Short Term Manipulation-SPY Arbitrage and the Levers

For whatever reason, (I'm guessing to effect an op-ex pin as there's a lot of premium on the line and thus profits if the majority of contracts close worthless) there's been an obvious effort to control prices today. As seen in last night's post, the 3C charts are suggesting down is the highest probability over the next few days), however it seems from risk assets and the SPY arbitrage chart that they've been trying to either hold the market in place, slow the rate of decline or maybe even are attempting to lift it.

Yesterday in this update I documented the same behavior in VXX we saw right before the sharp decline on 4/15 and then yesterday, the VERY next post, I documented the same behavior seen in TLT again, just before an op-ex Friday with the decline on Monday. 

The gist of the behavior can be summed up as VIX futures (via VXX) were not making lower lows as they should have with the market making higher highs-in fact the highs of the week, this is because of REAL organic market demand for protection as smart money was fearful of a decline and bidding up VIX futures, keeping VXX from falling any further and instigating our long UVXY trade. The same behavior was found both time (incl. yesterday) in TLT which is a Flight to Safety asset which would not fall to lower lows because real demand was keeping prices steady, the same thing that happened before the sharp decline of 4/15. Note both UVXY and TLT are up today.

So far HYG seems to be the asset of choice (HYG, VXX and TLT are the 3 assets used in the construction of the SPY arbitrage model from Capital Context).


Here are some examples with an updated SPY arbitrage chart...

 As we already saw, they were defending the market early this morning against sharper downside at the green histogram, then before we had a current update of this 30 min delayed chart, I pointed out they were using HYG to hold the market or slow the rate of decline, sure enough as the updated chart came in, the histogram is green again.

However, I think they are going to have trouble and a hard time at least in trying to use HYG to manipulate the market because it seems (according to the 3C charts), that natural supply (sellers) are starting to overwhelm the manipulated HYG higher price than SPX performance would normally suggest.

VXX has so far been contained today, limiting some of the SPY downside damage, although I don't think this can hold long, here's why...

The same chart on a longer perspective is quite positive.

TLT

 They seem to be doing the same with TLT today, even though it has gapped up strongly, there may be some profit taking here as well.

However the accumulation from yesterday was quite strong, I can see further upside here and that means downside for the market.

Most importantly, HYG...

Although they've been able to keep HYG from falling with the SPX and therefore positively effect the SPY arbitrage to some degree-obviously not enough, the holders of High Yield credit are overwhelming the manipulators as there is a sharp negative divergence suggesting the sellers through real supply and not manipulation are likely to send HYG lower and the market with it if they can't force VXX or TLT down.

GLD May 10th $130 Calls Are Finally Closed

I say finally because we closed half of the original position on Wednesday, half of what was left Thursday and the final sale to close out the position completely just now. The Wednesday P/L was a +30% gain from the $5.70 cost basis, yesterday the fill was $11 for a 93% gain and today, even though GLD was higher than yesterday, the fill was still $11.00 for a 93% gain with the position now closed.

This is why I like to use momentum to close positions, even though GLD is higher today, the volatility and time decay didn't add a single penny to the fill.

Here's why I decided to close GLD entirely, SLV was closed entirely yesterday for a 95% gain...

With this negative 1 min divergence this morning, it would take a monstrous move to the upside to overcome the time decay and make the position worth holding for any additional gains, in this way options are VERY DIFFERENT than stock long or short positions, option pricing is based on a complicated Black-Scholes model with premium based on volatility, strike and time remaining/decay.

All in all though we had a good run in both PM's, I still like both and think there's more upside to be had, but first we need to find another new entry point.

Closing the remaining half of GLD May 10th $130 Call Position

HYG Still Being Used

The SPY arbitrage model runs at least 30 minutes delayed so what is happening at this moment is unknowable from their end, but from what I see, HYG is still being used. My question is whether it is to slow the rate of decline in the market or arrest it, or whether it's being used to try to push the market higher intraday?

HYG

HYG vs. SPX

From the SPY and DIA intraday charts it seems it is being used to lift the market intraday, not so much on the IWM and QQQ charts.

Market Update

I don't find anything particularly interesting about early trade thus far, the charts as of yesterday and starting the day before were suggesting a near term pullback, the first reason for that could be an options expiration (weekly) pin in which max-pain is lower than the market was/is, thus the market needs to adjust to that to make the pin effective. The second reasons could simply be a correction that lasts a little beyond today, we should get some hints today as to which.

The early trade has been congested, but as I posted earlier, the 1 min charts were sharing small relative positives and moving toward gap fills whereas the 3 min charts were more in line with recent analysis suggesting some drawdown in the market.

For the most part, everything I've seen early on fits with all of the above. First the market congestion this morning...

SPY 

 The yellow box is where today's trade started, not much of a trend, just congested.

ES (SPX futures) have been congested also this morning...

ES since the open at 9:30 (white arrow), there's not much of a clear trend in price or 3C intraday.

The NYSE intraday TICK chart (all NYSE stocks advancing per bar less all NYSE stocks declining for the same bar) shows us a choppy market with a little direction, but no conviction as the TICK hasn't broke above the very mediocre reading of +750, so there's no strong underlying movement in stocks, just as the congested market would suggest.

The CONTEXT Model for ES suggests the analysis of somewhat longer (meaning longer than intraday, perhaps today's op-ex close or even a few days) term downdraft, while the SPY arbitrage (intraday shows the very early manipulation of the market (presumably to try to fill the gaps) and worsening trade since, HYG was clearly the lever used to effect early upside manipulation (or at least to halt the pace of decline).

 CONTEXT for ES, as mentioned last night saw ES come off the highs of the week yesterday afternoon and revert toward the model with only a -4 point differential last night as opposed to about a 25 point negative differential before that. Interestingly, Es has come down about 12 points-still about 13 points shy of the model, but has just about an 11 point negative differential right now which is growing- that's pretty close to "reversion to the model".

SPY arbitrage earlier this morning shows manipulation being used to help the market (green histogram), that is fading.

The obvious asset used which is 1 of 3 that makes up the model is HYG - High Yield Corp. Credit.

Note HYG's positive relative performance vs the SPX this morning?

So far there's not much of interest that is conflicting with our analysis. I would expect some volatility today as shifting option contracts being closed, exercised or even opened, change the area of max pain throughout the day. What we are interested in is whether there's any significant underlying change in tone, thus far, nothing.

UNG

I've had a few emails this morning concerning/concerned about, UNG and the downdraft this morning.

However it seems Energy broadly is down with XLE and IYE down (crude is up slightly) and UNG down, this seems to be all about this morning's weak GDP number, here's UNG pre-market...

Right at the red arrow on this 1 min chart, UNG sees a sharp move down, this is the same time Q1 GDP is released, it seems Energy weakness is all about the G1 GDP coming in softer than expected, thus discounting reduced energy demand.

All in all, UNG's 3C chart is holding up rather well so this looks to be more knee jerk than anything.

In fact the intraday 1 min (where any new short term divergences would start) is seeing a sharp leading positive move starting.

I'm not saying this is where I'd add to UNG, it may be an area, but I'd prefer to see more timeframes suggesting the same and this move is early, but in the right direction and making sense.

Early Update

If I just had to guess, I'd guess that we see somewhat rangebound (op-ex) pin action today with the market free to do what it wants during the last hour as most contracts are closed by then.

This morning (as you know I don't usually pay too much attention, or rather give much weight to a.m. trade), we are seeing some slight early strength, in some cases it seems like a gap fill, but I'd like to show you the averages on an intraday 1 min chart and a longer, more important 3 min chart...

IWM

 1 min chart w/ a  slight relative positive divergence moving toward yesterday's close (gap fill).

The 3 min chart w/ a significantly worse looking leading negative divergence. On another note, many members have written me showing me different indications they saw that suggested to them that the AP Twitter Feed Hi-Hacking event this week in which an AP Tweet said the White House had several explosions and that POTUS was injured, was in fact set up and ready for some fast moving traders/computers to take advantage of the situation, selling before the event and buying at the very bottom. I have noticed a negative divergence before the event (yellow arrow) in every case, maybe there is something to it.

QQQ

 1 min positive this a.m.

3 min leading negative as the Q's also were moving toward a gap fill.

SPY

 1 min positive

3 min leading negative, again all 3 charts show the same AP event.

The NYSE TICK chart was trending earlier, it was very weak though with nothing over +750, that broke and is getting volatile up and down now, but no trend apparent yet.

NFLX

NFLX saw an early surge this morning...

This surge seems to be based on "Insider buying, specifically Director Jay Hoag who purchased 2.3 million shares, however they were obviously an option being exercised as the average cost was just under $86 with the stock at $213, I'd guess in the coming days and weeks Mr. Hoag will be filing Form 4 updates with multiple sales.

Pre-Market

Last night the BOJ had a policy meeting/announcement and the message was, "Course steady"; the more subtle language hoped for was that the BOJ would in some way dial back or slow down their goal of doubling the BOJ's asset / monetary base in the next two years. I already covered this yesterday, the Yen's "wrong" reaction to the policy, the JGB's "wrong" reaction to the policy, Core deflation hitting 3 year highs and it's "wrong reaction to the policy while non core items such as food and fuel surge, again, the "wrong reaction to their policy. Perhaps the BOJ should consider their QE policy may indeed be "WRONG".

The Yen gained ground overnight (a market negative event)...

 This is the Yen's move from about 8 p.m. last night (EDT) to present, not good and not good for the market (stock).

While the more concerning large, classic double bottom base is gaining 3C momentum on a more significant timeframe for underlying flow of funds, 60 min. Note that the Yen is not too far from the neckline that separates a stage 1 base from the primary uptrend of a stage 2 "Mark-up" breakout.

Then this morning Spain cut their growth outlook, predicted higher deficits and scaled back the timing of their deficit reduction program.

Next the US and the first of 3 estimates for Q1 GDP...
The prior was 0.4%, consensus was +3.1% with the actual at 2.5%, disappointing. This is the biggest miss vs. consensus in 6 quarters. However this is a far sight better than the first estimate of Q4 2012 GDP which came in negative to be revised to 0.1 to avoid the possibility of the word,  "Recession" being thrown about, then to 0.4% for good measure. The market did not have a substantial reaction and it looks like last night and the last two days' analysis is more on track for our near term trajectory, at least to the point of an Op-Ex (weekly) pin, although I suspect more than that, but we'll get some clues today.

The Index futures...

 ES doesn't tell us much...

NQ seemed to be working on a positive divergence interrupted by the QI GDP

And TF is working on a positive divergence

Overnight

Not surprisingly, based on the afternoon activity (yesterday's as well), futures are drifting lower; ES is off by -2.5 points, but down 10 points from the intraday regular hours high.

There are some positive intraday/night divergences in the Index futures, but based on regular hours 3C charts, I'd expect some draw-down, thus the afternoon short positions. Currency futures are split, the $USD looks like it will head lower (market supportive), while the $AUD also looks to head lower (market negative), the Euro isn't giving very strong signals, but hasn't been performing well, presumably because of the upcoming ECB policy meeting with rates expected to be cut by 25 basis points. The Yen really looks like it could make a serious move higher, which if you recall in my weekend articles (2 weeks ago), "Currency Crisis" has been looking for a Yen move higher, very negative for the market and carry pairs, this could be what the negative market signals are about.

Take a look at the Yen futures...

Since the BOJ QE policy seen at the far left (negative divergence and crash in the Yen), there has been a strong, building 60 minute positive divergence, this is the base I'm worried about in the Yen, essentially this would be the BOJ policies failing and would have significant effects on the carry trades and the market. What is being termed, "Abenomics" (after Japanese Prime Minister, Abe and his very aggressive moves along with the BOJ to end two decades of deflation in Japan, have just seen an unexpected rise in deflation, the exact opposite of what they are trying to accomplish. The deflationary economic miss is the biggest in nearly 3 years so what they are doing is not only not working, it's making things worse!

Here are some examples of the short term negatives building largely since yesterday...I had expected some more upside on this move before we get a real tradable downswing, a serious downswing.

IWM negative

QQQ negative

SPY negative, but these are largely on timeframes in the 5-15 min ranges.

This 4 hour SPY chart shows a lot stringer accumulation stage at the previous bottom that should support a larger upside move so I expect any near term downside (whether it's a day or several), will be followed by the continuation of this move to the upside which has essentially (at least from the look of the 3C charts), seen a temporary set back. We'll know a lot more if we do get some downside as we can see how 3C reacts, any positive divergences in to downside and we know the move to the upside isn't done, which is actually good because it gives us more trading opportunities and gives us more time to set up our core positions as well as get better positioning and less risk. I can't really complain, I'm just surprised to see it, although no trend id a a straight line. I'm just a bit concerned that the Yen may change things market wide with very little warning as this is a true fundamental event that hasn't been discounted by the market yet as far as I can tell and I do think it will happen, it would just be good if it happens at the time we have all of our core shorts in place, it would actually be like adding a turbo charger to the downside move.

As for CONTEXT, the negative differential is only about 4 points, this has a lot to do with ES actually reverting toward the CONTEXT model (ES moving down, at least since the afternoon highs).

As for Leading Indicators, they are pretty much in line on a shorter timeframe, they are not negative enough in my opinion to be warning of the top I'm looking for after this move up (which seems like it's seeing a short term detour/correction). In other words, Leading Indicators as well as CONTEXT support the view of the 3C charts of the averages above, a downside interruption to our move higher, that move higher continuing (I'd say before the signals yesterday and today, it was probably half way or more completed) and finally a crushing move lower, but following the market signals has served us very well as can be seen by our trades and ranking, so we'll continue to listen to the message of the market and trade with that message.

We'll see what we have in several hours, but I'd expect an op-ex pin, which may be why we are seeing these negative divergences right now (Max pain may be lower for the op-ex pin).

See you soon.