Leading Indicators

Things are making sense, but you really have to work for it...

It has been like torture trying to get anything meaningful out of the charts today (as well as watching the charts today, which is where it gets dangerous as complacency in a dull market is always the calm before the storm), which is somemwhat expected (reversal process) and has led to the early lack of movement, but since the Energy sector divergences, we have seen some movement.

Otherwise, I've been through my watchlists several times looking for intraday clues, while it seems the larger picture clues are shaping up, the larger picture Leading Indicators are in a bad place for the most part.

As an example though of near term intraday clues, as I've been looking at everything, always careful  not to take a chart for more than its worth or as I call it, try not to torture the chart in to telling you something. The Leading indicator, commodities which is responding well to the Energy complex broadly today, has a clear correlation intraday.

Commodities intraday as a leading indicator are supportive of the SPX (green), but with Saudi Arabia confirming new highs in output, Iraq also out today with higher production expectations, what's driving the move in oil/broadly commodities as a leading indicator.

Try the $USD and weakness there today, although I view this as a short term reaction with the larger issues for crude in the near future being the increased Saudi/Iraqi output.

Remember as I posted last night from the April 2nd updates and forecast, we were seeing $USD weakness on the day which I said should be very "Short loved" and I expected a bigger upside bounce which we got, to be followed by a larger downside move, maybe even a lower low now that we have a lower high in the $USD's primary trend.

Why is this much more of an important indication than commodities benefitting intraday and the market to some extent as well from the weaker $USD?  You have to remember our broad $USD analysis as well as the JPY/Yen analysis as it relates to $9 trillion in trumped up AUM via the $USD carry trade and unwind and what that will mean to the market.

If you saw last night's post, Daily Wrap, I covered it again with links to recent forecasts and the $USD's move and more importantly the $USD's correlation to the market as represented last night by these two charts...

 Daily SPX vs $USDX (red) carry trade correlation. Remember the daily $USD 3C negative and the Yen daily 3C positive suggesting the unwind of the carry, to the tune of $9 TRILLION dollars in $USD based carry alone!

Closer term, the $USDX in red has been leading the SPX (green) as seen at the white (positive leading of the SPX) and red (negative leading of the SPX) areas.

If you recall the $USD forecast which I reposted last night in the Daily Wrap, it was for a near term bounce which was in line with the April 2nd market forecast and that was to be followed by a larger downside move in $USD, which has an obvious correlation to the market, but at the possible first lower low in the primary trend (with a lower high already in place), this has major implications for the carry trade and thus the market as the market HAS NEVER responded well to the unwind of the carry trade as that's what finances a big part of the rise in equities and bonds.

The $USDX Futures and the 4/2 $USD forecast of a near term bounce up, which se see followed by a larger turn down which looks like it hit its pivot point at the negative divergence as it hit its highs on 4/13 and has started turning down, the likely reason for the energy complex bounce intraday today.

However the larger issue is above on the $USD vs. SPX daily and 60 min charts reposted from last night's daily wrap, AS YOU'LL SEE, THE $USDX TENDS TO LEAD THE SPX AND WHAT ARE WE LOOKING FOR NEARBY IN THE BROAD MARKET?

As to the larger carry-based concerns that few in the market seem to be aware of (I wish this was as simple as looking at MACD and telling you which way the market was going, it's just not that simple and that's the attraction of Technical Analysis-LAZINESS)...

As I have already posted NUMEROUS times, I'll post again because IT IS THAT IMPORTANT TO LOOK BEYOND THE TREES (intraday) AND SEE THE FOREST (carry unwind of $9 trillion $USD).

 $USDX daily 3C trend with strong confirmation on most of the uptrend, but recent strong negative divergences in $USDX as it makes its first significant primary trend pullback in to a large 3C negative divegrence and upon closer inspection of the daily $USDX chart...

The first failure of the $USDX to make a higher high as it made a lower high (at the yellow "X") and according to our 4/2 forecast, should be making a stronger move lower after the bounce that should have and did take place around 4/2, refer to the 60 min $USDX chart above or to save you some time...

So far since the 4/2 $USDX and market forecast, we have the bounce that was forecast and as to the "Larger" downside move, we have the pivot/negative divegrence that is likely leading to the second half of the $USDX forecast lower on a larger basis, which could easily make a lower low within the 1-day $USDX primary trend, it would also serve as a leading indication for the broad market as you can see from the $USD vs. SPX 60 min chart above, thus the $USD's intraday weakness and Energy sector intraday strength PALES in comparison to the implications of a move lower in the $USD.

CONTINUING WITH LEADING INDICATORS...
Again, market weakness seems to be the theme of the day, even on a dull market day like this, it seems to need short term manipulation just to hold a mixed market that's not far off unchanged (tight range of the reversal process also forecast early this week and in last week's "Week Ahead " forecast of last Friday.

 This is the Spot VIX vs the SPX in green (although I have inverted the SPX prices in green so you can see the inverse correlation, which is made to look identical when SPX prices are inverted-thus showing you the relative strength or weakness of assets compared to the SPX like VIX today/above).

Notice ONCE AGAIN, just like yesterday, the SPX sees a SLAM lower which is part of the short term manipulation of the SPY Arbitrage.  Yesterday I predicted the SPY Arbitrage would be active based on the VIX action, once checked later in the day, it was responsible for supporting half of the SPX's gains, today....

As you can see the VIX is slammed harder in to the afternoon, the SPY Arbitrage becomes more active and is responsible for up to $.75 of the SPY's trade today, although the SPY was only $.55 higher at intraday highs, meaning the SPY Arb. kept the SPY from losing additional ground today without the short term manipulation of VIX, HYG and TLT.

The message of the market once again, as seen yesterday, is there's not enough institutional support to even hold a miserable +.20% SPY gain without manipulating the market to the tune of at least a $.55-$.75 added gain from that manipulation (all short term).

Here's the VIX slam today, you may recall yesterday's.

The VIX slam yesterday on the open and the VIX Whack-a-VIX today, activating the SPY arbitrage scheme.

VXX, short term VIX futures also has seen even worse intraday relative performance, as this is the true asset involved in the SPY Arbitrage scheme (along with HYG and TLT).

I was thinking, considering the reversal process, why would there be a specific, purposeful move to lift the market averages within the reversal process which is typically a tight range? The first thing I thought of is why the reversal process exists... It's to fill position whether long or short before a pivot reversal- the same as we are looking to do- and what does Institutional money use as a reference to grade the fills that market makers and specialists obtain in order to judge whether it was a good fill or not (also whether the market maker or specialist in the specific asset will get further business)? VWAP-"Volume Weighted Average Price" is the industry standard...

Look what happened to ES/SPX-Emini futures just before the cash open today, it dropped well below VWAP, no fills of either selling longs or entering shorts would be looked upon favorably by institutional money so far below VWAP, thus the reason for the Energy based or $USD based move to higher levels. The standard is at VWAP (white box area), a better fill for with transaction is ABOVE the standard deviation of VWAP (green area), which is one of the reasons the reversal process tends to be such a tight range, it's at VWAP. This also tells us something about where we are in the process of this particular move if positions are being filled at the reversal process and VWAP (hint-toward the end).

As for our custom Leading Indicator SPX:RUT Ratio...

Note intraday there''s no confirmation of the market move, which would make sense in the context of the larger signal in the indicator, the LEading Indication for the entire 4/2 forecasted move. I showed last night how it led in to the 4/2 area and is now in a leading negative indication within the overall trend, today just makes that worse-1 of the 3 indications I've been looking for.

Yields intraday

 The 5 year yield moved up earlier to support the market, it got it above VWAP, and has since deteriorated.

The larger leading indication we have been watching for...

 5 year yields negatively dislocated lower which act like a magnet for the SPX and pull prices lower.

10 year Yields

 Again intraday an attempt to lift the market up to VWAP and after that happened yields heading lower.

As far as the Leading Indication for the trend...

 From in line at the April 2nd forecast and first part of the move to leading lower.

30 year yield...

The EXACT same trend as the 5 and 10 year.

Pro sentiment...

 Again our pro sentiment indicators which were in line early in the move as we watched for them to diverge from the SPX trend, have done so for another consecutive day.

HY Credit...

 HYG's 3C chart has been forecasting a move lower in HY Corp. Credit, one of the most over-used short term manipulations in the market. Note the leading negative position relative to the SPX, this is what we re looking for in Leading Indicators.

And HY Credit which fell out of bed yesterday with the SPX showed early support like almost all other leading indicators until VWAP was achieved and then headed down for a second day, dislocating negatively for the second day since the trend started on the 7th.

Again, while perhaps not at the exact pivot considering monthly op-ex tomorrow and the max-pain pin and all of that free money or premium on worthless options expirations, we have been moving consecutively closer. I think if you don't understand the importance of the $USD divergence, go ahead and email me, don't feel embarrassed about the question, it's complicated if you are not use to the carry trade and how it works and most aren't, but understanding this aspect is crucial, especially where we are.

Broad Market Update/Leading Indicator Update on the Way

This is taking a bit as it's a lot, but it's vital to understanding near term and longer term probabilities which are still right along the lines of our forecast, in fact EXACTLY.

XLE Update

I'm not going to assume that I know what happens to the Energy sector if we are right on crude oil. Oil is just one part of the Energy sector which includes other fuels, services such as drilling, exploration, transport, storage, etc. It's a lot more than just oil prices, but in many cases it stands to reason that higher oil prices translate in to higher profits for many of the related sectors.

I know this is a report, but worthwhile...

 Energy is a large sector, yesterday it led by a long shot and the market was up as the major averages all have exposure to the energy sector (SPY green vs XLE/Energy in red).


On a larger overall chart, Energy red lagging the market badly (green).

It was some divergences in UNG that got me looking at energy after the negative initial reaction to the EIA Nat. Gas inventories...

 UNg intraday positive after the EIA inventories decline at 10:30 this morning and then leading positive.

 I looked at XLE and saw the same thing, a positiver divergence at the morning lows and leading positive which has now seen price catch up to in line status.

And the SPY...

The same divergence at the same place,  this is not coincidental,  and in line or leading positive since. USO has "similar" signals, not quite the same as it's missing the morning positive divergence.

XLE after the 1 min chart...

 XLE 2 min larger negative divegrence with this morning's positive "relative" divergence visible. The relative divergence is weaker than the leading divegrence and it makes sense here as the 1 min chart that was leading is a weaker timeframe than the 2 min chart which is relative, the point being, it's a positive divegrence intraday, but not particularly strong as the larger trend is a leading negative divegrence, this is a simple, small bounce within that, but one with enough market exposure to move the SPX.

 XLE 3 min chart from a relative negative to a stronger leading negative.

5 min XLE since the 4/2 forecast where it was leading positive on 4//2 and in to higher prices has seen 3C distribution like everything else to a current leading negative overall divegrence.

The 10 min XLE chart is probably most telling for the trend we can see on the chart above. The 3C trend goes from in line to the first divergence which is the weaker relative form and then a stronger leading negative form, suggesting XLE is losing upside momentum and approaching a pivot/downside reversal which would likely be needed if the broader market were to do the same given Energy's weight on various averages.

 So far the 15 min chart has not turned negative which I'd consider a prerequisite to a broader market pivot to the downside, although this is a different and longer trend as the 15 min charts for the major averages were only positive as of the days leading in to the April 2nd forecast, which is why they were specifically targetted as a condition for a downside pivot, that divergence represented the "gas in the tank" for the averages, before they run out and turn to the downside.

The longer term 30 min chart went negative right around the same time as USO/Oil last summer, but has been more in line with the downside move, unlike USO which has been building a broad base-like pattern with leading positive divergences, whereas this chart is in line with the downside move.

There are some longer term charts that look a bit better for a "possible" base, but not to the extent of USO/Oil.

I'll admit, I'm not sure just how much weight to give this and just where it should go negative, but I believe that the broad sectors which are the second most influential gravitational pull on any individual stock within those sectors, second only to the broader market, would require a clear downturn in Energy as well as so there's no supporting sectors, especially not one as large as energy so it will be on the watchlist as the 10 min chart , like the SPY's before it's 15 min turned negative, doesn't look good, meaning like the SPY, the 15 min could turn quickly.

Additionally, if there looks to be a high probability low risk trade set up in Energy, I'll post that as well. We seem to be moving in that direction.

Market Update

I have been going through watchlists all morning and keep popping back to NFLX's earnings, an absolute sham and wondering if Wall St. is actually going to buy this, I don't think so.

The issue at hand is pro-forma add-backs and write-offs which have been an increasingly large part of earnings, in fact JPM was actually better off on an earnings basis with the Billions of legal costs. I'm not an accountant and there's a hundred and one ways to make an earnings statement something other than what it actually is. I lament the days of simple guidance undershoots like AAPL use to do all of the time when Steve Jobs was around. AAPL would always guide on the very low side and then come with a blazing beat, it was what I called the "Scottie Effect". Remember Scottie from Star Trek who would always tell Captain Kirk that it would take 60 minutes to repair the warp drive when he knew he could do it in 30 minutes and come out like a rose? That was essentially what AAPL was doing and that was far easier to track than what companies are doing now, which incidentally, the last time they did it to this extreme was the Lehman era/financial crisis.

While I don't want to go off on a rant about something I'm not an expert on, the bottom line is these pro forma addbacks are not earnings in ANY sense, but rather accounting adjustments meant to boost the bottom line. The percent of Non-GAAP addbacks which has boosted S&P earnings to obscenely fake levels again, has not been higher since Lehman while actual SPX GAAP earnings have seen a significant decline for Q4 (the last complete earnings season), in fact they are at multi-year lows, while with the Non-GAAP addbacks, they are at new highs, it's a massive slight of hand and one NFLX pulled off or tried to on their earnings miss yesterday of EPS of $.38 vs. consensus of $.63 with the highest quarterly cash burn rate ever at $126 million just for Q1.

NFLX found their add-back and it was the impact of FX to its bottom line!

From the earnings, 

"Our strong performance led to overall operating income that exceeded our projections ($97m actual versus $79m forecast). Net income was negatively affected by currency-related transaction losses included in other expense; excluding these forex losses, Q1 EPS would have been $0.77 vs. our $0.60 forecast and our actual EPS of $0.38."

At $33.7 million was nearly 150% greater than the actual earnings, resulting in a non-GAAP EPS of $0.77.

FX impact! REALLY?

In any case, the charts will tell the story, but you really have to look in to these Addbacks to earnings if you really want to understand the amount of total and utter deceit these companies are using to boost their bottom line in a most devious way.

As for the market, I was looking at UNG which saw some volatility on the release of Natural Gas Inventories this morning, I'll try to get to that. There was a build of  63bcf with a prior of 15bcf. However in looking at them I noticed something I had seen near term in oil, and started looking at the energy sector and saw the same trend, I believe XLE is going to come down and as a result, as I had warned about a swing move several weeks back, a lift in USO/Energy would mean a lift in the market, such as we saw yesterday with the Energy sector leading.

Here's the correlation near term...

 The SPY in green and the Energy sector in red (XLE). Note the close correlation.

On a longer term view of 60 min, you can see the obvious impact of the energy sector to market swings...

 SPY green vs XLE red on a 60 min chart.

So far all good, easy to see the correlation, the problem for the broad market comes when you look at the daily chart.

SPY in green/XLE in red, there's a fair amount of catching down to do and this is just but one reason internals look so bad vs the market in some cases with nearly 50% of the market of stocks already in a bear market.

I'll try to get a more meaningful Energy post out. In the meantime as I have been going through watchlists and the market as a whole, it's been a bit strange, maybe dull as far as signals this morning.

I did notice HYG rolled over, this is an important move for Leading Indicators as it relates to our market analysis for the move since the April 2nd forecast and one that HYG's 3C charts have been forecasting.

Things are starting to pick up a bit more now, but have been rather dull all morning. Since yesterday's NYSE TICK posted a channel buster which is a "seemingly" very bullish move, note "seemingly"...

Whether intraday or a daily chart, whether applied to TICK or the SPX or AAPL, the channel buster concept is the same and one of our fractal concepts you can put in your tool box and use just about anywhere. The TICK as predicted after the channel buster, broke below the lower end of the channel (this is current as of this capture).


As for the averages, you can probably see why I haven't posted much, there hasn't been much to post as evidenced by the price action alone which is in line with the tighter range of a reversal process which was forecasted really last week, but in a more specific (example) way early this week..

 SPY 1 min slightly leading, but nothing even worth posting.


As was the case as of a couple of days ago, it's still the case that anything after the 1 min charts for the most part with a couple of exceptions, looks similar to this, very bad, very leading negative, implying what the outcome is going to be, but in such a low position it's difficult to use for intraday forecasts. SPY 2 min chart...

 The QQQ 1 min has been just as boring all morning, right in line with price action which is in line with the kind of lower volatility, tighter range price action I warned we'd likely see in a reversal process.

 IWM 1 min intraday has the same boring, non-descript look.

I don't think there's anything wrong with the indicators as they have not shown any strong signals intraday and the market has not made an interesting moves intraday, I believe it's just what we were to expect from a reversal process.

However the 15 min SPY chart I suspected may have broken and finally went negative with all of the other major averages, has.

 Here's a look at it within the trend and why it's in line signal was so important and why its divergence is so important, it is 1 of the 3 major indications I have been looking for to develop and it has.

As for that reversal process, if you remember the examples I drew out earlier this week in on Tuesday,IMPORTANT Market Update then the chart below shouldn't look very surprising as it was what was forecast Tuesday (actually last week for the "Week Ahead").

 The Hammer support of Tuesday's close, the Shooting star long upper wick of yesterday's close, both pointing toward the next day price action, but more than that, forming the tighter, lateral range.

Take another look...

The same SPY daily chart.

Please check the post linked above with examples, don't forget the head fake possibility or even probability in the reversal process, as of yesterday's SPX close...

EXACTLY at the MArch trendline. In the examples it was the reversal processes' range if it became too obvious that might create a head fake move, the kind of move that would be useful for puts in the broad market and likely most of the stocks on the watchlist,  however there's a clear new trendline, the March SPX trendline that is even more noticeable now, this is the one I'd watch for a head fake and that is the best price-based timing signal we have, please see the examples linked here, IMPORTANT Market Update from Tuesday on the subject as well as the "Understanding the head fake move" articles linked at the top right of the members' site always.

Although it has been dull, THIS IS THE KIND OF MARKET I ALWAYS WARN ABOUT. You may recall, "It's like the kids in the room next door being a little too quiet, YOU KNOW THEY ARE UP TO SOMETHING". Don't get complacent in the dullness.

A.M. Update

Futures fell overnight just as many indications had suggested...

Internals, Leading Indicators, 3C charts, the -50 point CONTEXT differential, the fact the market even needed to rely on the SPY Arbitrage scheme yesterday to get a bounce, all suggested the market come down today, but probably the first indication that they would be down today was on Monday...

That would be the identification of the reversal process in which the market would be moving in a more lateral/rounding top-like price pattern with tighter chop.

Also, thus far Crude futures are down overnight as well.

Crude futures overnight. Just as the monthly EIA report suggested, the Saudi's overnight have taken the recent spate of strength in oil prices as a sign or excuse rather to increase supply to a new record high with March production up another 659,000 barrels per day to 10.29 mn barrels a day.

Additionally the Iraqi Oil Minister said their output should reach 3.1mn barrels a day as southern oil fields are strong as weather conditions improve.

Gold futures also stayed strong overnight...

However a new put position may be about to open up. After opening a gold put Friday and closing it Tuesday morning for a +30% gain on expectations of a near term bounce in gold as we have seen the last two days, there appear to be negative divergences starting to build in gold futures again, although we'll look more closely. Remember closing the May put was only viewed as short term.


In addition to that, the Greek drama is getting worse as they "informally" asked the IMF if they could rearrange their payment schedule as there's not enough money to pay the IMF, government wages and pensioners, the IMF refused sending Greek bonds tumbling lower.

Overnight Asia closed up with the NNikkei lagging at a mere +0.08% gain on the back of a strong Yen as our analysis has called for, while the Hang Seng was mediocre at +0.45% and the Shanghai Comp. led at a respectable +2.71%, which may open a trade opportunity in FXI.

Europe looks much weaker, whether it has to do with the IMF request and denial by Greece or not, I can't be sure, it appears the timing is similar.

More soon