EOD Market Update: Patience

One of the things we look for in a move like yesterday to establish whether it has legs or not is a concept called follow through, it''s very simple, the excitement of the previous day follows through to the next and we have another strong day. I haven't seen many of those in some time, it seems by the time we get to the next day there's already been significant distribution in to the first day up.

As for right now, as suspected, VXX / UVXY are pulling back a bit and that's fine, I'd much rather run a full position size, but I want to do it smart and phasing in like this is actually part of my risk management. The same can essentially be said about the FAZ long entered as a half position size.

My gut feeling is still that the market is in an area in which it will likely open close to tomorrow to execute an options expiration pin on all 4 option classes that all expire on quad witching. I'd expect the same general principles to be in effect, most contracts should be wrapped up by about 2:30 or so, we will likely see a pin (they do move as the open interest changes through the day) until 2:00-2:30 and then the market does whatever it wants. In my experience what happens after 2 p.m. in price has very little bearing on how the new week opens, but the 3C signals over the last 2 hours of Friday tend to pick up right where they left off on the next day of trade, even over a long weekend so I'm more interested in the 3C signals the last two hours of tomorrow than price, price is deceptive, it's a billboard at this point.

We also have window dressing coming near and end, I haven't looked at a calendar for the exact date, but the rule of settlement is Trade Plus 3-Days, so that's about when all of the window dressing has to be wrapped up and then half days, etc. all play a part as they want to wrap it up while they are there, not one a half day that they can turn in to a 4 or 5-day weekend at the Hamptons.

My personal position right now is patience. I was going to post a sample of all the averages, but the IWM is a good proxy even though each average is different, the same idea applies.

 1 min

2 min

5 min

10 min.

To me it looks like intraday steering of price while larger distribution is taking place.

As for Leading Indicators, HY Credit is underperforming on the day, HYG Credit is underperforming significantly but we saw that in 3C yesterday. VXX is outperforming the correlation, again we saw that late yesterday. 5-year yields popped as the 5 year sold off so the SPX is at regression to the mean right now , today with Yields so there's no magnetic force there short term, longer term it's down.

Sentiment indicators are split, one is in line, one is VERY negative.

That's about it.

This isn't the kind of market in which I want to try to guess what will happen although I have my opinions, so do people playing Black Jack who want a hit, I want objective data. We do have a lot more than yesterday, it's leaning the way I suspected, but it's not enough to really go hog wild here. Being patient or on the sidelines is a Position too.

JPM is Tempting

With FAZ exposure already I think it's too much in Financials, but with a little more work, JPM core short looks good as a new issue or add to. On a trading basis it looks real darn close to losing its grip.

Trade Idea: FAZ Long

I'm also adding a half size position to FAZ (3x short Financials) long to the trading portfolio as well as again this is likely a shorter duration trade.

I'll add the second half if in essence FAZ creates a second half of a wider base.

 FAZ 2 min

FAZ 3 min

FAZ 5 min

VXX / UVXY

 5 min and 15 min above VIX futures holding up well.

VXX and UVXY are both just under what would be a head fake level, whether intentional or not, the effect is the same when stops are hit.

A pullback to create more of a "W" shape would cause me to add to the position as long as the divergence continues to grow.

Trade Idea: Opening UVXY Long Equity

This is the 2x leveraged version of VXX, VIX short term futures. If it pulls back and/or the signals grow even stronger, I'll add more to the position to full size, this will be in the trading portfolio.

Market Update

I've had quite a few questions about what I think the market or the averages (might be more appropriate) are going to do. First lets look at them and keep in mind my custom TICK indicator has gone negative, meaning like a MACD histogram that has peaked, it's moving down now.

 DIA 1m

DIA 3m

DIA 5m

IWM 2m

IWM 5m

IWM 10m

QQQ 1m

QQQ 2m

QQQ 5m

SPY 1m

SPY 2m

SPY 5 m

All of these have some negative movement and most have a little in line or positive movement in the timeframes we can expect to move today.

To me there's still a lot of dispersion, my best guess is that these are getting in position for tomorrows quad-witching options expiration and thus there will be differences between the averages or assets. This is one of the reasons I'm keen on VXX, this is more of a broad measure of where fear and complacency are, outside of a 1-day event that is coming up tomorrow.

To answer the question, I really don't know if they are going to make any significant moves today and if they did, the 3C divergence would have to be every strong for me to take a position, however if VXX keeps moving the way it is, I may take positions based on that. Otherwise the best policy may be to wait, let them pin numerous options on the biggest expiration (Quad) and go from there.

Again, like the F_E_D knee jerk reaction, the volatility that comes along with Quad witching week is notorious, it shouldn't be taken as a signal of the market's true intensions because it has an agenda all its own that is short in nature, but can be very volatile in practice.

This is one of those hard times to not only be patient, but not to let price movement scare you or cause you to get greedy.

The Signal the Screams

That would be, for now any way, the VIX futures which VXX / UVXY are leading. There have been a number of trades, but more importantly almost single asset analysis in which the VXX has been the single most accurate indicator from last week when it was being held down to yesterday just an hour or so before the F_O_M_C answering the question as to whether we should hold the trading shorts in to what you might call the most uncertain and far reaching consequential fundamental event of the year, VXX / UVXY have called not only the last short cycle in which the trading portfolio made its first 9% gain, but then the recent switch to the long side.

I see no reason why this indicator should have any less of an impact now, especially with a directional Bollinger Band Squeeze on spot VIX that has broken out already and done everything it needed to before moving to the mark up stage.

When the VXX signals are so strong that they can't be ignored, we know we have something, that doesn't mean that they are not subject to the reversal process like anything else. So far, they were hinting yesterday at what they've continued today. Around the time I closed the PCLN calls, I ALMOST entered VXX calls and / or UVXY long equity, although I have little doubt the signal will be there, I need that confirmation because I don't know which path it takes to get there and how long that path is.

Here's what we have so far, these signals are not too dissimilar from the averages (inverse) signals that confirm them.

 1 min chart continuing what we saw yesterday, I didn't enter a call because I don't know how large this reversal process will be until the leading positives are so large that they simply won't be ignored.

 The 2 min is beautiful so early in the move from yesterday, suggesting it is indeed the very "Knee-Jerk" reaction we see so often. The knee jerk reaction on the last significant F_O_M_C event was September 13th 2012 when QE3 was announced as an open ended program, by mid afternoon the second day, the initial knee jerk that started around 12:15 on the upside had stalled and that next day, the 14th put in an intraday high that would not be broken until the new year.

It's not just the leading divergence that is attractive here, it's the tight range which I always try to point out as being one of the biggest price based tell-tale signals of heavy underlying activity while most traders consider it a dull, boring market and move on. If you write one price based scan, looking for these tight ranges is the most useful.

Look at this 3 min chart, also note the reversal processes, remember that the bottom process like we are in now is almost always much tighter than the top process so being this is already almost the largest one on the chart, it would suggest quite a strong move that would have a much larger reversal process to the downside when it completes.

The 10 min chart never confirmed yesterday and remains leading positive and has added to that today.

 The stronger 30 min chart wasn't touched at all, it's kind of like taking a withdrawal out of your bank account to invest in stocks long, but rather than take the bulk of what's available, you only take a small portion because you know that you need the rest in place.

The VIX futures 15 min chart also held up and is adding to the divergence today.

The VXX will provide a good long opportunity whether calls or a long VXX or UVXY, SVXY is confirming as are many of the averages, but we aren't done with the volatility, thus I waited on the calls.

PCLN Follow Up

The trade plan for PCLN has been based on an expectation that the $1200 level which is a new high, a centennial number, a whole number and otherwise major psychological magnet would be broken on the upside as we aren't far from it. Out of the 7 positions in the trading portfolio in to the F_O_M_C, PCLN was the only short because of the possibility of things going the other way on the knee jerk, but as more and more evidence of short term trade mounted, Tuesday I closed the short for a small gain and "thought" or intended to open a long, this was a fat finger (not enough coffee) trade that just opened a new short which I promptly closed yesterday once I realized what I had done. The Call position in PCLN was opened earlier in the week when I first intended to hold PCLN short, it was a hedge position (even though it wasn't in the same portfolio so really not an effective hedge for me, but this is not for me, it's for you.

Truth be told, I should have taken profits on the call position yesterday in to upside momentum.

Here's the P/L for the calls and the charts for PCLN which I'd still like to see move up a lousy 14 points and take out $1200, then I'd be looking for a new entry or add to entry for a longer duration core short as well as a trading position short.

 The PCLN call would have MORE than served its purpose as a hedge and left some upside gains to boot.

The $1200 area hasn't been hit yet, conceptually this is the highest probability set up, but we are moving further and further away from normal concepts as the market's skew and internals (new highs/new lows ) as represented by indications such as a cluster of 5 Hindenburg Omens shows this market is not at all what price alone makes it appear to be.

Conceptually as far as a reversal process goes, this is near text book and a move >$1200 would be the chimney or head fake move (which is a broad category for a number of different deceptive traps, in this case a bull trap).

I have mentioned recently that the market is starting to act more like a market and less like a Bernanke Put driven brainless/thoughtless exercise. I'm still trying to figure out how this plays out, but I know one thing for sure, when the crowd is boastful over something that takes ZERO intelligence to follow, the market has a way of humbling you very quickly and very sternly,

The consistient way to outperform the market over the long haul and that's what we are all in this for, not to make money for a few months and retire, YOU HAVE TO FIND THE THING THE CROWD MISSED AND THERE ARE A LOT OF THINGS THAT THEY NOT ONLY MISSED, BUT WORSE YET CHOSE TO FLAT OUT IGNORE, THEY'LL BE PUNISHED FOR IT AND I DON'T GET ANY SATISFACTION OUT OF KNOWING THAT, BUT THIS IS A ZERO SUM GAME, SOMEONE HAS TO LOSE.

Like Warren Buffet said, (paraphrasing), "When you sit down to play poker, if you can't figure out who will be supplying all the winnings (the loser) within the first 5 minutes, then that person is you".

 1 min chart's trend, lots of stuff here from a negative to in line to a positive with a head fake move just before a parabolic launch yesterday, distribution today and the $1200 level just a tiny bit away.

A closer view of the 1 min

A closer view of the 2 min and head fake move, there were a ton of these yesterday about an hour before 2 p.m. which is another reason I chose to go long TQQQ, sounds counter-intuitive doesn't it, price breaks support and you go long on that move, that's because a head fake move is one of the best timing indicators we have, the "fake" part of the move can pretty much only be determined by the divergences.

The 2 min in context.

Remember that typically a 1 min divergence means a correction and that can be a 50/50 chance of being through time like a price pattern or through price like a pullback, when the 2 min chart is added, the pullback becomes much more probable, so letting the options stay open is against the short term probabilities.

 10 min, from confirmation to distribution which is leading negative even with yesterday's 3C move.

This is where the highest probabilities are. If PCLN makes it above $1200, this chart alone already says the probabilities are highest that the move turns out to be a failed breakout or a head fake, but we always try to confirm that on as many timeframes as possible, if for nothing else other than timing.

Hold tight, this is a beauty, if you're in, I would not sweat a move +>$1200, if you are not, I call these moves, "Gifts".

Closing PCLN Jan $1170 Calls

This is more of a momentum thing particular to options, if I had the PCLN long at this point, I'm not sure what I'd do with it as it would have a decent profit and it wasn't meant to be anything more than a trading position, I can't say for sure on that one, but on the calls, for me it's time to take the momentum.

Good Morning

I've been watching the market this morning, so far that's about the extent of my plans. Yesterday was exhausting, but it was really uplifting to get so many emails from people who made money following the trading portfolio and even had so much trust as to take the TQQQ long trade just before the F_O_M_C, that's an honor and I thank you for that and for letting me know how you did, it's always good to hear someone appreciates what you are doing; when I ran my own custom wood shop or managed the finishing department for a really high-end one, my guys would do anything for me, if I had to stay late until midnight to get a project out the door the next morning I wouldn't even have to ask them to stay because I always let them know what a great job they were doing and when they were messing up, I never criticized them, but put it in terms of, "You know, I use to always have difficulty with this and here's what I did to overcome it", plus in the 9 years I was there I never once asked for a raise for myself, although back then I was the highest paid finisher around, making nearly 6 figures when most made $14 an hour, I got raises, I never asked for them. However, I always went to bat for my guys and got them raises. The point simply being, everyone like to hear their work is appreciated, in my experience if it's sincere, it often means more than a raise.

Honestly yesterday took a lot out of me, I know you probably think I'm being dramatic or this is hyperbole, but CNBC just does something to me like Kryptonite. I made the mistake of being too busy to get up and turn it off after the F_O_M_C and my ears were defiled for far too long, when I turned my TV on later I caught Cramer acting like a clown on TV and I just can't take it, I can't take someone lying to my face and the sad thing is Cramer is a REALLY smart guy with a TON of knowledge to offer, his Street.com interview that I mentioned the other night was one of the best interviews I've seen (other than talking with floor traders and hedge fund managers myself), but his carrying water for Goldman, his over-simplification of the market as if we were all 7 year olds, his flat out lying (all characteristics of the Wall St. types) and most of all, the misleading of all of those viewers, is just too much for me, especially when I know how much he really has to offer if he ever really wanted to.

So it's too early to say if this was the knee jerk move (the first move generally is), it's too early to say if it's over, remember we have Quad Witching tomorrow so be prepared for Ultra-voltility, I'm not hedging analysis, I'm trying to anchor expectations the same way I always warn about the F_E_D knee-jerk move, I want people to understand what to expect, what it is and not get caught in emotional traps over seeing something like that which you've been warned to expect, especially if you've been here a while, I ALWAYS warn before F_E_D events because it's always the same.

So far this morning the interesting or most interesting thing is still the vIX, I'm convinced either the taper was leaked or as I put forward Tuesday night, they inoculated the market just the same way they did on the strong NFP print, whether inside information of the NY F_E_D's open market's desk. Either way, I'm glad to have sold yesterday. I'm usually not hard on myself over a trade going wrong, that's just the cost of doing business, but I'm having a REAL hard time with that fat finder trade in PCLN, I'd have a killer return right now, I worked hard on that decision and blew it on the order, that was just not paying attention.

So here's what's cooking and interesting this morning, IT IS STILL THE VIX / VXX THAT'S GOING TO LEAD THE WAY.

 VXX made the call to buy TQQQ yesterday just before the policy statement and the rounding and positive intraday are VERY interesting as is the migration below.

2 min chart.

The charts of the averages as pointed out in ES last night are interesting too, but we're only 3 hours in to this so the dust hasn't settled, but that's what I'm looking for. Everyone said "Don't fight the Fed Sept. 2012", I said I don't care about market mantras, I care about evidence and the evidence was negative and that day was the same day the market topped for several months and it took several more months just to get back to that level so I'll take objective data over "mantras" and fear driven analysis based on nothing but a saying.

So I'm watching, looking, if a trade pops up or management of one is necessary I'll be looking for that (PCLN should be getting interesting really soon, you know my target to start getting really serious about that one).

Again, if I'm quiet today, that means the absolute opposite of what you think, I never take even so much as a 5 min. break rom 8 a.m. to typically 4 p.m., maybe 15 minutes and then back to work until 8 or 11 p.m. so the quieter I am, the more busy I am.

Lets see what we can find that the crowd is missing.

*My apologies if you like Cramer's show, I don't mean to say anything bad in that way, if you find it helpful and it adds value to your trading, then by all means I would listen too, I just know how smart he is and to have him talk to his viewers like they were in diapers (compared to what he knows) is just flat out insulting and to me bad character.