USO

Here's another interesting retracement of 62%

 USO 5 min negative divergence.

USO 62% retrace from the highs, it looks like it found some support right there and bounced, but what comes next.

Am I missing something in the news? Gap filling? It seems a bit early for that as the knee jerk reaction would be to bid up commodities or is the half life of interventions speeding up?

Commodity Retrace

I just looked at GCC the commodity index (CCI) and found this interesting considering the inflationary move of the central banks...

I'm not going to read too much in to this yet, but a 62% retracement of the gap/intraday highs is a little interesting.

Market Update

I've been skimming through some charts and found some interesting ones.

First the market averages as I posted the SPY, here are the rest.

 The DIA zoomed in like the last post (second SPY chart) shows the same thing as the SPY, a leading negative as well as a divergence earlier near the highs. It appears there's a fair amount of distribution going on here when at least on a 1 min chart I would expect something closer to confirmation from short covering, but as I noted I think yesterday, the NYSE short interest has falling way off so there apparently aren't very many shorts in the market relatively speaking and those that are left seem to be strong hands.

 The 2 min chart has had plenty of time to offer confirmation and move up to price, it hasn't.

 The IWM chart s showing something close to the DIA/SPY charts.

 And the QQQ is showing the same, divergence near the morning highs and a leading negative divergence.

 The SPY again, the 1 min leading divergence is worse then the last post, it is below any 3C reading this week.

And the 2 min hart, again no where near confirmation, not even an effort. However, remember the SPY and other 1 min charts, how they had leading negative divergences, because the next set of charts should (if the reading here are legitimate) look exactly the opposite.

Here's VXX which moves opposite the market.

 And what we see in the VXX chart is the exact opposite of the market averages, a leading positive divergence. Here's a zoom of the SPY chart again for comparison.

Look at that! Nearly the exact opposite, thus confirmation of both the VXX and SPY (as well as other 3C market charts). The VXX went positive at the lows (remember for confirmation, these should be exactly opposite) and then a strong leading positive. SPY went negative at the highs and then a strong leading negative. This is why we compare, confirmation gives us the most reliable outcome.

Back to the VXX...

 Look at the 2 min chart, a strong positive divergence and even stronger leading positive hitting new local highs. When the VXX moves up, the market moves down, so signs of accumulation in the VXX combined with signs of distribution in the market are the confirmation we are looking for.

Just for giggles I took a look at the long term 60 min VXX chart, you can see the positive divergences that sent VXX higher off the Oct 31 lows, with today's drop, thus far VXX 60 min is in a positive divergence.

Other charts...

I was wondering about TLT (Treasuries) which like the VXX move opposite of the market and they have damn near the exact same signal, a positive divergence on the lows and a strong leading positive divergence since.

How about commodities?

  GCC (Continuos Commodity Index or CCI), looks very much the same.

Here's the long term view of GCC on an hourly basis from the April highs.

So Copper has been doing well the last several days...

 Here's JJC the Copper Index, not looking good this a.m. which is a bit surprising.

 The next timeframe looks worse.

Since FCX tends to be a good proxy for copper, lets take a look...

 Whoa, unexpected and has me considering a FCX short.

 FCX 5 min

 FCX 15 min

And hourly, this bounce in FCX looks attractive to me for a new short position, I'm going to be patient as it is still early and let the dust settle a bit, but FCX is definitely on my radar now.

I'm going to keep browsing and see what pops up.

First sign of trouble?

Well it wouldn't be the first as the earlier update showed, but now that we have had more time for 3C to move and it hasn't, I found this interesting and will follow up, but I wanted to get this out quickly.

 As you can see the fastest moving chart, the 1 min which should be able to confirm the move up almost immediately, has not moved up past Monday or Tuesday and in fact is moving down, this is the proper scaling.

To show you the intraday relevance of this move, I have zoomed in super tight, this is NOT confirmation, we are far from that, this is to demonstrate the intraday 3C 1 min trend. It not only went negative at the top, but is now leading lower then yesterday's close.

More coming...

If you are trying to play catch up with what's going on in the market...

Last night the S&P ratings agency downgraded just about every major American Financial or at least bank and a few others around the world, more downgrades are coming as the S&P is just getting started with their new guidelines. BAC traded under $5.00 briefly in after hours last night, thus far BAC is not responding as well as the market and $5.00 seems to be the magic number, that is why I mentioned it yesterday and commented that I would wait for the break of $5 so you don't have money in the market at risk until the probabilities are the highest, that being said, BAC should be on your radar, despite what the F_E_D may say about liquidity backstops, we all saw in person what happened when much smaller institutions like Bear and Lehman were on the rocks, if BAC gets to that position, the F_E_D will have a lot bigger worries then just BAC.

In any case, that event that happened after hours sent ES much lower, right through yesterday's lows and near Monday's lows in the evening (EDT).

The EU Finance ministers agreed to leverage the EFSF (haven't we been here before?) between 2-3x which falls well short of the 1 trillion originally agreed upon. It is thought that because of the lack of agreement in the EU over the crisis will see the G20 refuse to boost IMF lending power for a EU bailout next weekend when they meet.

German unemployment came in worse then expected and the European session was trading down until....

Early this morning China cut their Reserve Requirement Ratios by 50 basis point which sent EUR/USD as well as ES higher and the European market too.

China recently had an inflation problem just months ago that led to riots, but the collapse of the housing and real estate market seems to be a bigger concern for them right now, thus the 50 bp cut today. The cut is good for commodities, Reuters has more on the news...

China's central bank cut reserve requirements for commercial lenders on Wednesday for the first time in three years, a policy shift to ease credit strains and shore up an economy running at its weakest pace since 2009.

As recently as the middle of 2011, China was still tightening monetary policy to combat stubbornly high inflation, which rose in July to a three-year high of 6.5 percent.

However, as the economy felt the chill of a slowdown in global activity and inflation eased, Beijing adopted a policy of "fine tuning" that included loosening credit for cash-starved small firms.

"I think the move is partially driven by capital outflows in November. Also, it may indicate that the economy has weakened quite bit and that the official PMI reading does not look very good," said Zhiwei Zhang, China economist at Nomura.

In short, expect global inflation to rise again, this also ties BerCranke's hands a bit as to QE3 options with inflation expectations to rise as China sets out on an easing cycle. This also confirms what we had been seeing in commodities the last few weeks which as was mentioned here numerous times, "This is a sign that China is in more trouble then they are letting on", today's move was confirmation of exactly that. It also highlights the problems in Europe as Europe is China's biggest trading partner-as if we needed additional confirmation! I do however wonder what the S&P will do as they left Chinese banks alone last night?

As for QE3, Business Week ran this article about a divided F_E_D over QE3, something mentioned here yesterday as two F_E_D speakers directly contradicted each other-Yellen and Lockhart.

Then at 8 a.m. today, there was a Global coordinated Central Bank policy action to lower $USD swap rates, again confirming the liquidity crisis in Europe as was clearly evident by Italian banks borrowing from the London Stock Exchange!!!

The Central banks involved included our own F_E_D, ECB, BOJ, and Bank of Canada, the swap rates were lowered by 50 basis points.

The F_E_D also made mention of a promise to bailout BAC, why would they be making these statements in the first place when BAC said months ago, it will accept Warren Buffet's $5 billion investment, but THEY DON'T NEED IT! In any case, the F_E_D said the following with regard to BAC:

U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets.  However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.

After seeing what happened with Lehman and more recently, MF Global, the above statement should offer little comfort.

Back to the coordinated policy action, the half life of such measures is shrinking every day. You saw the chart in my last post. The bigger issue here is why they had to take such action in the first place, it is obvious that the situation in the EU is far more dire then we have been led to believe and that's hard to believe, but given the Chinese action and now this, it is pretty well confirmed.

You saw my initial update, since then I have learned that Sovereign Credit Spreads have not responded nearly as positively as one would have thought. Italy is only slightly better, Portugal is actually wider. 

In the Iranian/UK conflict, the UK has asked the Hague to expel and close the Iranian diplomats and embassy in London, the Hague ordered the Iranian embassy closed and all diplomats expelled.

As far as the coordinated Central bank action, while being large, the measure of dollar liquidity is to be found in the Euro-$USD cross currency basis swap, the move by the Central banks today inly moved that metric back up to last week's levels (same as 11/23), so how effective this will be is yet to be seen, we are just seeing the knee jerk reaction thus far in equities, it will be highly inflationary, especially taken with the Chinese move. Gold should perform well in the near term as well as commodities.

In the US, Chicago PMI printed better then expectations of 58.5 coming in at 62.6.

Now, the latest on the multi-Central bank move-including China which if you think about it, is a little odd in timing with the other CBs today. Forbes released an article just about an hour ago.

Big European Bank Failure Averted: What Central Banks Did Not Tell Us

It appears that a big European bank got close to failure last night.  European banks, especially French banks, rely heavily on funding in the wholesale money markets.  It appears that a major bank was having difficulty funding its immediate liquidity needs.

The cavalry was called in and has come to the successful rescue. 

The F_E_D,  Bank of England, European Central Bank, the Bank of Japan, the Swiss National Bank, and the Bank of Canada in a coordinated action moved to provide liquidity to the global financial system. 

In a separate move, the Chinese Central Bank cut bank reserve requirements.  The People’s Bank of China cut reserve–requirement ratio by 0.5%, the first cut in nearly three years.

These are the type of actions that were being taken during the financial crisis in 2008.  Now most knowledgeable experts agree that not rescuing Lehman Brothers was a mistake.  The authorities are not about to make the same mistake again.  The only explanation for the massive action is that central banks were concerned about a pending failure that is not publically known.  

And for now, that about covers it.

Interesting Bloomberg Chart

This is a chart of the effect of the last Globally coordinated intervention.

A 2-day sugar rush and a decline. It's the entire concept of sugar rush news, a knee jerk reaction and then the thought, "Wow, things must be pretty bad for them to do that".

So far the 3C and bulk of the Credit/Risk Basket indicators would call this a sugar rush. I'll certainly give the market some time to settle in and the indicators a chance to catch up if they are going to, if they don't, I'll be adding today as I didn't yesterday and was saving my dry powder for such an event.

Opening Indications

By now you probably know what sent the market gapping higher, if not I'll follow up on that in the next post. Here are the opening indications thus far.


Credit/Risk Indicators, the High Yield Corporate, Euro to a large degree and commodities are pretty much in line with the S&P this morning, the Euro and commodities make sense and aren't odd, only High Yield Corporate Credit stands out.

 Financials were initially sharp on the open but lost momentum pretty quickly.

 High Yield Credit (not the same as Corporate Credit) hasn't done much of anything, it still hasn't passed last Tuesday's highs, it certainly hasn't moved anywhere near today's S&P move, just the scaling doesn't show very well how big the disconnect there really is.

 The same with rates, the scaling doesn't show how bad the disconnect is, but as you can see, rates are still below Monday's highs while the market is well above that level, providing a strong dislocation.

 ES has a current negative divergence, the green arrow is the 8 a.m. announcement.

 The DIA thus far isn't even close to confirming on the 1 min hart.

 You can see the 2 min chart hasn't moved much either.

 Same with the QQQ

 The SPY 1 min chart is no where near confirmation as of now.

Nor is the 2 min chart.

After Hours

Well it's a bit ironic that today BAC and the $5.00 line in the sand were mentioned. I saw ES after hours dump and wondered what was going on, unfortunately before I could find out I took my Vizsla puppy to the dog park. Upon returning, I saw the downgrade of major banks by S&P and in after hours, BA is fighting to hold $5.00.

ES is below today's intraday lows right now.

Notably ES took out today's intraday lows and is finding some support from Monday's support level that was breached and saw a late day rally to recover above it, this s a key short term support level.

Interestingly, Treasuries (which usually trade inversely to the market and are a safe haven trade against an equity market decline) performed better today (not as well as yesterday) then their correlations would imply, suggesting that smart money is using this opportunity of the last 2 days to move in to the safety of treasuries.

 Since TLT's bull flag, TLT has rallied higher, it has pulled back as it should on the market bounce, but the two day closing price pattern in the Japanese candlesticks is called a Harami reversal, and a nearly perfect example of one. In this position, the Harami reversal suggests an upside reversal and would count the last few days as a minor pullback within the trend, this would have negative implications for the equity market.

 nce again, today's intraday trade saw TLT-Treasuries rally from 11 a.m. through 2 p.m. and much sharper then the implied correlation.

The 5 min 3C chart remains bullish and even went to a leading positive divergence at the afternoon rally highs, no negative divergence, but a leading positive confirmation.

In contrast...

 The SPY daily closing candles are a star yesterday and a more potent Doji star today, both signal a loss of upside momentum and open the market to a reversal. You almost always see these kind of candles before any trend reversal.

 The DIA closed with two star candles, both signal a lack of momentum. A healthy rally/bounce should have a long bodied candle, such as what is seen at the start of the October rally/October lows.

 The NASDAQ actually gapped up and gave up all of the gains to close down nearly .60%, so not only are we seeing very weak trade, but now the averages are decoupling as tech underperforms badly. The S&P is likely only held up by energy stocks within the average, financials certainly aren't helping.

 XLF posted a bearish "hanging man" candle yesterday and closed lower today, again by nearly .60%. Even the S&P close was a paltry +.27%

 Here's a look at 3C over the last two days in financials (XLF), several negative divergences and now a leading negative divergence.

 The more important 15 min chart is in a deep leading negative divergence as price was at the relative  11/21 levels.

 The hourly chart though really shows the extent of the damage in financials.

Here's 3C over the last two days in Technology, now leading negative and the obvious reason for the NASDAQ 100's underperformance relative to its peers.

Back to the event of the night, the S&P downgrade of major American Financials...

S&P reviewed 37 of the largest banks and financial institutions, BAC for example was cut from A to A-

The full list of downgrades which includes subsidiaries is so large that I think few members would be interested in reading the entire document.

Here's a link to Forbes that covers the story.

Among the majors downgraded: Bank of America, Goldman Sachs, Citi, Morgan Stanley, Wells Fargo, JPM Chase, Bank of New York Mellon, Barclay's (another on our short list), HSBC, Lloyds, Royal Bank of Scotland (recall earlier today that Goldman's Sigma X showed several of these banks trading down substantially-leaked information I'm sure),  UBS  and this is just the start.

As this Forbes article makes clear, more are on the way

Here's the full list in PDF format for those interested, but I think we were right on target in transitioning from directional trades to stock picking and starting with the financial sector, clearly today's rating action vindicates the view 3C has been showing toward financials.

As far as I can tell, most downgrades were 1 notch, however subsidiaries of each bank were considered separately under S&P's new November ratings guidelines. It seems every BAC subsidiary was downgraded by 1 notch, from a quick look, the same was applied to Citi's multiple subsidiaries, I assume the theme is the same for most of the majors that were downgraded.

Again from a quick browse, banks all over the world were hit including South America, Australia and New Zealand. In some cases it seems some banks were left unchanged, but subsidiaries were downgraded. Several high profile European banks remained unchanged.

What really stood out was the number of major US banks that were downgraded.

The practical effect of the downgrades is not just equity valuations, these banks that are already struggling with weak economies and the accelerating pace of the EU's crisis may have to post billions of dollars of collateral and termination payments, adverse liquidity effects, potential loss of access to credit markets, higher costs of borrowing, and counter-party credit problems with regard to trades and interbank liquidity. So this isn't just a simple downgrade, the downstream effects could tip an already fragile banking sector over the edge and the new Dodd-Frank regulations make financial institution bailouts that much more difficult. Again, we are at the edge of the second shoe dropping, but in far worse condition to deal with the fall out.

A few real world examples:

Morgan Stanley estimated over-the-counter derivatives counterparties could demand $1.29 billion of collateral or termination payments from the New York-based firm after a one- notch downgrade. In addition, the firm may have to post an additional $323 million to exchanges and clearinghouses. All the estimates were as of Sept. 30.

JPMorgan, the largest and most profitable U.S. lender (BKX), has said the New York-based company may have to post an extra $1.5 billion in collateral against its derivatives and pay additional sums for contract terminations after a one-notch cut. 

In retrospect, it's little wonder that the  credit/risk assets indicators remained so weak over the last two days.

Didn't Add Today

I didn't add today, I'm leaving the option open in case we get higher prices.

The credit indicators and risk basket with the exception of commodities which seems to be up on crude/mid-east tensions today, remain weak.

 The market is still trading well above the Euro correlation providing a dislocation that should revert back to the mean or even overshoot on the downside.

 High Yield Credit is what I am mainly interested in and it has been trending lower since yesterday, despite the S&P creating a divergence/dislocation.

 This is the XLF compared to the S&P-it is not the momentum indicator, clearly financials are struggling as they have not been able to surpass yesterday's opening highs, while the S&P which has significant financial exposure has broken above yesterday's opening highs.


Rates are also key, the market gravitates toward them so the downtrend of the last two days is encouraging for adding shorts in a market that is clearly dislocated and seemingly becoming more so.