USO Update

Last week I mentioned the lateral trend in USO was likely to create a head fake move below the recent range and support, I followed up on this yesterday in USO / Oil Update.

Before I forget and since we just covered the $USD, one of the historical correlations is the $USD and Dollar denominated assets moving inversely, at least on a historical basis. So if we were to get a sharper pullback in the $USD, to make up for the $USD which is worth less, the price of oil would adjust (arbitrage) upward, if we were to for some reasons have a sharp, unexpected move lower in the $USD, it might be enough of a catalyst to trigger a massive short squeeze.

Let me reiterate that based on the size of the lateral stage 1 base (which came after a gap down on volume, looking like an exhaustion or capitulation event)  as well as the 3C charts in the appropriate timeframes, I do NOT think oil is on a course to reverse trend to the upside, but I do think it has a strong chance of a good bounce/counter trend move that is helped out by a short squeeze.

In any case, the updated /CL and USO charts quickly and the set-up I'd most like to see.

 These are the /CL charts (Light Sweet Crude oil Futures). This 30 min chart shows a strengthening positive divegrence which I try top represent with the size of the white boxes I usually use to indicate accumulation, I didn't want to draw the divergences on the chart because they are clean and easy to see and I want everyone to get use to picking out divergences as they are useful in just about any indicator you can imagine.

 The 15 min chart is showing the same, but more detailed/less history, positive divegrence from the 30 mi chart.

As is the 10 min CL chart in the same area.

Even the 7 min chart is leading positive so it looks like there's a good strategic set up there, from here it's more about tactical entries.

There's been an obvious change in character in USO's trend, from down to an increased downward ROC ending with a high volume gap, typical of an exhaustion move followed by a lateral trend, usually a base of some sort.

 This is a 30 min look a the same area, there's an area of support (I view support and resistance as areas rather than exact numbers, although I understand exact numbers are useful in analysis as traders make it a self0fulfilling prophecy, however when you consider what moves the market, "areas" are more useful than specific levels which are often used against technical traders, especially those placing orders (stops/limits) on the books.

What I'd like to see is a head fake move BELOW the range, we saw that in the yellow box, but we didn't see any significant move in volume. If we do, that's most likely where I'd consider a USO long entry to likely be the best timing, of course we'd want to confirm it is a head fake move, but based on the longer term charts above, it would be a high probability, thus an entry at lower prices, lower risk and better timing as head fakes often directly precede a reversal, would be my ideal scenario.

 As for USO, you've already seen the longer term primary trend charts, we see a positive divergence at about the 30 min timeframe, before that the downtrend was being confirmed by 3C (green arrow) making lower lows.

The yellow arrows represent a head fake move below the range (on higher volume) and then back above, setting a small bear trap, picking up shares on the cheap and setting up the initial momentum spark (short squeeze) from a small bear trap.

 The 15 min chart is still nice and positive with a leading positive and higher 3C lows.

 The 5 min chart, also looking good. Usually when timeframes around 5 min and then 1-3 min are all positive and we have a full house, we are close to a move.

 As far as the possibility of a head fake move, this is an intraday 2 min chart, it is in line right now, but as you know all new divergences start on the earliest timeframe.

Looking at the same area with a 1 min chart, we have a small negative forming suggesting a pullback toward our head fake area is a developing probability.

The 1 min /CL chart is showing the exact same thing.

Perhaps Another Surprise, $USD

The consensus is the $USD is strong and it will continue to strengthen through 2015 as the F_E_D normalizes policy/interest rates.

Admittedly the $USD is not in a vacuum and the number of currencies with moves of 10% over the last 12 months is near historical highs, some much, much more which effects the $USD /$US Dollar Index.

However, while the trend has clearly been up and a few days don't necessarily make a trend, I'd imagine just about everyone is long the $USD and short the Euro and Yen, thus that could be too many people on one side of the boat and you know how the market doesn't like that as it's essentially a zero sum game, someone has to lose for someone else to win.

I'm wondering after all of the earnings (bad) that have been blamed in part or large part on the strong $USD, would like to revise his stance that a strong $USD is good for the country? Or how about the "Weak oil" narrative, that hasn't been working out too well either.

I found these charts interesting, especially coming before the F_O_M_C tomorrow, however it's not helpful as a piece of the puzzle with regard to the broad market right now, it really creates more questions than answers. In any case, here's a look...

 Daily chart of UUP- DB USD Index with a large positive divegrence/base and in line thus far or price/3C trend confirmation.

 The 6 hour chart shows the same thing, a huge positive divergence at the base and in line on the up trend.

And the 4 hour chart shows the same.

Even the 30 min chart is in line, so we've essentially established there's a reason the USD keeps heading higher, underlying trade is supportive.

That's why some very recent changes are of interest. Now nothing goes straight up or down and there has been a lot of currency devaluation sending the $USD higher, to put together all of the different moves and how one effects another at this point is really best left for an arbitrage computer trading program and I may not have even thought much of this if it weren't right in front of the F_O_M_C tomorrow.

The conventional wisdom is that the F_E_D is not going to hike interest rates this soon in the year, the closest thing we probably got to guidance from the F_E_D was Yellen's "A couple" meaning 2 , meetings, so the second meeting in 2015, but there were a ton of caveats with that as well.

It's kind of difficult to believe that the F_E_D would hike with oil so low as they did say they'd hike before they hit their 2% inflation target  so long as they felt reasonably assured inflation was on track to move toward that goal.

There have also been some pretty large firings/lay-offs recently and then of course there's the devaluation across the globe and the strong $USD, despite what Jack says, I think the F_E_D would prefer that the $USD wasn't so strong, rate hikes and policy normalization should only make it stronger. 

At the same time, policy normalization is likely not going to be helpful for the broad economy and probably less so for the stock market.

On the other side of the coin, things are pretty ugly and getting uglier, not just in the US, but globally and as the Bank of International Settlements (BIS) said not too long ago and I paraphrase, "Leading Central Banks (read F_E_D) don't have the room on their balance sheet to deal with even a garden variety recession".

So you might make the case  that policy normalization is needed to give the F_E_D elbow room, you can't go much lower than ZIRP.

I could go back and forth with this all day, perhaps with rising rates they think it may force inflation which would be a risky gamble, it usually doesn't work that way, but without getting in to the inner workings of my mind, I've considered a scenario in which that might be possible.

In any case, a sliding $USD right now, just in front of the F_O_M_C would tend to suggest that something on the dovish side is expected, whether taking a pass on rate hikes at this meeting would be enough to consider that a dovish move considering market consensus doesn't expect a rate hike at this meeting anyway, seems doubtful.

I really can't speculate much more with any profound insights so back to the charts...

 Here , recently on a 5 min chart we see a negative divergence and price has stutter-stepped since then.

 The 1 min chart shows a much sharper negative divegrence, although it would as a shorter term chart and less powerful in signals. I avoided drawing on the chart just because the divergence is SO obvious.

 As for the $USDX futures, this is a 60 min chart, it's not a crisp, clean divergence, but there seems to be a negative tone in the area.

However this 30 min (shorter term like UUP's 5 min), has a very crisp, clean negative divergence. It's not huge, it's also around the same area as the market's negative divergence from last Friday, this doesn't make a lot of sense on a straight level as the historical legacy arbitrage would suggest a lower $USD means higher oil, gold, commodities in general and equities, yet both are negative i the area.

Playing devil's advocate though...

 This is a chart of the SPX (green) vs. the $USDX (red). In the white box to the left, you see a more "normal" historical legacy arbitrage in which the $USD and equities move opposite each other. To the right, you can see that has changed. Granted, there are a lot of other circumstances during the period.

A closer look at more recent action, the trends aren't exact, but generally the same. I realize that "Correlation is NOT causation".

Again though on the devil's advocate side of things, the SPX and $USDX are pretty darn near in line during the mid to late 1990's and then after the Tech top in 2000.

Just as we have seen Treasuries rally with the market  which is not a normal correlation.

Still, the point is the recent change in the $USDX, this is a 15 min $USDX chart. I think the UUP charts above show things a bit cleaner.

As I said, thus far this is worth looking at, but is not especially helpful in putting the pieces of the puzzle together without getting real creative and that's hard to justify on such a short term movement compared to the longer term trend, but the situation in itself appears to be a significant problem and F_O_M_C / F_E_D tightening should only make that worse.

Here Comes A Bounce

There's not much of a base, there's not much of a positive divegrence, so we'll see how long this can go, either way, movement is good, it tells us a lot about the strength or gas in the tank.

Market Update: Bounce? Gap Fill?

Normally this early in the day with a move this big (NASDAQ 100 -2.25%), I'd say we should expect a bounce and probably be looking for evidence for a fade trade (fade this morning's weakness on a gap fill / bounce.

Honestly, what happened overnight is still an unknown, I don't know if it's some sort of leak or perhaps some sort of head fake so I'm being cautious here and I still want to keep my longer term positions on the side of highest probabilities and that has clearly been bearish.

There are some strange charts that I haven't quite put together yet, there's some REAL weakness, but there are also some contrary indications as well and some surprising indications. There's also charts that are showing clear relative strength disparities such as the Russell 2000 (and futures) vs say the NASDAQ 100 (and its futures). Either way, Russell is still maintaining better relative performance as we expected going in to this week from Friday's Week Ahead post.

 Intraday NYSE TICK (1 min) from yesterday afternoon to today with a late ramp which we saw in HYG near the close, presumably to keep as many averages as close to unchanged as possible rather than red and this morning's decline which printed at -1300 on the open, an extreme, but not an extreme extreme; I was surprised this was so low considering.

Another look at the TICK from the same period shows an intraday uptrend in breadth.

As for my custom TICK/SPY Indicator, you see the short term capitulation event to the far left right at the base from 1/14-1/16 and then breadth move up and then kind of stall, reminiscent of the last bounce attempt.

 This is the 1 min intraday ES chart with the full overnight decline and a relative positive divergence forming right in the area now, however there's some strange indications on the other Index futures...

 This is TF / Russell 2000 1 min intraday which I'd say is closer to in line and maybe slightly leading negative and then we have NQ...

NASDAQ 100 Index futures with no positive divegrence at al, but near perfect downside confirmation with the Q's being the laggard, somewhere around -2.3% right now. However they are moving laterally so that gives them a better chance at building something they can bounce off, but without a positive divergence, I'd be very careful.

 This is the 1 min VIX Futures with a positive divergence, interestingly, right at yesterday's cash close.

The SPY daily chart is showing its relative lateral movement intraday with a Star (daily) candlestick, although volume is not very high , which i would take as a short term oversold condition that would most likely bounce, but we still have time.

This is where things start to get strange and I'll post some longer term charts that show some of the heavier damage that has been done, but this SPY 1 min intraday chart shows a negative divegrence Friday which guided our early Monday forecast for the market's behavior and additional negative divergences yesterday which were posted yesterday a couple of times including here, Market Update.

I thought (yesterday) these would lead to a late day sell-off, apparently they led to a decline today so it seems whatever we saw last night, may just have had roots in yesterday's trading activity, maybe even Friday's (this is if there's some leak or some insider knowledge that's not public).

In any case, you can see we are in line right now, although if the market can keep up the lateral trade, it has a better chance of forming a positive divergence and bounce, I'm not sure I'd want to be involved though at this point until I see the rest of the data as there are peculiarities as mentioned.

 For example, this 3 min SPY chart is in a relative positive divergence, it is similar to the ES intraday positive divergence, but doesn't make a lot of sense considering the price action.

However the TICK/market breadth doesn't make a lot of sense either considering market action except in the case of market weighting, only this time being used against the market, take MSFT which is down around -10%, that has a lot of weight on the averages of which it's a component.

 And back to strange again with a 5 min SPY chart, the positive divegrence at the base from 1/14-1/16 and a pretty clean and clear leading negative divegrence that seems a lot more in line with price action than the 3 min chart above. Being a 5 min chart and the 3C indicator sections chunks of volume, this would indicate more negative activity in larger chunk trades. I consider the 5 min chart the earliest timeframe in which we see the large intraday institutional activity.

 QQQ 1 min is negative and in line, no surprises here, but it does have some of the same strange elements on multiple timeframes as the SPY, however where it seems to count the most, on longer charts, there's some serious damage which I'll post next.

 And intraday 1 min IWM, leading negative, similar to its Index future.

I realize some of these charts are a bit old for intraday standards, but nothing has improved since their capture, in fact the IWM 1 min looks even worse now.

A more current look at the exact same IWM 1 min chart, note the worsening intraday divergence leading negative even deeper.

 The SPX:RUT Ratio indicator on the whole is negative, but today looks positive, this is because of the relative difference in performance between the SPX and Russell 2000, which I'd normally not be concerned with, but in this particular case, the charts are so different in certain timeframes, it looks like we can and will see massive relative performance divergences, just look at the market yesterday, Russell 200 vs any other average.

HYG intraday 1 min is still close to in line, probably "trying to offer support", however as I will post and as mentioned above, there are longer/stronger charts that have seen a lot more serious damage and I think you need to see those as well.

Quick Update

Before the open this morning you may have seen the NYSE invoked rule 48 for Extreme Market Volatility, in which mandatory opening indications are not required. I didn't read the whole note as I was busy looking at other markets and indications, but I wouldn't be surprised if they blamed it on weather in NYC.

In any case, things are not looking better since last night, which really had no news catalyst to send the market lower, but remember we had some very ugly closing charts on Friday and yesterday's charts as posted here, Market Update late afternoon , were not a smoking gun, they weren't pretty either.

Last night's odd signals from Odd ES (SPX E-Mini Futures) Action, posted at 1:15 vs the 2:45 a.m. start of the move in EUR/CHF and seen hours before any possible SNB currency intervention, may just have been the smoking gun. I find it odd that it occurred pretty quickly, pretty severely and right before today's F_O_M_C meeting starts in front of tomorrow's policy announcement.

I'm obviously still checking around as the cash market opens as it takes a few minutes for 3C indicators to catch up to the gap down, but the Dow has lost approximately 475 points since Thursday/Friday's intraday highs to this morning's lows thus far.

What I'm seeing on some of the Index future charts  (same ones that were looking odd last night before this move lower started), interestingly look similar to market performance. As you know from Friday's, The Week Ahead post, we were expecting better relative performance from the Russell 2000 which was the case yesterday and is the case today.

Some of the best looking (on a relative basis) Index futures charts are those of the Russell 2000 futures and as you might imagine, some of the worst looking are those of the NASDAQ 100 futures which is down as I write, over -2% this morning.

I also find it worth noting that the SKEW Index or what is sometimes called, "The Black Swan Indicator" has recently been sharply elevated in to the red zone with a huge 2-day move last week.

As for some of the example charts...

ES 1 min, so far it has been in line with the overnight decline, however there's a possible relative positive divegrence forming which should at first slow the downside momentum, whether it can go further than that, we'll have to wait and see, especially on the charts of the averages rather than Index futures.

 1 min NQ/NASDAQ 100 futures are near perfectly in line with the overnight decline.

The 5 min NQ/NDX futures chart is still leading deeply negative.

As is the 5 min ES chart.

The 7 min TF/Russell 2000 chart is also leading negative in a big way on a longer term chart, but overall, TF looks a lot better than ES and NQ.

This is the ES 15 min chart leading negative which is quite a migration move in the 3C charts in such a short period, but that's what grabbed my attention late last night or very early this morning.

 NQ 15 min leading negative as well, the red box highlighted is Friday's action.

And the USD/JPY.

Something doesn't pass the smell test here, this appears to be a SECOND bounce that has failed prematurely, although "failed" might be premature.

Again, being so close to the F_O_M_C and with SKEW elevated, it's certainly something I want to look at as a possible leak of policy on Wednesday... yes I know the meeting hasn't even really kicked off yet, but as I showed you last week, Jim Bullard's comments from last week were looking for almost the exact same rate hike by 2016 starting at almost the exact same time as an interview he gave on Bloomberg radio 9 months earlier. Bullard has said a LOT of things just over the past 4 months that have been totally contradictory and in some cases in as little as 2 weeks he's done a 180 about face, but this particular bit about where the F_E_D Funds rate should stand in 2016 at 4+% when he becomes a voting member and some mention of a 1st quarter rate hike, it makes you wonder how far out F_E_D policy may have already been charted.

A.M. Update

Well it's good I posted last night's Odd ES (SPX E-Mini Futures) Action, very odd indeed and you see the result of it this morning...

 ES overnight since last night's 1:15 a.m. post, Odd ES (SPX E-Mini Futures) Action

I'm still not sure what it is, some say earnings, currency devaluations, the EUR/CHF seems to be the big one...

EUR/CHF saw a 250 pip move higher on rumors of Swiss National Bank currency intervention, then after the rumors subsided, it lost -2.9%, smashing all stops in either direction, the problem is I posted Odd ES (SPX E-Mini Futures) Action at 1:15, this move didn't start until 2:45 a.m.

So we still have a mystery and now you know why I choose to ride out a bounce and stick with short positions that are in line with highest probabilities when it comes to longer term trades.

I'll be very interested what 3C shows in the cash market and what Leading Indicators show, this is just a little too strange as the F_O_M_C meeting starts today.

More shortly...

Odd ES (SPX E-Mini Futures) Action

I'm not quite sure what to make of this as of yet. I really only see this strange behavior on the 3C charts of ES/SPX E-mini futures, but in 3 timeframes. I suspect the signal may be stronger in ES than NQ and TF because of the obvious higher liquidity even though liquidity is very shallow at this time of night.

I'm not going to assume anything or make too big of a deal of it, but I do want to document it in case something else happens from here. At this very moment, just a few minutes after these charts were captured, we're seeing a little ramp of about 1 ES point in the Index futures on slightly more volume.

 On the 1 min Es/3C chart, the green arrow is the US cash open, the red arrow is the US cash close and the yellow arrow is midnight EDT. Note the very tight range in ES as well as 3C in a leading negative position.

Usually I wouldn't pay any attention to a 1 min chart in overnight futures trade, but it's on several other timeframes and just strikes me as a little odd.


This 5 min chart shows the weakness Friday which was part of our forecast for The Week Ahead post near the close which was looking for...

"As for early action next week, it looks like early weakness on Monday, although I think it will regain some strength in the later part of the day or some time afternoon-ish....

I think the IWM/Russell 2000 outperforms the other averages early in the week "

Both events occurred, even though we saw the opening Futures trade Sunday night (yellow arrow) gap down a bit and then recover right up until the cash open at 9:30 at which time we saw the cash market "Early weakness" that recovered not too long after and of course the dramatic relative outperformance of the Russell 2000 today over the other major averages.

Beyond the chart from Friday that led to The Week Ahead forecast for early intraday trade and relative performance among the major averages, the other interesting feature is the same leading negative divergence seen on the 1 min chart here on a 5 min chart of ES.

The 7 min ES chart also shows a negative divergence at Friday last week right in to the highs and the small gap down on the open of trade Sunday night at the yellow arrow. Again, that odd leading negative signal is in the same place on this 7 min chart.

I don't see anything after a quick look around that would explain it and as of right now, in this thin overnight market I don't want to make to big of a deal of it, but it did strike me as strange enough to be worth a post as this time of night.

We'll see what we have in the morning.