Market Update

ES had a negative divergence on the open in which various averages retraced between 25-50% of the opening gap, we have another negative divergence now so I would expect another move to the downside to begin shortly. Keep an eye on the support level in the SPY around $123.50

Some time to reflect on the FAD

2:15 and we'll know whether Bennie's helicopter has been grounded due to severe and unpredictable weather or if Bennie who lived through the excruciating 2008 Bear Stearns, Lehman Brothers and AIG and the potential collapse of the entire financial system within days and even hours, will be keen on taking early steps to avoid being behind the curve like they were in 2008.

I would think that the FAD would much rather that their meeting were held next week after the g-20 summit and have a broader bird's eye view of what is likely to happen there, but that's not reality.

There's been a lot of "talk", just the same as the last 3 meetings, that QE3 will emerge today, however there are some serious problems with that.

First of all when QE1 and QE2 took place, inflation was running around or below the "FAD's" mandate, we know what happened to inflation after both programs were started and although it was called, "transitory" it was only transitory until the programs ended. However today we are near 4% inflation y.o.y which is 1-2% higher then the Fad's mandate making initiating QE3 very difficult as it would likely drive consumers over the edge.

The other problem will be admitting that operation twist was a failure, which it has been thus far, but monetary policies take time to filter through the economy.

Also there is the political backlash as the Fad has come under increased political pressure for their interventionist policies that have failed to turn the economy around and certainly have failed to do anything for unemployment. The Fad in my opinion will need significant political over, some of that may come in the form of a deep sell-off in the market and GDP revisions providing they are lower. The recent GDP release was a bit stronger then expected so that would also make it politically challenging, even though consumer spending is what largely propped up GDP and the consumer is now tapped out, but that's too complicated of an argument to make to the majority of Congress.

Lets also not forget that the last few meetings have shown that the Fad wants Congress to know that they can only do so much and they haven't done much and instead have thrown the ball in the court of Congress to finally do something.

I expect that money supply will continue to expand, I expect some very bullish talk of what "can" be done, I wouldn't be surprised to hear an allusion to QE3 in the near future "should conditions deteriorate" which alone should goose the market temporarily. In essence, I expect a LOT of talk and very bullish sounding talk, maybe some slight modifications to policy and purchases.

I do believe with foreign bidders fleeing treasuries, there's little demand for them as Europe tries to prop itself up and sells USTs, meanwhile China will continue to make a political statement because of Congress and their bill calling China out as a currency manipulator. The Treasury is going to be issuing a LOT of debt and there don't seem to be many buyers available, at some point I think the FAD will have to step in to be that buyer of last resort, I just think the timing right now may be difficult.

This meeting has gone largely unnoticed in the wake of all that has happened in Europe, but I believe it will be one of the most significant meetings the Fad has had in a year, maybe more. The collapse of MF Global, being the 7th largest bankruptcy in the US certainly will bring Bennie back to the dry-heaving days of Lehman and he won't want to be behind the 8 ball again, however, there is probably an argument to be made for patience to see just exactly where firepower may have to be most urgently deployed if the situation worsens and the 2008 effect accelerates. I do expect a lot of pressure to be put on Congress to realize that this is no time to be planning on spending, but rather to be trying to find ways to cut debt as it may become very likely that they are called on again in the not too distant future to answer the calls of another TARP when overnight, someone a bit bigger then MF Global is on the verge of collapse.

Ultimately, I don't think the Fad can disappoint too much here and we may see a knee jerk reaction to the upside. However, remember what we have consistently observed to the degree that it is beyond random statistics, the knee jerk reaction is often the wrong reaction and it takes hours or days often for the market to digest and really discount what the Fad had to say.

Early Update

There's no real divergences yet that suggest that the market won't continue to drift slowly back down in to the gap, I do find it interesting though that the reason for the overnight low volume melt up was a rumor that was discredited long before the open, but the first local negative divergence didn't occur until the higher volume open as you can see the transition from pre-market to 9:30 is about when the negative divergence started.

Essentially one would think the market would start moving lower once the rumor was dispelled and it did to some extent, but the 9:30-ish timing is at best, suspicious.

The SPY...

is seeing very low volume, especially compared to the other opens this week and it is also near the support/resistance line that has been the main area of interest this week. I expect it to linger in the area until the next headline creates some kind of volume and conviction. We also have the typical trnedless trade before the FOMC today.

Ooops Forgot

I did mention yesterday that the closing candle, a "Doji" was suggestive of a short term reversal (upside).

The Rumor Mill Back At It Overnight

The latest rumor driving ES higher overnight with the Euro was that China was prepared to invest $700 billion Euros in to the EFSF. This rumor was swiftly kicked aside when for a second or maybe 3rd day, when the EFSF cancelled it's Irish bond issue rescue that had already been reduced from $5 billion to $3 Billion and now is $0 because of the same reason we have seen all this week, "Poor market conditions", meaning no bidders, meaning the China rumor was most probably exactly that.

 Here's the Euro move since yesterday's close

 Here's the longer view and resistance coming up.

 Here's the Euro/ES correlation overnight hovering at +.90-almost 1.0

 Here's the latest ES action, which looks like the gap up may be filled to some extent.

It's past 2 a.m. in Greece

And a hard working G-Pap has emerged with the following:

• GREEKS TO VOTE ON EURO MEMBERSHIP IN REFERENDUM: PAPANDREOU - BBG
• GREEK PM SAYS PARTNERS WILL RESPECT AND SUPPORT GREECE'S EFFORTS -RTRS

While, Netherlands Will Try to Get Greek Referendum Canceled, PM Says

Does everyone realize what G-Pap is trying to do? He IS for the bailout, however with the strikes and civil disorder in Greece, he has basically said, "You know so much, then you make the decision".

If the question is framed, "Do you want this bailout?" the answer will be no

If the question is, "If we scuttle this bailout, we will be kicked out of the EU, is that what you want?"

Then the answer will be yes.

However, the G-20 set a deadline for the EU to resolve this crisis by this week's meeting and beng the vote isn't until January and depending on whether the Troika issues the next tranche, Greece could already be in default by then.

Like I said yesterday, I'd love to be a fly on the wall at the G-20 summit, it is surely going to provide more fireworks then the first Finance ministers meeting last Sunday.

Like a Charm

The last update at 6:55 showed ES with a leading negative divergence and the last thing I said, "I would expect more downside on this leg"

30 minutes later...

The red trendline is where we were last update, and now 5 ES points lower!

Had we traded 1 single contract the profit would have been $400 for 30 minutes of waiting.

After Hours ES

I am sure happy to 3C/ES back up.
1) Pre-market positive divergence sends ES higher off the open
2)negative divergence at important resistance sends ES lower
3) Before the Greek-no referendum announcement, 3C accumulates sending ES higher to resistance again
4) a negative divergence sends ES lower in to the close
5) The EOD lows are accumulated and ES moves higher in after hours
6) a negative divergence on the after hours highs starts sending ES lower, there's a continued leading negative divergence, I would expect more ES downside on this leg.

Chasing News and the Latest Headline

This is when it really helps to have a news service like Briefing.com (I'm not an affiliate for them).

We are in the land of news driven markets, at least on an intraday basis.

I don't think this chart should be ignored and it is not daily headline based.

While the recent highs were only about 5% off the highs depicted to the left, 3C is at a new low for the entire period.

As far as the daily gyrations and news, I would guess the news count is something like 20 times normal-just during market hours, throw in 24 hour and probably more like 40-50 times normal and these are big headlines, not just the Oil Inventory report.

On the last post I showed you today's intraday parabolic move up which was based on the news that there would be no Greek referendum and the parabolic move down is based on the latest news that the referendum WILL go through-sending the market lower in to the close.

We have the FAD tomorrow which will introduce a whole new level of volatility and remember that the knee jerk reaction is almost always wrong.

When I was trading exclusively for my livelihood, I had the "experience" of trading through the Bear Stearns/Lehman Brothers market. What I can tell you is that the market right now is very much like the market back then, except I would say the stakes are much higher now. So get ready for extreme volatility, get ready for indicators that you trust no longer working (3C should be fine as a money flow indicator, but momentum based indicators and oscillators will go nuts).

I'm featuring a lot more news then normal and believe me, I'd rather not, it's an additional burden, but it is important to what we do at this stage in the game. For instance, when we received the details of the bailout, cursory examination of the deal showed it to be full of holes, it wasn't hard to predict the Chinese would back away from such a messy plan. It also punished Greeks, especially their pensions so it was not hard to predict that they would not be happy, nor was it hard to predict that the other PIIGS would look to take advantage of the bailout to negotiate better terms, so the news I feature is not for entertainment, I'm far too busy for that, it is for thoughtful insights that should help us put more pieces of this insane puzzle together. We are going to need every edge we can find right now.

As bad as the trend down was in 2008, there were huge countertrend rallies, these are opportunities, but we need to identify them as soon as we can. I'm always open to hearing your opinions and to receive links to news I may not have seen yet.

If this is as it seems, the start of chaos like 2008, we'll have a lot of opportunities, but we need to work extra hard for them.

So the latest is, the referendum is back on.

Today's Close

Today's close looks to be a Doji, con't be surprised to see some upside off this close tomorrow.