options model portfolio, VXX March $25 Calls

VIX/VXX Volatility Trades

Trading VIX options has done very well for several of our members, they had a decent trade last week of over 50% and it looks like we are getting close to another trade (that 50% move was just the tip of the iceberg, the full move was in the triple digits).

The VIX also has an inverse relationship to the market so a rising VIX is accompanied by a falling market.

I use the CBOE's VXX for intraday analysis of the VIX.

 This is the long term 60 min chart with a small double bottom and good 3C positive divergences.

 The 30 min chart was in line with the downtrend, now it is showing a positive divergence.  (leading which is the strongest).

 What I have been waiting on is the tactical entry. I've been telling my VIX traders that I'd like to see the short term charts go leading positive as an entry signal. This is what the 5 min VXX leading divergence looked like yesterday (which was not enough for me).

 Here it is today, so in my opinion, the trade is close by. I'd prefer to see a little more leading, but this is a big improvement already and is in the zone in which I would start considering the trade.

Finally, yesterday the SKEW Index moved up at already elevated levels. SKEW is another CBOE index, but unlike the VIX which tries to predict "predictable events", SKEW tries to predict events that are otherwise considered, "unpredictable", specifically Black Swan or Market Crash events. The higher the reading, the more likely a Black Swan will occur. At 100 the probability of a Black San is very low, 115 is about the average, above 115 and the probabilities increase exponentially. This would of course be supportive of a VIX trade which would be long by buying calls.

GLD: So Far so Good

As you know, I have a longer term theory on GLD, but for now, after making nearly 215% in about 4 days on the last play which we thought was a head fake and turned in to a head fake, I'm just looking for the next set up and as with the head fake (which was planned days in advance), I have a theory and a plan on GLD that is so far, moving as expected.

 As you might recall from yesterday, I'm looking for a candlestick pattern called falling 3 methods, which is at the bottom of this post. I think 3C will identify GLD before it breaks so I think we can get in early before the confirmation candle-more on that in a minute. What we want to see is a series of 3-5 candles (approx) that have relatively small bodies and that remain inside GLD's large down candle 3 days ago. It would be best if they rise, but with Euro weakness and dollar strength it may be hard. I'm not going to walk away from a potentially great set up because it doesn't look exactly like the textbook-they rarely do.

 Intraday we see a little price strength, but volume is weak, this is what we want to see, what appears to be price strength, but weak underlying conditions.

 The 2 min chart shows enough of a positive divergence that I think a Falling 3 Methods can play out, but it's not so much strength for me to be worried about a Harami reversal.

Today's intraday trade is inline so that's good.

This is roughly what the pattern looks like, the entry is usually on the last down candle making a new low, but as I said, I think 3C will be able to identify the potential reversal before that candle, giving us a better entry in price and with less risk.

USO Update and Possible Trade

Yesterday morning's USO update started with this,

" some long lower wick candlesticks suggesting a reversal to the upside-this gives no target, just a reversal. In green, the most common place for a bounce to move to, the lower end of the channel or "kissing the channel good bye"."


That's exactly what happened...


In Oil related news,  A Saudi official has said there were no acts of sabotage on pipelines in the country, following reports from Iranian state press yesterday claiming an explosion on a key pipeline.

 Here's USO on a daily chart, yesterday's high volume and long upper wick on the price candle was not a bullish development.

 As I pointed out late yesterday, USO kissed the channel, all that remained to see was if it was a kiss "Good-bye" and this morning it is looking that way.

USO will have an even harder time considering the Euro weakness and dollar strength.

 The Euro on some bad economic data and events in the EU overnight (I'll get to them later). As you can see, the Euro has lost a lot of ground since yesterday's close and is struggling to hold on to $1.32

The Dollar is seeing strength, putting pressure on commodities like oil.

 The 30 min 3C chart registered a negative divergence at yesterday's highs, so it was a strong divergence and strong underlying selling.

 The 15 min chart confirms the same, I'm actually surprised to see such a strong negative divergence on a 30 min chart so quickly.

 The 1 min chart seems to show that there's some intraday accumulation, my guess would be to try to fill today' gap and that is where the potential trade is.

Should USO fill this gap as is common practice, it would make for an interesting short entry with a stop nearby at yesterday's highs. Again I would set some alerts. I'll be looking for this trade.

Second Verse Same as the First-LTRO Carry Trade Not What ECB Anticipated

Just like the first LTRO in which French President, Sarkozy, said the LTRO would help banks buy sovereign debt on a carry trade (the banks pay 1% interest for a 3 year loan and in turn buy sovereign debt yielding 5% and make +4% in the process) , the second LTRO has failed in its mission according to ECB records.

Bloomberg reports 

ECB Says Overnight Deposits Surge to Record

Financial institutions parked 776.9 billion euros ($1.03 trillion) with the Frankfurt-based ECB. That’s the most since the euro was founded in 1999 and up from 475.2 billion euros a day earlier. Banks get 0.25 percent on the deposits.


Although the LTRO operation was for  $529.5 bn, after accounting for rollover payments, the true net added liquidity came to aprox. $311 bn added to the system. The ECB overnight received $302 bn bringing the deposit facility to a record $777 bn. Literally the banks are willing to pay 75 basis points to protect the cash and keep it out of the financial system, a reverse or negative carry trade (the loan is at 1%, they receive .25% in the deposit facility, so they pay .75% for the protection of the deposit facility). Some rough math means that the 800 banks that participated will collectively pay $6 billion in interest over the next year! 


So there you have it, another European solution gone awry.

Trade Idea WMT (Short)

Although this can be a straight equity trade, because the BETA is so low at .34, I would prefer an options trade for leverage on what is otherwise a solid set up.

 WMT broke clean from a solid uptrend on heavy volume and has since formed a bear flag. The obvious trade is a cross down below the bear flag, however as we have seen over and over, obvious patterns like this often get shaken out on a head fake move first. Be on the look out for a move above the top trendline of the flag, it may be a high probability/ low risk entry. Otherwise you can wait for a cross below the bear flag. A head fake move could all happen in one day so I would set some alerts fro a cross above and another alert for a cross below. If you don't have an alert system that is real time, email me.

 Money Stream has shown daily distribution since at least November so it most likely started before it showed up on the daily chart.

 The X-over screen identified one false crossover in white that was not confirmed, the recent one in red is confirmed and the first pullback is usually to the 10-day m.a. in yellow, so the head fake makes even more sense as a probability.

 The set up on a break below is a "show me " trade so it's a bit less risky. As you can see, yesterday we had a CandleStick Star (common reversal) in the downtrend, it was also on high volume making it a very likely reversal up (possibly for a head-fake shake out) and further more it happened right at the flag's support.

 The 60 min 3C chart shows as I suspected, this trend up looks like it has been under distribution most of the time, WMT is a big stock with a high market cap, positions are bound to be large and therefore take time to distribute, but it seems as if that phase is over and we are moving in to stage 4 decline.

 The 30 min chart shows the divergence before the breakdown and that the bear flag is almost ready to break as well with a negative divergence there.

 This short term 1 min chart shows the "bounce" that I showed above and the probability is that bounce will turn in to a head fake move.

The Trend Channel (2-day) has held the entire uptrend, so that would be my tightest stop I would use and only on a closing basis, the more room you give it initially, the better your chances are.

So look for a break above the $59.50 area as a warning of a shakeout and a possible trade there and another alert should be set for the $58.50-458.70 area, it depends on how long the break takes as the trendline is rising.

If you have questions, email me.