Market Update

Here's the situation and the judgement call that I would have to make now, I'm not about making judgement calls, I'm about having overwhelming evidence that the odds are stacked in our favor.

Therefore, I prefer to wait than rush in to something because I'm afraid to miss the move, that's called "GREED". However, now you know why I have been focussed on building short positions a bit at a time at favorable areas for each individual asset, I have sufficient short coverage on my long term positions that are meant for that and because they are not leveraged, they do not suffer bad drawdown. In Fact the Equities Tracking Portfolio that is building short positions in to strength is ranked #45 of 1000 and the market hasn't even moved in our favor yet.

Here's what's going on, currencies threaten to send the market higher, if they do, then I'll be more inclined to look at short positions as long as the negative divergences that are in place continue to grow larger.

Should the market pullback before currencies fire off, then I'll likely enter new call positions.

 The Euro has moved to a new low for the week, sending the market higher intraday which is quite strange, usually it would be the opposite, the only thing I can think of is the Yen which has been increasingly more influential on the market saw a sharp drop pre-market and there may have been some arbitrage going on or perhaps this has something to do with the weekly op-ex tomorrow although both are poor reasons.

The $USD has a stronger negative divergence threatening a move to the downside, very market positive, you may be wondering why I closed the calls, it is about momentum and the fact that the market can get to extreme readings with the kind of volatility and unpredictability I warned of.

I'd rather take those strong 5 hour gains than lose them.

The EUR/USD also has a significant positive divergence threatening to move higher even as it makes a new low on the week, this would be market supportive.


The SPY as an example...

 1 min SPY looks to be largely in line with a small negative divergence, this alone would suggest a consolidation, but add the 2 min and you have a pullback/correction.

 This is the same 1 min chart zoomed out to proper scale, it is deeply leading negative.

The 2 min chart has a negative divergence and very little accumulation for this move, I'd say it's all well used up by now. The main point is with a 1 and 2 min chart negative, we should get a pullback rather than a consolidation, we see that 90% of the time, the only time we don't is when the market gets extreme like it is now.

 3 min in line intraday, but both the 2 and 3 min look like the 1 min when zoomed out, deep leading negative position, note no accumulation here on the reversal to the upside.

The 3 min in scale.

The 5 min is about the first chart that is in line in scale and it has no negative divergence so I have a LOT more analysis to do to get a grip on this market which is acting quite extreme and seems to CLEARLY be trying for SPX $1600 as discussed earlier, a nice centennial number and new high to make its rounds through weekend press as the last 2 SPX new highs did.

Additionally as far as my actions closing calls...

The SPY Arbitrage is a quick way for me to asses our leading indicators screen without spending the 20 minutes or so.

You can see early support has fallen off, my initial thought is, whatever small amount could be accumulated yesterday and I showed you charts of the IWM suggesting that was happening most of the day, I'd think a high probability is support has been removed to bring prices lower and allow accumulation to a larger degree to sell in to if we are going for $1600, I know I'd like to load up again for another Call run.

The other fact is for the longer term, final push down, as I illustrated last night, some leading indicators like credit, need deeper negative divergences, they can only get those with price staying flat or moving up, so I'm not as concerned that this is the final top and time/place to back up the truck, at least not until all of the Leading indicators are screaming. "divergence".

Counter Trend Shorts Are Possible, Not Advisable

The probabilities are that the market averages ARE COMING DOWN, I DO NOT FEEL ENTIRELY COMFORTABLE SHORTING OR BUYING CALLS ON THEM.

I think if you do it, the position should be speculative and you MUST be able to watch the market every minute.

Closing Yesterday's GOOG Calls

Closing Yesterday's IWM May 10th $92 calls Now

EIA Natural Gas Report / UNG Long Position

It's Thursday and 10:30 brings the EIA Natural Gas report which looked like this today...

Released On 5/2/2013 10:30:00 AM For wk4/26, 2013

	Prior	Actual
Weekly Change	30 bcf	43 bcf

The expected injection was 30 BCF, so we saw nearly 50% more than consensus injected in to storage, obviously that's going to send UNG down.

For newer members, we have been following UNG for well over a year when it was still trending down and we knew something was special about this one so this is a long term long position for many of us and even though it's still in its base area, many of us have a +40% or more profit here.

Lets take a look, see what is going on in underlying trends, whether the EIA report was leaked, I didn't have a chance to check it yesterday with the craziness in the market (the EIA nat gas and petroleum reports use to be the most consistently leaked and allowed us to front-run the reports by a day from 3C signals).

The bottom line is we are at the mercy of the market as to "when" to buy/ add to or expect a legitimate shot at a stage 2 breakout in to mark up.

 Weekly UNG chart and one of the obvious changes in character.

The daily: "A"=the base, "B" the head-fake false breakout leading to "C" a "W" bottom accumulation zone to make a real try for a stage 2 breakout and "D" what we knew at the time (and even took profits) to be a false breakout as UNG was already too extended to make a Stage 2 move without pulling back and gathering strength.

 My Crossover Screen to avoid false cross-overs or whiplashing, note the 3 indicators all fire a long call at the white boxes which happens to be the second bottom of the "W" base and followed by a +35% move over the next 2+ months. As many of you know, the first pullback or two are to the yellow 10-day price moving average, subsequent pullbacks are deeper to the blue 22-day  price moving average. RSI is giving a sell signal here, but the other two indicators are holding up so it is not confirmed, but a warning. Long term I think there's little to worry about.

The yellow vertical area is the strong breakout that we actually took partial profits on that very day as 3C showed it to be a head fake and the trend was already too extended without a rest by the time that move above the breakout area was made.

The red arrow is a little concern for a move below the 22-day, it is possible and still not cause a problem, but I'd like to see UNG close at least at the 22.

 The daily Trend Channel holds the entire trend from the base until today, but as you know I've been using the 2-day trend channel which I feel is more appropriate for this type trade, the stop is below $21.95 on a closing basis, but I'd give it more room if you view this as a long term play as I do.

ATR has increased with the trend which is good for the most part, today not so good.

Resistance is still $23.40 for a stage 2 breakout.

 This is my "Big View" version of 3C, it is not meant for intricate signals like yesterday's in the market, it shows the flow of major underlying funds. Note the first head fake which we knew at the time at the apex of the triangle where technical traders expect a breakout any way. That pulled back to our "W" base which saw strong accumulation and the last head fake breakout was the strong day we took profits (partial) on.

The indicator below you may remember, my MACD Heat Map. To the left the red box shows momentum fading for a reversal, divergences in the Blue are early warning, by yellow they are serious. In green an example of a positive divergence, in white an example of a cycle from negative to positive and to the right in red an example of a negative signal, this works well and actually can be used as a complete trading system including partial profits, entry and exits.

Today's 1 min 3C shows accumulation in to the move intraday, this is a start, but not a signal.

The 5 ,in shows the head fake breakout, why we took profits there and that the leading negative 3C divergence and price have regained "Reversion to the Mean", which is a good start.

This is the 2 min chart, still negative. The 1 min is positive. You know the routine, reversals are a process, not an event and evidence of that process is migration of the divergence from the fastest 1 min chart to the longer charts like 2, 3, 5, 10, 15, 30 and 60 min.

The market will tell us when it is safe and a high probability area to reclaim those shares we took profits on.

Tactical

As you can see we are getting a bit of a pullback, the 1 min 3C charts are negative so the pullback is no surprise, however it can be used to enter positions (these are for what will likely be a quick trade-perhaps even intraday, we have to let the market tell us so keep Regulation "T" Day-Trading Rules in mind as well as your broker's) like leveraged long ETFs,  for example, UPRO (SPY 3x long), URTY (IWM 3x long), UDOW (Dow-30 3x long) and TQQQ (QQQ 3x long), although the Q's are my least favorite.

I prefer the IWM and may add to the call position if we get a decent enough pullback making it worth it.

I think GOOG for a bounce is another decent one, but it would need to pull back more than I think it will.

Also FAS (3x long Financials)  long if it will pull back a bit, it is not as important for ETFs as it is for options (Calls). I would not short volatility. I also do not like Tech long for this bounce, it doesn't look as good to me and this may show up a little further down the line, but I don't like it.

Silver and Gold whether options or leveraged ETFs look good "IF" they fill the gap, so probably not soon.

I would try to keep it simple and stick with the IWM or SPY and maybe FAS/Financials and keep in mind the increasing volatility which not only means increased ATR's (larger daily moves), but more up/down days and less trend, although SPX $1600 is a big, fat centennial number worth shooting for.

Keep dry powder in mind (spare portfolio capacity-money on the sidelines) as our big picture strategic move is to add to/initiate short positions in to price strength and underlying 3C weakness, this is the longer term, Primary trade and I don't like leverage for these. In fact not even ETFs although they can be useful for initial reversals, I'd prefer having a short equity position, remember the advantages, "How to Make More Than 100% in a Short" , but you need a true equity short, not a short ETF.

We will probably have some time to confirm and decide where we might want to start or add to trades so try to be patient.

Quick Update

This morning, although we only took 2 new trades for a move up, GOOG Calls and IWM Calls (by the way, glad I didn't chose QQQ's as they don't appear to have as much 3C support and I will be updating AAPL soon as I think that is a cause-we did leave AAP Puts open) we are still ranked number #4 and # 2 on the Options Tracking Portfolio weekly and monthly (respectively) this morning, showing that our call to close the market average calls and open even just two call positions has kept us on top of the crowd which tells me the crowd was over run by the emotion of GREED.

They saw some nice gains on Puts and expected we'd see another big move down this morning (we may close and reverse our positions intraday today, but based on objective information, not greed or fear) and stuck with them only to find their profits disappeared.

So far here's the expected move in the Euro and the $USD which will be market positive and as mentioned with only a cursory look at leading indicators, HY Credit was already performing better on a relative basis vs the SPX first thing this morning, telling me it is either being used as a risk on (short term) trading vehicle with its large liquidity or is being used as one of the 3 levers to manipulate the market intraday.

 A large relative positive divergence in the single currency future of the Euro as it is at the lows for the week.

 On the other-side of that equation, the $USDX is seeing a deep leading negative divergence off the pre-market relative negative as it hit the highs for the week, both divergences imply a move that is market positive.

ES had an early morning positive divergence and since moving higher has managed to stay in line or better, I can't say the same for NASDAQ futures.

So Far...

Our move to close Puts in all of the Indices / Major Averages late yesterday at lows and in to downside momentum was absolutely the right call, as were our two new positions opened yesterday, IWM and GOOG calls.

 This is nothing to celebrate yet, but at least thus far we are on the right side of the trade with this late day GOOG Call position initiated for what should be a short term correction, but probably a volatile one. Remember we have the normal Friday op-ex (even weeklies now are pinned) and as such, we usually see Thursday's close pretty close to the max-pain pin level.

IWM so far is moving the right way for our call position, but this is extremely early and this is a.m. trade which is the most deceptive of the day as retail limit orders and stops by traders with a 9 to 5 get run out of town.


So far the SPY Arbitrage isn't out as it is delayed, but I do see HYG (probably manipulation), although it's possible, though not highly likely that it is short term organic demand as a risk asset for a market bounce; so I do expect we will see the SPY Arbitrage in the positive (green).

ES caught down to the CONTEXT model yesterday and as such is showing risk assets (and they use a lot in this model) are generally performing as expected for where ES is right now, suggesting it is fairly valued, which never lasts for long.

CONTEXT for ES at fair value.

Ooop, look at that, while I was writing the SPY Arbitrage came out and I was correct, GREEN.

The Quickly Shifting Sands of Currencies

First we'll look at the single currency futures, then the pairs.

Here's a little legend to help you understand what currencies mean what for the market (Generally speaking, there are times when different policies or changing carry trades create caveats, but this is pretty accurate as of now).

Rising Currencies / Market Relation:

Yen=Bearish
EUR=Bullish
AUD=Bullish
$USD/$USDX=Bearish

If the same currencies are falling, the reverse market relationship exists.

As for Pairs, Rising Pair / Market Relationship (this gets more complicated, but holds generally true)

EUR/USD=Bullish
AUD/JPY=Bullish
EUR/JPY=Bullish
USD/JPY=Bullish (*This one I might have some doubts about, as a carry trade the pair rising is generally good, however a rising $USD is a market negative and shifting Japanese economic policy, well may shift. *In any case, the pair rising has been supportive of the market rally from the end of last year through this year).

Single Currency Futures-*Divergences should be obvious

 EUR 1 min

AUD 1 min

$USDX 1 min

Yen 1 min

Yen 5 min

Yen 30 min

However the long term trend on the Yen's 4 hour (above ) and daily (not seen) is very positive suggesting the primary trend for the Yen will be moving up, not good for Japan, not good for the market.

FX Pairs...

 EUR/USD 1 min

EUR/JPY 1 min (Carry trade)

USD/JPY 1 min (Carry trade)

AUD/JPY 1 min (Carry pair)

ECB Surprises, ES Rises

Along with all of the other Index futures.

Besides quite a few disappointing and declining PMI readings across the globe, the main story this morning and so far a great reason to have closed our puts yesterday seems to be a surprise cut from the ECB on their policy decision today.

The ECB's refinancing rate cut of 25 bps was expected, pushing the main refi rate to a record low of 0.50%, what was surprising was that the Marginal Lending Facility was also cut from 1.5% to 1.0%. The deposit rate at 0.00%, was left unchanged.

This sent key currencies either higher or in to a tailspin, pretty much all of the moves in FX were market positive, this sent Index futures higher.

Then the US comes along with Initial Claims which printed at its lowest since January 2008 at 324k. This is well below expectations of 345. This is the biggest beat since September 2011. Bloomberg's first sentence in their report of I.C. was, "Jobless claims are moving surprisingly lower and there's no special factors to explain away the improvement." One has to wonder what tomorrow's Employment report looks like and if the F_E_D's odd policy comments yesterday were exactly as I thought, the next logical step in removing or normalizing accommodative policy, the "unexplained" improvement in Initial Claims would seem to support the F_E_D backing away as they not too long ago set EMPLOYMENT as one of the main factors on their yardstick...VERY INTERESTING. Tomorrow could be even more INTERESTING (Wink, wink).


Then came International Trade. March exports of $184.3 billion and imports of $223.1 billion resulted in a goods and services deficit of $38.8 billion, down from $43.6 billion in February (revised) and  below the expected number of $42.3 billion. This was driven not by a jump in exports oreconomic strength, which declined by $1.7 billion in February, but because of a plunge in imports of $6.5 billion, typically confirming economic weakness, mostly of consumer and capital goods as the US economy slowed substantially in March.

As for futures, I'll try to make this brief...You can probably figure out where the ECB sent the market higher and where the combination of IC that gives the F_E_D a reason to withdraw QE purchases and a worsening economy sent the market lower.

The 5 min charts are either in line or slightly negative.

 ES 1 min

NQ 1 min

TF 1 min

Into the open the $USD is heading higher, but starting to run in to a relative negative divergence, the Euro lower, also hitting a relative, but positive divergence, the Yen is lower (the only market positive right now, and in line and the AUD is starting to head higher on a positive divergence.

To break that down, the USD price is a market negative, but looks to reverse intraday, the Euro is market negative, but looks to reverse intraday, the Yen is a market positive and looks to continue and the AUD is a market positive looking to head higher.

More on currencies coming.