Leading Indicators- The Week's Biggest Developments

Here's a  look at Leading Indicators and the biggest developments of the week. If I have time, I'm going to try to explain why the saying "Credit markets lead, stocks follow" in a subsequent post, but as you probably know, the last two hours of op-ex Friday often gives me some of the best data of the week so I'll do my best, but I will cover it because HY is screaming and stocks will follow.

In my opinion the biggest developments of the week other than the re-introduction of volatility the last day or so (not today) as I remarked earlier in the week, "Volatility tends to slowly die down, but from low levels it explodes". If we look at volatility in its most common measure, the VIX, high volatility is a high VIX which trades opposite the market, meaning high volatility often is the result of a sharp market decline.

The real developments though have been accumulation in VIX futures well above and beyond any divergences I can recall this year including the negatives at the October lows before the rally started.

The other interesting indication is Treasury bonds accumulation, if VIX futures are the "Flight to protection", Treasuries are the "Flight to Safety", as I have hinted at this week and specifically last night, I think we are on the cusp of a major treasury rally, again they tend to trade opposite the market implying a sharp market move down which is something I have expected since we first got wind of accumulation for the October rally nearly 2 weeks ahead of the actual rally's start.

Take a look...

THIS IS ONE OF THE MOST SIGNIFICANT MOVES IN ASSETS THIS WEEK, THE CRUSHING OF THE MARKET RAMPING LEVER HYG, (High Yield CORPORATE Credit), which just sold off sharply over the last 3 days.

 Looking at Pimco's High Income (Credit) Fund in green vs the SPX in red, note the absolute carnage in HY Credit.

I'll try to cover this in greater detail so the mechanics are more clear.

And Pimco's fund in green vs the SPX over the course of the October rally which started at the green arrow. Anything look familiar? Almost every Leading Indicator looks similar to the dislocation or divergence between Pimco's High Income Fund and the SPX, meaning all have deteriorated at about the same time ( a VERY LEARGE dislocation) and all very sharply, much stronger then the leading indicators at the October lows which caused us to try to anchor expectations by saying this was going to be a face ripping rally that will have you scared even though you have advance notice days before it started", followed by the challenge to "Book mark this post and come back" as you'll see, the rally will be that strong you'll feel fear to short in to it, which is something no one at the time was thinking as sentiment was as bearish as it could get. No one could imagine even a bounce, much less this kind of move, so what does that tell you about the size of the current leading indicator dislocations?

 HYG's 2 hour 3C chart and long term distribution, it is especially sharp right now at a new leading negative low.

 HYG 30 min from in line with 3C confirmation of the uptrend at the green arrow to a leading negative divegrence in June and a worse one now.

Just looking back at past posts...

July 25ths Daily Wrap post, this is right at the SPX top before sharp decline in to the end of July and about 15 days before the August rally started...

"High Yield ETFs and funds have seen huge outflows the last month, THIS WEEK SAW THE LARGEST OUTFLOW FROM HIGH YIELD FUNDS  IN MORE THAN A YEAR! Much of the flow has gone to low yielding, defensive Investment Grade Credit."

August 14th's Daily Wrap just as the August rally was starting the next day or two...

"Lastly, as we moved toward a base/bounce I noticed some inflow (small) in to HY credit which I figured was for a bounce "


And this chart and commentary from August 18th's Daily Wrap... just as the rally got started for August...

"Here's the massive outflow. The market cannot stay up with HY credit falling, thus the saying, "Credit leads, stocks follow". You can see the tiny inflow last week for the bounce."

And from our Sept 12th Important Market Update which was going in to the August cycle's head fake move and change from stage 3 top to stage 4 decline with an SPX decline in to the October lows of more than 8% and a Russell 2000 decline of more than 11%...


"According to Lipper Data, for the week ended Sept. 10 US High Yield bond funds saw an outflow of $765.8m , which is the second consecutive week of outflows as the previous week saw an outflow of  $198.1m. I think it's pretty clear to see that HY fund flow (much more coming out than what went in in late July/early August, is leading the market and pretty well synced with assets like High Yield Corporate Credit (HYG)."

It's obvious that while the trend is hugely toward outflows from HY credit, we see small inflows for bounces or market lever support such as HYG just before a rally starts.

HYG's 15 min chart in to the October rally with a sharp leading negative 3C divergence with the sharpest 3C decline the last day (yesterday) at the red arrow.

The longer term HYG/SPX correlation with HYG supporting the SPX through most of 2013 and as of June when huge outflows from HY Credit began, look at HYG's leading negative dislocation from the SPX, they are literally moving in opposite directions with the SPX making new highs and credit making new lows with large divergences at each SPX pivot high. Credit markets are much bigger and more sophisticated than Equity markets, they are telling you two different things, which do you trust?

And this week we have seen VIX and VIX short term futures outperform the SPX almost every day. Here's VSXX, short term VIX futures vs the SPX just today, I have inverted the SPX prices (green) so you can see the natural inverse correlation and differences in relative performance.

 At the green arrow VXX is moving as the correlation would suggest, in line with SPX, but today for a 4th consecutive day, VXX outperforms the SPX as VIX futures are bid.

 The spot VIX has also been outperforming the SPX all week, again SPX prices (green) are inverted. Note the SPX trend is nearly flat through the week while the VIX's trend has been up, this is because protection has a solid bid under it, demand = higher prices.

Not only is there a Flight to Safety, but a Flight to Protection". Why do you think large caps outperformed small caps yesterday so massively?

 And the chart of the week, the 60 min VIX Futures, this is not hedging, this is a HUGE leading positive divegrence/accumulation of VIX futures. Someone with very deep pockets has been accumulating VIX in size that is at least 15 times larger than the distribution at the October lows before this strong rally.

 VXX short term VIX futures 2 hour large picture chart and highest probability resolution for price leading positive at the move up (in VIX-down in equities) that led to the October low in SPX (at the top of this move) and the current leading positive divegrence, even higher and stronger.

Note the head fake move at the yellow arrow just before the upside reversal.

 UVXY 2x long VIX short term futures 60 min chart with an impressive divegrence now, again note the stop run/head fake move at the yellow arrow just before the last reversal to the upside.

I suspect some of the market action seen this week including AAPL is such a head fake move, you know the concept.

XIV, inverse short VIX futures, this moves with the market unlike VIX, yet look at the distribution at pivot highs and the lower lows in price vs the SPX as well as the sharp leading negative divegrence this week.

VXX short term VIX futures 30 min, again the head fake move before the last rally (yellow) and the current positive, much like actual VIX futures above.

XIV-the opposite of VXX above, again at 10 mins showing strong distribution this week.


Note the head fake move just before the downside reversal, this is the same time as the head fake move in the SPX in September as the August cycle transitioned to stage 4 decline.

XIV 5 min leading negative especially strong this week.

VXX short term action looks like a near term pullback before it launches higher, perhaps a head fake move/stop run?

And of course one of the other big developments of the week, the VIX buy signal on our custom buy sell indicator, only the second signal of the year. 

 VIX sell signal at the SPX's October lows and a current buy signal, more interesting, look how VIX has performed since the buy signal...

It has been trending up this week with the buy signal marking the week's lows on Monday.

30 year rates...

 As shown earlier, they not only called a top in yesterday's intraday SPX move in the morning (red trendline), but are leading negative today.

 Rates move opposite treasury bondx, this is the 60 min 30 year Treasury bond futures with another leading divegrence similar to VIX futures.

 And the 20+ year Treasury bond fund, TLT with a 60 min leading positive divegrence.

The 2x inverse TLT, TBT with a matching negative divegrence as confirmation, the green arrow being the October lows and small accumulation there.

TLT 10 min with October lows at the green arrow and small distribution compared to the positive divegrence now.

And the inverse TBT with a confirming opposite leading negative divegrence, with notable weakness this week.

TLT 3 min looks like it's about ready to fire...

10 year yields also leading SPX price (green) lower today

While the 10 year treasury Futures lead positive.

And 5 year yields leading the SPX lower (green), while...

5 year T-bond Futures show a leading positive divegrence. Remember bonds and yields move opposite each other and yields tend to pull equity prices toward them like a magnet.

As for professional sentiment...

 Again we are seeing it sell off vs the SPX in green and the trend...

This is since the July decline and the October lows and rally, there's a very clear professional sentiment divegrence.

Market Update

Looking around this morning, it seems like yesterday's late day intraday 1 min divergences were in fact likely both a move to SPX green on the day/week and VWAP as well as bringing price to the options expiration max pain pin level as prices in the averages have not strayed far from yesterday's closing prices and the 3C charts seal the deal.

For instance...

 Yesterday the SPY saw a negative divegrence on the a.m. highs as well as some other divergences like 30 year yields. The late day positive that I saw and posted here Volatility Ahead Part 2 seems to have been much less about volatility and just getting the SPX green for the day and the week as it had been testing red, as seen in last night's Daily Wrap , the move was more about those two things as price closed at VWAP and apparently about the Max-Pain op-ex pin, which as almost always, opens and pins right at Thursday's close, you notice we haven''t strayed too far from yesterday's close today.

The A.M. Update this morning expected very little price action and more max-pain op-ex pin behavior as 3C was in line with price, that has continued as you see above in ES futures/SPX E-mini futures as well as NASDAQ and Russell 2000 futures...

TF- 1 min R2K futures...

 Even the HYG divergence has returned to in line this morning...

And the TLT divergence that looked like it would be headed lower was just to get it to the pin area, note yesterday's yields spike around a p.m. were not a move for the averages to follow, but rather a move toward the low end of TLT's accumulation zone and as mentioned last night, the move was accumulated as seen above. The yellow trendline is yesterday's close so 20+ year treasuries have had very little movement.

VIX was also included as it looked as if it were to come down, but only to the area of yesterday's close with a slight negative this morning as it has been a bit above yesterday's close.

The intraday internals are similar to the last several days, very narrow, very thin, trendless...

 TICK is very narrow again, but the spikes have been to the downside.

Although everything looks like an op-ex max pain pin today, there are still signs things are deteriorating, there's still a message from the market...

 Take the SPX/RUT Ratio Custom Indicator, it has been right on with price moves, yesterday it called a top in early SPX action as I mentioned above (as it was in several indicators), but right now it is calling for lower prices, just follow the tredlines and where prices and the indicator are relative to the trendlines, SPY owes some downside according to this, but it's in a op-ex pin for now...

30 year yields also called a top yesterday morning in the SPX as they refused to make a higher high and again, like the SPX/RUT indicator above, they are calling for lower prices as well, but again, right now Wall St. isn't going to give up all the premiums they wrote by letting the max pain pin slip.

There are other indications as well, many were already seen yesterday in Leading Indicators, but a quick round up...

Like the macro trends on the 60 min charts, the near term 5 min charts, suggesting timing is right there show the $USD getting weak, the Yen getting stronger and the Euro getting stronger which will only weaken the $USD more...This should also have the effect of knocking the USD/JPY down as its macro trends indicate as well.

 $USD 5 min negative

Yen 5 min positive

Euro 5 min positive

The value in these shorter term charts is the macro charts, the larger picture that show the path of highest probability which eventually the short term charts should follow as they are now, take the longer term $USDX and Yen macro charts for example, both suggest the USD/JPY sees strong weakness...

 $USDX leading negative

Yen leading positive.

These are not waiting for additional strengthening or weakening, these are huge signals over a long period, they can and should fire off nearly any minute and these are the types of signals and confirmation that I don't ignore and for very good reason.

The averages are far beyond there which may want to cause you to dismiss such charts as mistakes, the fact is they are at the most serious divergences of the year and are easily confirmed using simple breadth charts that have broken down and showed more stocks trading lower than higher during the same period. What these charts are telling us is the move to come is well beyond the emotional intensity and percentage move of the October rally which was a means to an end, not an end.

 SPY 30 min

QQQ 30 min

I don't see charts like this very often, I see them fail even less often and the moves they make are beyond my immagination in selecting downside targets. Increasing volatility as we have seen this week just tends to make the actual break much quicker and more unpredictable, this is why I have ZERO problem maintaining my short positions. This isn't information the masses have, they see a new high and a strong move and assume that's institutional buying, if it were, why did we see institutional buying up to 2 weeks before this rally and were able to not only call the rally within 3 days, but call the intensity of the rally due to the size of the institutional buying?

We also called the reason for the rally, put simply, as I said near the lows, "I get nervous about calling a top being in when so many other people are saying the same, Wall Street often flips the script when too many people are on the same side of the trade, they can't make money in a zero sum game when everyone is on the same side of the boat"...
Which was the case at the October lows.

Additionally...

VIX looks like it's going to put in a huge upside move while Treasuries, the flight to safety trade look to do the same...

 

BABA Trade Set-Up

This week has been one clean set up for a BABA trade, however what type of trade depended on how BABA's price action played out.

Monday November 10th of this week our first post on this new BABA possible trade was posted, Alibaba (BABA)

I'd encourage you to go back and read all 3 posts which I'll link to,  not only if you're interested in the BABA trade, but for the concepts that are strong, proven and can be used with any kind of trading on any time frame and in any asset, more tools for your kit.

The gist of Alibaba (BABA) was that BABA made a "seemingly bullish upward acceleration from it's 60 min 30-bar moving average which has defined the recent uptrend and more importantly broke through the top of the up channel it had been in. Note I said "seemingly bullish" upward acceleration, that's because this is almost always a red flag or warning that the trend is about to change. Note that a trend change doesn't always mean from up to down or vice versa, there's a 3rd trend which is lateral or a range, however in this case a Channel Buster usually makes a sharp move lower to the bottom of the channel and often below it. I also said that we could check out BABA's health which has been stellar, on a pullback and see if it is worth a long play in a pullback as well as being a possible swing short on the pullback trade itself and if it's not healthy, then we can start to look at a larger , longer term topping set up.

Tuesday I followed up as the day after our first post (above) calling for a pullback, BABA saw the second biggest decline in its history, the pullback had started. That post of Tuesday November 11th is here, BABA Follow Up and the gist of this post was that the alerts set for a pullback had triggered and the next thing I'd like to see is BABA turn lateral in a range for  several days so we can identify whether BABA is likely to be a good swing short on a pullback move and what the probable targets where. I said if the 60 min 30 bar moving average was broken, then price should drop down to the 60 min 50-bar moving average,  which has come to pass since then.

Wednesday November 12th I posted another BABA Follow Up which reviewed what we had covered so far,  it showed the 30-bar support, it showed the range we hoped to see develop forming, it put higher probabilities on BABA behaving like a typical Channel Buster and making a sharper, deeper correction to either the lower support trendline of the channel or as so often happens, a break below that trendline with a pullback under the channel before BABA has a chance to right itself. The post also updated the Trend Channel Stop and the 3C charts which strongly suggested the next day (Thursday) would see lower prices which it did, down -2.84%.

Now we are pretty near decision time. I believe that BABA still offers an excellent pullback trade, this is one of my favorite because price comes to us at a discount as well as with good timing and it has to prove itself on the decline via 3C positive divergences to show there's still institutional interest in being long BABA, if that's not there, we don't take the trade, it's a real "Prove it to me trade" as well as letting the trade come to you rather than chasing it. Of course there's also the higher probability deep pullback swing short to consider also.

At this time I suspect a typical Channel Buster pullback is probable, but as I often remind myself, a probability is not the same thing as a high probability, low risk trade set up so we'll take a look and see what the trade set up for the swing short would be from here and you can decide how to use the information.

Updated charts...

 BABA has officially broken the wider Trend Channel (60 min with the standard deviation adjusted by changing the "Width" setting from 10 to 20). The break of the Trend Channel (blue) which has held the entire uptrend came yesterday with the stop at $115.45 and the close at $114.84. I prefer to stop out on the Trend Channel on the closing price or break of the channel rather than intraday unless using a shorter channel like 15 minutes. This increases the probabilities of a deeper pullback as the Trend Channel is constructed to allow enough room for a normal consolidation in the trend without stopping out.

 Our 60 min X-Over Screen is VERY close to a stop out as well. It too has held the entire trend up with only 1 waiver at the orange arrow, but this is why we use 3 indicators, to avoid price moving average whipsaws or false signals, the other two indicators stayed long. However price has crossed, the middle window custom indicator (yellow) is crossing as I type and RSI at the bottom has criossed since loading this chart. Again, this suggests a deeper pullback.

The yellow 60 min 30 bar moving average used to define the trend was broken as expected with the next move to be to the blue 50-bar moving average which happened this morning as expected, price is stuck at that moving average right now which is not uncommon.

However most importantly as a concept and for a swing short trade on a pullback, the "seemingly" bullish higher upside Rate of Change (ROC) was indeed a warning signal just as we posted Monday before any pullback had started, a warning that the trend was about to change and at minimum it has changed to lateral. However with Channel Busters, the momentum and the failed breakout typically sends price to the lower trendline and more often than not, below it , especially once price moves back in to the channel as it has this morning.

 The longer 30 min 3C chart is still strong as I said on Monday, but since Monday it has put in a small negative divegrence that is along the lines of a pullback.


 The 10 min chart we saw Monday suggesting a pullback remains negative and price has ranged laterally as we hoped to see.

During that time the 3 min chart has led negative to the downside even more, suggesting a higher probability of a deeper pullback. You can see Monday the 10th highlighted when we first suggested a pullback as the trend looked stronger than ever, but as always, price is deceiving.

 The intraday chart shows a pullback/negative divegrence and is pretty much in line today which would be typical of an options expiration max pain pin. As already mentioned, a move to the downside is highest probability with a move below the channel becoming high probability, however that's still not the same as a high probability/LOW RISK entry/trade.

Here's what I'd like to see, although you can use the information however you see git, some of you may see some option strategies that look good, some may want to take the trade with a stop above the recent range, this is what would draw me in...

I'd like to see BABA make a head fake move above the recent range that developed this week as the pullback started Tuesday. I'd like to see a move above the recent range (yellow arrow) which reduces risk and gives a better entry price and then set a stop above that day's intraday highs and look for the move below the channel (red arrow) to the target area of the yellow box, depending on whether we get such an upside head fake move and how strong it is, I may use Put options too increase the risk:reward ratio, if premiums on puts are not significantly reduced by such a move, I'd just short BABA with the same stop, I figure there's at least 15 to 20 points under a scenario like this and often the moves below the channel can be quite extreme before correcting themselves so a move to the psychological magnet of $100 would not be out of the question at all, with approximately a 20 point move for a swing trade and more for an options trade.

I'll be setting price alerts.

If you are more conservative, you might wait for a pullback and see what BABA looks like on the pullback, it may make for an excellent long entry or it may tell us something different about BABA's health leading to a different trade.

A.M. Update

Good morning.

Yesterday's late day positive divergences had looked to be more about op-ex than anything, getting the market to where it usually opens on Friday, right at Thursday's close and pins there for most of the day until about 2 p.m.

I posted a lot of charts all in the 1 min range that looked like this late yesterday...

With 3C, the closing divergence is typically where price action picks up on the next open, today, however after looking everything over, it's hard to say that divergence was not just a late day run to green and VWAP.

Either way, this morning the market looks like it is most likely to be pinned, index options look like the following ES chart...

 nearly perfectly in line, not suggesting any major movement.

Almost every chart looks the same. It looks like there may be some later USD/JPY weakesss building in, but not quite yet

Technically the USD/JPY is divergent here, but the $USD made a sharp move higher and I'd give it some time to let 3C catch up before calling this divergent, but from the looks of things, that may be the last sharp move up of the day before at least a downward correction in the currency pair.

Watch for more volatile action around 2 p.m., even though the opening volatility/reversal is quite common, this is a boring Friday op-ex max pain pin, at least until 2 p.m. unless there's a bunch of call contracts at these levels , then things may be interesting. I'm expecting a dull morning by the looks of futures charts.