Financials/ XLF / FAZ

Tuesday I updated Financials, the general premise based on the charts was that financials would pullback (with the market for the most part as it too is giving similar signals and correlation is running very high between sectors, or at least higher than usual) which would be a constructive pullback and likely see positive divergences and then the sub-intermediate uptrend would continue, likely triggering a real short squeeze, not just the hints of a short squeeze we have seen recently.

This also made FAZ (3x leveraged Bear Financials ETF) an interesting short term long trade so long as you can pay attention to the market and are nimble to move in and out quickly (which has been the overall theme for the market the last several months).

As of today, here's what the charts are looking like...

 Another bear trap in Financials, this time from a large bear flag.

 The expectation for a move down in financials from Tuesday has been thus far fulfilled today. As the market bounced intraday off the 1 min positive divergence, Financials failed to participate, instead they just consolidated sideways

 XLF/Financials 1 min negative from earlier in the week and a leading negative as they consolidated today.

 2 min negative-

 3 min negative

 And 5 min leading negative so we have good confirmation of a pullback. I would not consider going long financials until we start to see positive divergences within a pullback, as the move is fairly new I would not expect to see that yet.

 The XLF 60 min chart is positive and this suggests that after a pullback Financials will continue higher in the sub-intermediate move up, again likely triggering a strong short squeeze.

FAZ (3x leveraged Short/Bear Financials) is looking good intraday with a leading positive divergence in to the consolidation.

FAZ 15 min leading positive looks like it has more upside as Financials pullback.

UNG Update

The last Update for UNG was last Friday, it looked like UNG was headed up to the resistance level, since then that is what it has done.

The question remains whether UNG is ready to break out to stage 2. Right now it doesn't look highly probable that it is coming within the next several trading days, however we do have the Natural Gas report due tomorrow. I have an open long in the equities model portfolio that is currently up +17%, but I'm looking for a much larger primary trend up. Here's what UNG looks like now.

 The breakout level to move UNG to stage 2 mark up-or where UNG is much more likely to trend.

 UNG currently sitting right above that level, but will it hold it? It appears it will pullback, which would be a nice opportunity to add to or start a new position in UNG on some price weakness if you like the trade idea.

 1 min looks like at least a consolidation if not an outright pullback.

 5 min also looks like a pullback.

 As we moved up from the 29th, I was watching 3C for signs of confirmation which would make a stage 2 break out much more likely, we haven't seen that confirmation and a pullback looks more likely.

OVerall, the 60 min's trend is why I believe UNG will eventually breakout to stage 2 mark up and be a good long, trending position. I'll be sticking with the long position even through a pullback and may even add some.

Market Update

That intraday positive divergence seen in the first market updates this morning so far looks like it has done what it set out to do and doesn't appear to be much more than what I originally suspected, just an intraday move. Here's the updated charts...

 DIA 1 min positive divergence this morning now seeing a negative divergence off the intraday bump up.

 The 2 min chart of the DIA is in line, not seeing the 1 min negative migrate over yet.

 However the 5 min chart shows a negative divergence and an overall near term negative atmosphere.

 ES is about in line since seeing that positive 1 min divergence just after the open.

 The IWM which has been pretty strong the last several days shows a 1 min negative that is in leading negative position.

 That has migrated to the 2 min chart.

 And overall is making its way to the 5 min chart, even though the IWM's underlying trade shaped up very quickly early this week.

 QQQ 1 min positive this a.m. is turning here

 The 2 min looks worse, this was already in place for the most part since Tuesday's readings suggesting the market looks quite a bit different today than it did Tuesday.

 The 15 min in the QQQ is at a relative negative divergence, unless this turns a lot worse, I would still expect a constructive pullback in the market.

 SPY 1 min positive this a.m. and a relative negative now.

The 5 min shows a much more overall negative tone, again suggesting a pullback, however the fact the longer timeframes haven't seen much damage suggests that this will be a constructive pullback, the kind in which we expect to see some positive divergences and may be used to enter some speculative long on price weakness.

EIA Petroleum Report sees a Draw

The EIA petroleum report usually released at 10:30 on Wednesday was released just 4 minutes ago because of the US holiday, the draw was fairly decent size, although consensus is not provided for the petroleum report as it is for the Nat. Gas report which is coming out tomorrow.

Released On 7/5/2012 11:00:00 AM For wk6/29, 2012

Prior Actual Crude oil inventories (weekly change) -0.1 M barrels -4.3 M barrels Gasoline (weekly change) 2.1 M barrels 0.2 M barrels Distillates (weekly change) -2.3 M barrels -1.1 M barrels

Compared to last week's draw of -0.1 mn barrels, this weeks -4.3 mn barrel draw looks significant; SO had a fairly strong response to the report...

Although I do have some open USO call positions at a loss open from former signals, right now I do not favor a trade in USO fro several reasons. For the time being I will leave the existing call positions open, but I don't really want to be involved in new trades unless USO gives a very solid negative signal; I'll explain....

 USO's reaction this a.m. to the EIA report showing a draw.

 USO exhibits one of the many bearish price consolidation price patterns that have (as expected in most cases) turned in to bear traps. This descending triangle is a bearish consolidation/continuation pattern and as price broke below it, you can see volume jumped as retail shorts usually wait for price confirmation, the move back above the apex of the triangle puts these shorts at a loss and as such, in a bear trap.

 The lack of support from the Euro/$USD on the move up is what has me skeptical about a long position in USO which seems to be largely driven by event risk in the middle east (USO vs. Euro-they should move together).

 USO vs the $USD, the normal correlation is an inverse one, so the $USD moving higher with USO moving higher is unusual and not broadly supported.

 The USO 5 min chart gave good signals and made sense, this most recent negative divergence in to rising prices also has me skeptical as oil's move up seems to be largely contingent on unpredictable event risk.

 USO 15 min chart also does not lend support to USO's move higher.

Nor does the 30 min chart.

I would consider closing the long calls and opening a short/put position if we were to see some very negative signals develop

Potential Stop for GLD

Although I prefer stops on the close as intraday and especially morning trade are deceptive, you may want to consider this as an intraday stop, although I suspect any stop in the GLD trade will be signaled by 3C first, it's good to have this stop handy.


The 60 min Trend Channel

The stop is right around $156.70. This is why I prefer to use leverage in these short term GLD trades.

GLD Update

We've had good success trading GLD from the short side in a series of short term put trades (I believe 3 or 4 consecutive winners). Today, Tuesday's new GLD put position in the options model portfolio (August $160 puts) which was based on this analysis from just before on Tuesday so far is doing pretty well, but GLD trades have required that you be nimble.

Up +22.64% in about 2 hours

Remember that gold has the most to gain from QE or specifically $USD debasement and as such rallies when the market sentiment is leaning toward more QE.

Here are the updated charts for GLD this morning...

 The 60 min chart has been negative since the sudden accumulation on May 31st that sent GLD soaring, there was distribution in to that move higher. This 60 min chart' position is why I have wanted to keep short term GLD trades on the short side for the time being.

 On the daily chart we predicted at least a an Intermediate downtrend and perhaps a Primary, we have already seen the Intermediate downtrend and are close to a Primary trend, however since GLD first went negative in to the August highs last year, there has been improvement on the daily chart, suggesting the Intermediate downtrend may be all we gat and a new trend in GLD may emerge to the upside over the coming months, of course we are not there yet, but it should be watched for continued strength building in.

 The 1 min chart suggested GLD pulls back this week and thus far that chart today is pretty much in line with price, a bit on the negative side.

 The 2 min chart also shows the negative divergence for a pullback and today is about in line.

 The 5 min chart is higher than I'd like to see in a leading positive position which I believe is a carry over, thus for the current position we need to watch the 1, 2 and 3 min charts to see if they grow more negative and migrate to the 5 min chart and break up some of this positive divergence, otherwise GLD may have to be closed sooner than I'd like.

The 15 min chart is still in a leading negative position, there's quite a bit more work to go before we can say that a GLD primary uptrend is high probability.

SPY / ES Market Update

As you may recall, Tuesday I said, "Thursday may look very different than today" on expectations of a pullback that have been in place since last Friday. Here's ES and the SPY with more updates to follow.

 It looks like someone knew something about Draghi's intensions as ES hit its highs in to a negative divergence pre-U.S. regular hours opening. There's a VERY slight relative positive divergence in effect, I don't think it carries much weight, but I've never been a fan of a.m. trade as it can be very misleading.

 SPY 1 min negative divergence from Tuesday with the same relative positive as ES.


 The 2 min negative divergence from Tuesday's close, note there's been no migration of the 1 min positive divergence in early trade to the 2 min chart, this is why I think it is not very strong.

 The SPY 3 min negative divergence in to Tuesday's close, no hint of a positive intraday this a.m. here either.

 The 5 min negative on Tuesday at the close and leading negative this a.m.

And the SPY 15 min chart which gave us the first expectation of a pullback last Friday with a negative divergence on the 29th.

More updates coming...

Back to it...

While we celebrated the 4th, the rest of the market slowly turned.

Knocking the Shanghai Composite around yesterday was Chinese Services PMI which came in at  10 month low, giving more evidence to a string of bad either official or HSBC Flash PMI readings in both Manufacturing and Services. The actual report was higher than consensus, but the slowest pace in 10 months; the bottom line is the same as it has been since mid-2011, China is in more trouble than their opaque government lets on.

The Euro-area ISM Services Composite reading of 17 EU countries came in at 46.4, slightly above expectations of 46, but well below the 50 level which signals contraction in Services as well as Manufacturing saw earlier in the week. This is the 5th consecutive month of contractionary readings for the Euro area Composite in both services and manufacturing.

Germany surprised a few as German Service Sectors report contracted to 49.9 on consensus of 50.3 (contraction below 50). Spanish and Italian 10- year yields crept up yesterday on the news. In contrast, the Irish 5 year yield fell as the Irish government announced they'd be back in the debt markets selling treasuries for the first time since 2010.

Yesterday the Stoxx European 600 and the DAX were down -0.50% and -0.60% respectively.

Sovereign Yields have not been helped by the news from the German Finance Ministry, 


"It remains unclear if Eurozone finance ministers will decide on Spain's request for banking sector aid at their next monthly meeting on July 9."


 This comes after divisions arose in German politics with the CDU's main opposition party, the SPD opposed the plan to allow Europe's permanent rescue fund, the European Stability Mechanism (ESM), to directly recapitalize banks. You may recall this was one of the key agreements reached at last week's EU summit, but as usual, these summits propose grand ideas that the market takes as the gospel without realizing that each individual member country must pass, ratify or otherwise agree with the terms, this is why EU summit headlines are typically little more than temporary market moving events. It must have been at least a month ago since that 2 hour Finance minister weekend call that promised Spain $100 bn Euros to re-capitalize their banks, yet it is still not agreed on and the ESM is still not ratified.


Furthermore, the Troika is now expected to make its own assessment, originally the Troika was not to be involved after the IMF and private Spanish banking system audits. It never fails, grand EU plans always fall flat on their face. The fact still remains that even if the EFSF (temporary bailout fund) and the ESM (permamnent bailout fund) were both fully capitalized (which Finland, Holland and Slovakia seem to oppose in one form or another) and running simultaneously, there still isn't enough money to deal with Spain and Italy. In addition, this morning Finland made news as they contine down the road they have been clearly moving toward. As Bloomberg reports this morning of July 5th:


"Finland is contesting the wording of an agreement struck last week in Brussels, arguing it doesn’t adequately address the possibility that loans to Spain from Europe’s permanent rescue fund can give taxpayers seniority.

A June 29 statement from the 17 euro-area leaders stripping the European Stability Mechanism of its preferred creditor status in Spain was incomplete, said Martti Salmi, a Finnish Finance Ministry official. The 100 billion-euro ($126 billion) bank bailout could provide seniority to contributor nations if fresh funds are transferred by the ESM, he said." 

So, as mentioned above, Summit headlines are one thing, reality is another-Watch those sovereign bond yields in Spain and Italy!

On the Syrian/Turkish/Nato front, the two pilots originally shot down on June 22nd after crossing into Syrian airspace were discovered yesterday, dead in the Mediterranean Sea. Since the event there have been daily scrambling of Turkish fighter jets to the Syrain border.

As of July 5th... 


First in Asian, the Japanese Central Bank (BoJ) has upgraded the 9 Japanese regional economies which is the first upgrade from the BoJ since 2009.


In the EU, German Factory Orders came in better than expected at +0.6% on a month/month basis (since May) with consensus at 0% and the previous at -1.9%. However price action in Europe remained muted as the Central Bank decisions from the ECB and BOE (Bank of England) were awaited.


Brent and WTI crude gained some ground after losing some upon the release of Chinese economic data on July 4th, after the Norwegian pension negotiations for oil workers is still unresolved and as a result, locks out some 6000 oil workers with an expected drop of 1.2 mn barrels a dat from Norway.


Around 12 p.m. local time the BOE did meet market expectations by increasing (QE) or asset purchases to a target of an additional $50 bn Pounds and leaving interest paid on bank reserves as is at .50%. 


The real SURPRISE came only moments before as China's PBoC announced,


"The People's Bank of China decided to cut financial institutions RMB benchmark deposit and lending interest rates since July 6, 2012. One-year benchmark deposit rate cut of 0.25 percentage points, year benchmark lending interest rate cut by 0.31 percentage points; other deposit and lending interest rates and individual housing provident fund deposit and lending rates be adjusted accordingly."


This move sent ES popping higher as it was unexpected, there was chatter earlier in the week of a Reserve Requirement Ratio cut coming, but the cut announced this morning pre-market was a surprise.


As for filling out the Global Central Banking coordinated movement today, the ECB cut its benchmark rate by 25 basis points to .75% as expected. The ECB also moved the deposit rate to 0%, perhaps trying to finally ignite the carry trade intended by the ECB LTRO 1 and 2 loans to banks as the deposit interest rate is stripped away.


Futures started sliding as Draghi says during the public statement portion of the rate decision, "There will be no LTRO 3", which is perfectly understandable as EU banks have no assets left to pledge as collateral.


The Euro's reaction...

Gold which is a reflection of easing bias in the markets also fell on the Central Bank actions.

 In the US, Initial Claims were released at 8:30

Released On 7/5/2012 8:30:00 AM For wk6/30, 2012 Prior Consensus Consensus Range Actual New Claims - Level 386 K 386 K 375 K to 395 K 374 K 4-week Moving Average - Level 386.75 K 385.75 K New Claims - Change -6 K -14 K

Initial Claims finally beat after 6 weeks of misses. At 10 a.m., US Non-Manufacturing ISM missed

Released On 7/5/2012 10:00:00 AM For Jun, 2012

	Prior	Consensus	Consensus Range	Actual
Composite Index - Level	53.7	53.0	51.5  to 54.0	52.1

You may recall US Manufacturing ISM missed earlier this week, now services follow. This is the 3rd consecutive miss in Non-Manufacuring ISM, however it did manage to print above 50. Market updates are on the way...