Post F_E_D Market Update

It seems excessively clear at this point with HYG making a 5-6 day positive divegrence, the idea was to make the August cycle's head fake move posted earlier today, yesterday/last night which looked like this in last night's Daily Wrap...

This is what the normal concept of a head fake move would look like before a downside reversal on top of a rounding top, all of this should be seen as a singular cycle off the early August lows and base from 8/1-8/8.

The reason for needing HYG? Exceptional breadth and internal weakness, underlying (3C) weakness, etc. The only real lever left as the carry trades have failed is HYG and it has not done so well for the market today as I currently don't see an average up more than a quarter of a percentage point on an upside head fake move or rather F_O_M_C knee jerk reaction.

As of this afternoon just after 1 p.m., the analysis was for such a move as posted in the previous update.

As for the initial charts I have during the post F_O_M_C and the press conference, there was a wait and see element, but tone quickly turned ugly, we'll find out how bad after the close with market internals, but during the event...

 SPY intraday leading negative as the press conference came to an end.

The SPY 5 min chart which is essentially the roof on the upside move for this week as forecasted Friday in the The Week Ahead  post is now showing a clear negative divegrence. There's only so much gas in the tank for a move on the upside with about a day (Monday and early Tuesday) of accumulation which reached the 5 min charts. As the 5 min charts deteriorate and turn negative, we have the same pivot as the Monday/Tuesday divergence, except to the downside.

 DIA 1 min intraday looking horrible.


The migration to longer charts, like the 3 min and...

The 5 min which was still in line this morning, now with a negative divegrence.

IWM took some of the worst of it with pretty sharp leading negative divergences, but it also had the most upside to sell in to.

 Showing the IWM 3 min with this week's early positive divegrence forecasted on Friday and the migration of the 1, 2 min negative divergences to the 3 min chart.


 This morning we had a small relative negative divegrence (the weakest form) on the IWM 5 min chart, you can see, since the F_O_M_C, that divegrence has grown and is in worse shape, now starting to lead negative (stronger divergence form).


The QQQ 2 min with the end of the positive divegrence in to Tuesday morning lows  and a sharper negative divegrence in to the F_O_M_C.

 There's clear migration from the QQQ 2 min chart to the 3 min chart, next stop the 5 min chart.

Thus far the 5 min is the only of the major averages still "in line", I suspect this changes soon, tomorrow.

As for breadth during today...

 The hard number count of advancing stocks less declining stocks intraday was tame pre-F_O_M_C and then was in a +1000 to -1000 range with a few outliers, but after the press conference dropped notably with -1500 and -1600 tags.

The TICK/SPY custom indicator trend shows TICK/intraday breadth slowly declining earlier in the day to a F_O_M_C pop and continuing to decline to lows of the day in to the close.

Daily breadth charts after a update should be revealing.

The MSI (Most Shorted Index) which saw a short squeeze in Russell 2000 names on the open continued to lead through the rest of the day saw a catch up after F_O_M_C and no longer had any edge for the market.

If you want to know what is moving the market, what the strongest correlation is, it's the same one that allowed us to forecast price movement in to the F_O_M_C this week, the same one that allowed us to call for an upside knee jerk reaction after the F_O_M_C and will likely be one of the key indications of near term market action, HYG...

 HYG has maintained an in line divegrence through the day with a little weakness in to the close, we'll see if that continues to deteriorate.  My gut feeling is, "If HYG with a 6 day divergence can't lift the market to something better than a quarter percent knee jerk move (often 1-2% moves), they'll abandon HYG quickly and that may be what we are seeing in to the close.

As far as actual proof of this correlation...

This is the SPY in green and HYG in red today, moving in tandem EXACTLY like yesterday, carry trades be damned.

More to come, I'm still picking through a lot of data. 

Knee Jerk Tone

The knee jerk move was as anticipated in the Quick Market Update post this afternoon before the F_)_M_C with the expectation being,

"Taking this altogether, this is something I suspected last week in the posts toward the end of the day Friday and early this week.

I suspect the F_O_M_C knee jerk reaction will be to the upside, it will be a failed move and also allow us nice entries in multiple shorts, some of which are in the area and listed yesterday.

Of course no one knows what the F_O_M_C will do or what Yellen will say at 2:30 (MAKE SURE YOU WAIT FOR YELLEN), but based on what I see thus far and being this was already a probability I suspected before this week's move higher even started, I'd put probabilities there.

The way I want to use that is to short in to those higher prices in the assets laid out and I will put out the posts as they confirm a false move or head fake.

That's my best guess at this time."

Not only is the strength of the knee jerk move surprisingly weak, the underlying tone is weak. I'll have some charts out in a moment, although there's much more to look at.

HYG remains the short term key.

Hilsenrath is the F_E_D's Leak

Yesterday Jon Hilsenrath from the WSJ sent the market higher when he said that the F_E_D, which was widely expected to remove the "Considerable Time" language which is a reference to how long the F_E_D will wait to raise rates AFTER QE has ended. When questioned during the last F_O_M_C meeting in the presser, Yellen said "Considerable Time" is  6 months. there's debate about whether this was off the top of her head in a press conference or is this really F_E_D forward guidance that maybe she let slip and might regret.

The market WIDELY has expected the "ConsiderableTime" language to be removed this meeting largely because in speeches from Hawks, Doves and Centrists, nearly all have said it's time to remove that language and update forward guidance for rate increases.

Judging by what we know as the F_E_D reduced MBS by another $5 billion today and Treasury purchases by $10 billion today, QE is set to expire next month which would theoretically put the first interest rate hike around April of 2015, well before the market's current sentiment of June 2015 or Q3 of 2015. Expect Yellen to back away from the 6 month definition for "Considerable Time" during the press conference, this is where you REALLY want to watch how the market responds to the Q&A and you'll find out some interesting information just as we did when QE 3 was introduced, but the market topped the same day (Sept. 13th, 2012) and went on to lose -8% in the months ahead and didn't regain those highs until nearly 4 months later as Bernake had inadvertently made clear in the press conference (at 2:24 p.m., can you believe I still remember it? It was that big at the time), that the F_E_D was changing their yardstick or at least moving toward a change from quantitative guidance based on dates to qualitative guidance based on incoming information, but  much less certain and the market hates uncertainty. That is exactly why the market topped after QE3 was announced on the same day at 2:24 p.m. as Bernanke accidentally or perhaps purposefully, let that cat out of the bag. The point is, listen to the press conference.


More to come as there are a number of small items that are lost in the shuffle that mean a lot to the bigger picture.

I just want you to catch the press conference and watch carefully.

Pre-F_O_M_C Update

There have been a couple of more dramatic negative shifts in some of the averages, but my opinion in the last post was based largely on concepts that have shown to be high probabilities and HYG, the concepts are what they are and I don't see deterioration on the scale in HYG yet, that would give up market support.

None of the carry (JPY based) trades are connected to or are supporting the market at all.

AUD/JPY vs ES/SPX futures...

 Total disconnect as AUD/JPY heads higher and Es lower, this is in line with intraday TICK data / market breadth.

HYG (red) continues to remain supportive of the SPX/market broadly short term.

The MSI is drifting lower with the market, although outperforming, it's not lifting anything.

 Price tone in most of the averages is in line with the cautious intraday breadth/TICK although we did see a panic move to the downside at -1200 which is not that bad vs some of the historic intraday lows seen over the last week or two.

 based on this move forecasted Friday for early in the week, pre-FO_M_C, the TICK/SPY custom indicator shows a natural rate of deterioration, there's only si much gas in the tank on a 1-day divergence and without outside influence, this would and may continue to deteriorate on pace with the size of Monday's positive divegrence.

 SPY 5 min is looking a bit worse than anticipated since earlier charts this morning.

We did see a strong leading negative move out of character with the leading negative divegrence at the red arrow, pretty much specific to the SPY.

 The 1 min intraday SPY chart shows a small intraday positive divegrence which we have seen some support from.

 The QQQ intraday 1 min shows stronger intraday support.

While the IWM seems to be seeing heavier profit taking.

Still it is the HYG divegrence that matter most at this point and it's just not seeing rapid deterioration.

Quick Market Update

Looking around for any possible leak of embargoed news, as we have found them before, although rare (news networks already have the F_O_M_C policy statement, this is how they have instantaneous reaction as they've read it long before us, although it is embargoed, however I would suspect it wouldn't be that hard to get some newbie at the station to get the gist of the statement out for a handsome fee, in fact the BLS built a new media center to rectify exactly that problem, in building the media center they had admitted embargoed information was reaching trading firms before the official release) What I see looks like a couple of things: on a 3C basis of the averages, it looks like the natural decay of the Monday/Tuesday morning accumulation for the move up based on a deep oversold breadth environment last Friday (the same scenario as last Tuesday with a 1-day oversold event in breadth that rallied Wednesday, although I have said from the start I expect this to be bigger than last week's based on HYG's divergence and of course the probability of a head fake move taken with the possibility or likelihood of an F_O_M_C knee jerk reaction-all concepts that are typically seen except of course the HYG divergence-which is a divergence, not a concept) first lets look at that.

 Intraday the SPY looks worse as it should as the natural decay/distribution from a day long positive divegrence only has so much gas in the tank. From a breadth perspective, very little of the oversold condition was worked off as of last night's data.

 SPY 5 min seeing about the expected rate of decay or negative divegrence migrating to the 5 min timeframe. So far this looks like the analysis from Friday for early this week "IF" it were in a bubble devoid of outside influence like the F_O_M_C.

The Q's with their positive divegrence Monday and early Tuesday morning and a natural looking negative divegrence in to the bounce. if we can call it that.

And the IWM 5 min chart with a relative negative divegrence (the weakest form), meaning the IWM lagging yesterday wouldn't give much reason to sell/short in to higher prices so it's seeing that today.

SO far, nothing that looks like a leak of the F_O_M_C.

On a different concept, the head fake one which I have drawn , talked about and posted numerous times over the last 2 weeks with last night's daily wrap showing this chart to get an idea of what one would look like, as they tend to be excellent timing indications just as longs jump in, shorts cover, they tend to reverse to the downside creating a boatload of momentum, which is behind the concept, "From failed moves come strong reversals"

 This was posted yesterday and last night, the "Igloo with a Chimney", the igloo representing a real reversal process or top and the chimney representing a false breakout that fails and gives the downside reversal momentum as shorts are forced to cover on the move and longs jump in to be caught in an eventual bull trap, thus increasing downside momentum which I suspect is one of the reasons (other than creating demand and supply) we see them so often just before a reversal  (80%).

 HYG's divegrence has deterioration, but not as much as I'd expect by this time.

In fact...

 HYG (red) supported the SPY/market intraday as it was moving lower along with the MSI.

Here's te intraday move lower from a TICK perspective with a -1200 reading so some serious selling there intraday, likely F_O_M_C nervousness as I see VIX futures were bid at the same time.

 The TICK trend continues to deteriorate...

And MSI holding up better than the SPY today, also giving support pre-F_O_M_C.

From this perspective, it looks like a head fake move as drawn above is probable as the initial F_O_M_C knee jerk is dependent on the market reaction, not the actual news so some HFTs hitting the ask can create an upside knee jerk if that's what they want until the F_O_M_C language sets in, thus the fade of the knee jerk reaction.

However, while HYG is manipulated short term for stuff like this, general HY credit is not and it is not looking good.

 HY Credit vs. the SPX

And while this is a new indicator for the site, VIX Inversion and SPX/RUT Ratio, it has been pretty spot on...

The July top has a negative SPX/RUT ratio (red) signal at the yellow area to the far left sending the market lower in to our 8/1-8/8 base where the indicator fails to confirm a new low and is divegrence as well as 3C positive at the base sending the market up in to the August cycle. Since however as we have been in stage 3 , there's another clear negative divegrence in the indicator.

Taking this altogether, this is something I suspected last week in the posts toward the end of the day Friday and early this week.

I suspect the F_O_M_C knee jerk reaction will be to the upside, it will be a failed move and also allow us nice entries in multiple shorts, some of which are in the area and listed yesterday.

Of course no one knows what the F_O_M_C will do or what Yellen will say at 2:30 (MAKE SURE YOU WAIT FOR YELLEN), but based on what I see thus far and being this was already a probability I suspected before this week's move higher even started, I'd put probabilities there.

The way I want to use that is to short in to those higher prices in the assets laid out and I will put out the posts as they confirm a false move or head fake.

That's my best guess at this time.

MCP Bullish Signal

The 60 min X-Over Screen is now giving a bullish buy signal. While the stop I'm providing is probably about accurate for trading this signal and timeframe, I do have a little more faith in MCP. In any case, here are the latest developments since yesterday's continued improvement.

 The V-Over 60 min chart has a solid buy signal.

For this timeframe swing I'll use the 60 min Trend Channel.

This channel has held similar "swings", however if we do get a good breakout, this has a pretty darn high short interest so the adjustment of the stop will be an ongoing daily routine. Right now the closing stop is below $1.54 for this particular timeframe swing move.

Market Update

This morning things are a little interesting from the perspective of what was anticipated last week for the The Week Ahead. This is just a reminder of that post because the context of where the market is now is what is interesting and the underlying trade, so the expectations for this week from Friday's post (the more interesting parts in bold),

"While I can't pinpoint the exact moment, my guess is HYG is used to boost the market, maybe even our head fake move because the market itself just doesn't have the positive short term divergences to do it alone. However after that, I'll say HYG will be headed straight back down and I'm guessing this happens before the policy announcement on Wednesday. Judging by the scramble toward our set-up targets in several of our short set up plays today, despite a red market, it looks like they are in a hurry to get that move in place and I suspect HYG is going to help early in the week and then retreat before the market.

So rather than last week's "More of the same" sideways chop, I think the SPX's downtrend of lower highs and lower lows I have posted several times this week is a target for technical traders and HYG will likely sponsor the move"

Not only did HYG sponsor the move, but later that night (Friday) I wrote from a breadth perspective and showed the market to be in a 1-day oversold BREADTH condition, not percentage price move, although Tuesday was down and the following day, Wednesday we saw a bounce. I thought we'd see something like that, although slightly bigger because of HYG and as we saw in to Monday and early yesterday morning, because of a day long positive divegrence in the averages that las week didn't have, so this morning's charts are interesting from that perspective of what was expected and about when and how as well as to where (the head fake move still being on the table and we aren't far from it, but the SPX's downtrend being the essential technical target which was hit).

This morning HYG is still leading the SPX,

 HYG in red vs SPY in green, yesterday and today. There was some debate about AUD/JPY leading yesterday, I suspect it has some influence, but at the end of the day ES stuck with HYG a lot closer than AUD/JPY. This morning...

AUD/JPY (candlesticks) has virtually no correlation with SPX futures (purple).

From a 3C perspective, in yesterday's first market update the positive divegrence from Monday and early Tuesday morning was shown as well as some very early distribution. As of this morning, considering the context of the "Week Ahead post" linked and quoted above, here's what we have in the averages.

 SPY  5 min chart which is where the positive divegrence Monday and Tuesday morning reached,. We see 3C in line with the downtrend from last week and putting in a positive divegrence Monday and early Tuesday as we expected on Friday for there to be early strength in the market this week at least breaking above the SPX's established downtrend and maybe even the head fake move (Igloo with Chimney) we have been looking for going on weeks now as it is an excellent entry for shorts and timing indication as you'll see below.

Yesterday there was some negative divergences forming in the earliest charts as they always do, but hadn't reached the 5 min. chart which they are starting to this morning.

 The faster intraday charts show the damage first and if it is strong enough it moves to the next longest timeframe (the concept of migration of a divergence in multiple timeframe analysis). This 1 min chart is looking pretty bad, especially in to yesterday afternoon where we lost momentum and this morning with a new leading negative low.

This divergence was strong enough and migrated to the 2 min chart with a leading negative divegrence.

 As well as the 3 min chart and as seen above, is now moving to the 5 min chart where it ultimately need to go negative for a downside reversal (taking the F_E_D out of the analysis for concept).

 The IWM 5 min (IWM lagged yesterday) is still in line...

The 1 and 2 min chart above are starting to see migration of the distribution process from Monday's accumulation or mini base for this week's expected move before the F_E_D.

 And here it is on a 3 min chart so it's not far from hitting the 5 min IWM chart.

The QQQ 5 min is also still in line.

However intraday charts are seeing distribution of the move and migrating, the 1 min above and...

The 2 min chart.

It looks like the Most Shorted Index was squeezed on the open, although it didn't last long, I'm guessing this is mostly Russell 2000 names as there are so many that would be deeply oversold with 40% down by 20% or more.

 The most impressive divegrence has been  HYG's ,  note the head fake stop run just before the upside move in HYG.  There's also some damage reaching this chart, but not all out so I think a F_E_D inspired knee jerk move to the upside with HYG could still create the stage 3 head fake move we have been looking for for at least 2 weeks now which as you see above, is an excellent timing signal for a reversal, except this time to the downside, especially since F_E_D knee jerk moves (whether up or down) are almost always wrong and retraced.

 TICK is very quiet at +700/-500 today from yesterday's late afternoon breadth decline.

On a trend basis, it's also declining for this specific move forecasted for this week on Friday. Today is in the white box to the far right.

My custom SPX/R2K ratio indicator still isn't confirming any upside form this move (on the week).

Otherwise it's probably a bit early for other leading indicators.

If it weren't for the F_E_D wild card (and who knows which way it goes short term, but we all know which way it's going on a big picture basis), this move would just continue doing what we forecast, maybe hit the head fake area as HYG is still in the game and then fall.

I'm going to spend about an hour looking for any signs of a F_E_D leak as the news embargoed F_E_D policy statement comes to them soon. Otherwise, the intraday action in to the policy announcement will be important and there may be a number of trade ideas called out quickly so I may be a bit slow on email responses today.

I'll try to get to as many updates and position set ups as possible as I come across them as several have hit alerts this morning, FSLR, IYT, AAPL, MCP (that's a different trade, but looking better and better), XLF and FAZ as well as COF all triggered this morning so far.

More to come as it pops up.

A.M. Update

We've seen a fairly flat overnight session for US Index futures in front of the F_E_D, but after a lot of horrible macro economic data and nearly 2 weeks of consecutive declines in the Asian markets , a record stretching back to 2001, yesterday's PBoC Injection of $500 bn CNY to 5 major Chinese banks for a 3 month period got the liquidity train to leave the station taking Asian stocks higher. The Shanghai Comp closed +.49%, Hang Seng +1% and Nikkei -.14%.

Some now think the PBoC may have been acting in advance of the long "Golden Week" holiday in early October, anticipating rising cash demands. In any case, this isn't a large sum compared to the trillion CNY in loans created by Chinese banks every quarter and it has a 3 month shelf life.

Also of note as Europe trades mostly green at the moment is the German 2 year note issuance this morning of $3.34 billion Euros with enough demand to send the yield negative 7 basis points (yield =-.07%) , yes a negative yield and new record low whether that because traders think the ECB will change its charter and monetize sovereign debt and traders are trying to front run such an event (although I doubt German debt would be the first they'd pick up) or more likely a flight to safety trade is on and willing to pay to keep money out of the market and in the safety of German Bunds, with a negative yield, you are paying for someone else to use your money!

The main event of course is the F_E_D and Jon Hilsenrath of the WSJ (unofficial F_E_D mouthpiece) who created a little dust up yesterday in the markets saying the F_E_D would NOT remove the "Considerable time " language, backs away from that today saying it was a best guess and only those in the room know.

As ALWAYS, beware the F_E_D / F_O_M_C knee jerk reaction just after the policy announcement, sometimes lasting days. This almost always happens and is almost always faded, but it may be useful in some entries depending on the outcome of the policy statement at 2:00 p.m. EDT and the Yellen press conference at 2:30 in which she is likely to come off more dovish no matter what the policy statement says, so prepare for two possible  knee jerk reactions.

Finally I wanted to show you something quickly as I had mentioned Monday night that 47% of the NASDAQ Composite stocks are down at least 20% or more, a technical bear market for those stocks with the average decline off the highs being -24%. The Russell 2000 has about 40% of its stocks in a technical bear market with declines of more than 20%, with an average of -22%.

I have talked a lot in terms of the market being like a pier over water in which we stroll on and look at how well it's doing, how high it is, but below the surface the pilings that support the pier have been rotted away, creating an inherently unstable structure.

3C has shown us this process for a long time, it takes time for stocks to distribute in to higher prices and then top and roll over to the point that they are down around -24% and nearly half of them, but Market Breadth shows us this in hard factual numbers.

For instance, when a majority of stocks are above their 40-day (like a 50-day ) moving average, you are likely in a bull market and the averages should reflect that. Take PCLN...

 To the left PCLN is clearly in a bull market, above its 40-day moving average and making higher lows and highs, but looking at it now, it is below it's 40-day, but only down about 14% off its 2014 highs, the stocks above are well over -20% meaning they have moved to stage 4 decline while PCLN is close, it's more appropriate to consider it a stage 3 top, but it clearly doesn't have the ability to support higher prices as it did in 2013, which is what 47% of NASDAQ stocks are doing or actually much worse and 40% of Russell 2000 stocks. This is why I keep reffering to the market as a high pier with rotted pilings.

When looking at the Percentage of all NYSE stocks Trading Above their 40-day Moving Average, the higher lows have stopped and the average highs of 75% have disappeared, yet the market (the SP-500 in red) looks very different, as would the NASDAQ Composite, they look different on top of the pier than they do below, but these breadth readings are reality.

I found something interesting yesterday as we consider High Yield Credit traders to be some of the smartest money out there. Take the same indicator and replace the SPX as the comparison symbol in put in High Yield Credit and see what you get...

The Percentage of stocks > 40-day moving average and HY Credit or smart money move almost in tandem, what does that tell you about the long distribution process we have seen, the ugly indicator readings and nearly half of the market in NASDAQ and Russell in an over 20% down bear market right now?

It tells me that the high and shiny pier we are standing on is not as stable as it looks and really is a marvel of F_E_D engineering, but the F_E_D engineers are backing out of taking care of this market,  smart money has known that, this is why we have seen distribution for so long, this is why nearly half of those two averages, making up a large percentage of the market are already in bear markets.

The F_E_D is important today near term, but the course has been set already, don't pretend it hasn't because the SPX hits 2000 or the Dow hits a new high, we are nearing a majority of stocks that disagree. The age old question, is it a stock market or a market of stocks? Ultimately the market of stocks wins.