Risk Assets

 Unfortunately the CONTEXT model has a lag but it is clearly showing ES diverging away from the model, meaning  ES/S&P-500 are considered to be over-valued right now as compared to a cornucopia of risk assets that make up the model.

 Commodities were a clear beneficiary yesterday of the strange overnight ramp in ES which remains unexplained and in my opinion was a manipulation of ES during the low volume hours. Yesterday I searched all day for any correlation of news that would have justified the move, which even looked suspicious on the chart itself. As explained in an earlier post, the financial media was quick to attribute it to Aloca's outlook for aluminum demand, that seems to have been shot down with Alcoa closing near unchanged yesterday at .11%. Today we can see commodities diverging downward from the S&P.

 Longer term you can see how the strong October rally saw commodities in line with the S&P as they should be on a strong risk on move which I would say the October rally was, since then however, they have diverged significantly to the downside and leave equities stretched pretty far at the end of a very narrow limb. The idea here as with most of these models is a reversion to the mean, which would mean either commodities and almost every other asset class that is also showing a negative correlation would have to rise or more likely, equities which are largely off on their own and without the support of the larger credit market would have to fall.

 Rates, the Equity magnet, were in line for a short period, but once again started trending lower and faster then the S&P and are now back to levels seen before yesterday's strange pop in equities.

 Looking at a longer term hart of the same, you can see how they have moved together in tandem in what I would call a confirmed or believable trend, they even led the S&P in the green area and the S&P has caught up to that high in rates, however one again the longer term picture shows rates selling off while the S&P trades pretty close to the range that has persisted for several weeks. This time in equities could certainly be used to sell/sell short by institutional money, the environment is right and the other risk assets suggest that is what is happening.

 In the VERY near term, the Euro had been in line with the market the last couple of days, but has now fallen sharply lower from the normal legacy arbitrage correlation between FX and equities, again suggesting a reversion to the mean in equities.

 Even just slightly longer term charts show how bad the disconnect is.

Finally, thus far today financials are showing more momentum then the market as a whole, we'll see if that can hold up. I'll also be looking in to each of the main sectors.

PEIX Still Looking Good

The last major run in PEIX was good for over 400% and this in less then a month.

 Triangle consolidation, volume is correct for the pattern. The price pattern implied target is about $1.60 or nearly a 60% gain, but PEIX could certainly overshoot that target.

 Here are some of the last daily accumulation cycles, notice how flat price is at the first one to the left, typical accumulation area. Think about how you would accumulate a huge block of a cheap stock like this without driving price against you and you can understand why we often see accumulation in flat areas or in to falling prices. The first run was good for over 500%. The second accumulation area was in to falling prices and ran nearly 175%. Then we saw a bullish descending wedge, another flat area and a run of well over 500%. We are now in another flat area in the form of a triangle. The daily chart still looks excellent.

 This is a closer view of the current daly chart.

 Here's the hourly chart and the current triangle, there are several nice positive divergences in the triangle.

The last chart showed a recent positive divergence near the apex of the triangle, here we see it on a 5 min chart as well and in to a flat trading area. I personally like PEIX right here, a stop can be placed below the triangle, but if you do that, make sure you give it sufficient space as a head fake move below the triangle would not be uncommon before an upside break out. You could also wait for an upside break out as well. I like prices here because the down side risk s less as prices are near the support of the lower triangle line.

Remember that this is a speculative trade being a cheap stock and risk management/allocation should reflect that.

USO Update...

Yesterday in this post I showed you two USO charts that were falling apart pretty quickly, a 10 min and 15 min.

So far today USO is down around 1% and near the a.m. lows and has also helped to drag XLE (Energy) down over 1.3%. Here are the updated charts....

 This was the first hint something was wrong in USO yesterday (10 min chart-leading negative divergence that was spilling over into the 15 min timeframe). It's too early today to expect much from this timeframe.

 The 5 min hart shows a minor cycle of accumulation (white), distribution (red) and some downside confirmation (green), the downside confirmation is a little higher then it should be for true confirmation, it may be that the 5 min chart has not had enough time yet to confirm or there may be an intraday bounce setting up near the a.m. lows

 The hourly chart is the one that seems to suggest the bigger trend is in trouble and given what we have learned about hyper-inflaton in Iran, a real conflict may take back seat to an internal Iranian conflict/ regime change if we have somehow managed to infect Iran with hyper-inflation.

 When we zoom out and look at the full scale of the hourly chart which is the most important intraday timeframe, you can see there appear to be real problems with USO as the rough confirmation of the past is replaced by a leading negative divergence of some size.

 XLE also warned yesterday on the 10-min timeframe and yesterday you know I thought something was fishy. Commodities were one of yesterday's biggest movers on what was attributed to a risk on mood because of Alcoa's earnings guidance in which their forecast for aluminum demand was 7% rather then 6.5%. I find this reasoning to be deeply flawed especially as Alcoa (presumably the company that would benefit most from the forecast) closed the day at a meager .11% gain.

 XLE 5 min (zoomed) suggests that bounce intraday that I mentioned above re: USO.

 XLE 5 min (zoomed out) shows the trend on this chart to be quite negative.

 Here's the 15 min XLE chart with accumulation in white/ distribution in red, currently there's a distribution cycle on par with the last that took XLE lower.

The daily chart which cuts out the noise appears to be very negative and it seems as if there was a major shift in the sentiment toward energy. I would consider this to represent the Primary trend, although intermediate and short term counter trend cycles will still be in effect. Usually as the Primary trend reveals itself clearly in price, these counter-trend rallies can be quite sharp, that is why they are there, to look like a real reversal and draw more suckers back in to feed the primary downtrend.

Second Verse Same as the First

The European financial market action is getting quite predictable every morning, as we have seen the last several days and actually weeks with only a few exceptions, the ECB's (European Central Bank) deposit facility has ramped up to a new record at $486 billion on deposit, since December 21st when the LTRO was carried out, all of the LTRO money and then some has made its way right back to the ECB as the banks seek safe harbor.

Q3 Euro growth has been reduced to .1% and it is likely that recession started in the Euro-zone during Q4 2011.

After a slight recovery in Hungarian metrics as they agreed to conditions which could re-start the IMF deal process, their currency the forint, dropped again overnight as the EU made clear that funding could be withheld if they don't make the legislative reforms the EU is seeking (in the broadest stroke, this essentially is Hungary trying to hold on to the last shred of sovereignty while the EU is seemingly using monetary policy to do what bullets and bombs couldn't do in 2 world wars).

The Euro is trading back under $1.27 and on the slow march toward sub $1.20 levels. The Euro did pop slightly this morning as Merkel announced she was willing to pay more upfront money in to the ESM (new bail out mechanism set to come on line this year to replace or run in tandem with the EFSF) in order to give the ESM more credibility. We've been over the ESM, it' Euro-zone members paying money into a fund to save other euro-zone members, but some who will pay in are the ones in need of the bailouts in the first place-i.e. Italy.

In Iran (I don't know if this is the work of the US -I don't know if it could work that quickly), yesterday there were rumors of products doubling and tripling in price overnight, we see now there is truth to the Iranian hyper-inflaton story. Iran has hiked interest rates to 20%!!!! n other news out of Iran, a nuclear scientist was killed by a bomb in the street earlier today. Details are sketchy, but the US is officially being blamed. There have been an unusual amount of explosions at key military/nuclear facilities over the last month and a half that have gone unexplained as well as the apparent downing of a US drone in Iran. I'm sure all will be made clear in a Hollywood movie in about 5 years from now.

Yesterday we had an unexplained commodity rush, I said it all smelled fishy, today oil and most commodities including silver have opened down. Only Gold has opened marginally higher.






 There is an ECB meeting tomorrow, there's a split as to whether they will cut rates again. Goldman, remember Draghi is a GS alumni, seems to think he will stay his hand for the time being.

ES VWAP Study

 The above chart shows ES (The S&P-500 E-mini futures) with the VWAP in white (center) and a +2 standard deviation (light blue top channel) as well as a minus 2 standard deviation (green lower channel0. The history covered here is almost the entirety of 2012. The dark background is normal market hours, the light tan background is the everything that falls outside of normal trading hours. ES futures trade 24 hours a day except on weekends when they close Friday at the close and open Sunday night. Don't get lost in the lines, just eyeballing the price chart shows a choppy lateral trading range; to demonstrate the choppy lateral range, from the first trading day of the New Year through yesterday at 4 p.m., the S&P-500 has gained exactly .29% (5 trading days yield a return of just over 1/4 of a percent-that's a lateral trading range). To demonstrate the volatility of the range, note how price before last night (where the blue arrow is) chopped about bouncing between -2 and +2 standard deviations. On an daily basis, you probably have felt like the market has been bullish, but in reality it has just been very volatile and has gone nowhere in 5 days-the big first 5 days of the month when funds are supposed to be flowing back into the market.

Last night represented by the light blue arrow shows the first trend that has developed, there's still little reason to support any notion of where it came from, AA's earnings and assessment of market conditions were given early credit, but Alcoa has closed today at a .11% gain, hardly the bullish assessment that should have been most beneficial to Alcoa itself.

The move last night was clean and strong, but also on very light volume. Price spent a lot of time near the +2 standard deviation top channel and only pulled back to VWAP 1 time and that was at the opening of the European markets at 3 a.m. EDT (at the red arrow). Note how such a powerful and clean trend started falling apart at the US open and broke below VWAP for the first time throughout the entire period from about 5 p.m. yesterday until 10 a.m. today (17 hours, but all in the low volume environment).

Here's a closer view of ES from about 2 a.m through today' close. ES gave up VWAP in the normal volume environment several times and on pretty heavy volume as ES either broke below VWAP or tested it as resistance. Toward the close, as I suspected, ES broke below VWAP again on increasing volume and tested VWAP and failed on the largest volume of the day; quite a difference between last night's low volume (easy to manipulate) environment and regular hours.

ES didn't look right from the start today, I mentioned it many times and many metrics that should have been much stronger like early NYSE TICK were way off the kind of gins ES put in.

I'm not sure what this is about, but it definitely seems fishy to me.

Thus far in After Hours ES has broken below today's regular hours lows, this even despite the Euro showing a slight bounce during the same time.

When something in the market is inexplicably fishy, you are best off looking at as many different metrics as you can and determine whether it is a bullish or bearish event. These are usually opportunities, at least once you figure out which way to play it. I'm leaning toward this being a bearish setup/manipulation.

AAPL close

AAPL had a chance yesterday to breakout above all time new highs. Yesterday it gave up the gains, today AAPL gapped again and gave up the gains, this is way out of character for AAPL over the last several weeks, although the advance of the last several weeks has been parabolic and thin in the trading range, as I mentioned several times, it looks to be driven by short covering and by hitting a new intraday high yesterday, I would think the fuel of short covering is just about all used up.

 The last two days AAPL has gapped up and given back the gains.

The short term 3C chart shows this happening in underlying trade. Note the negative divergences on both opening gaps, AAPL gave back all of the gap intraday both days and now it's leading negative.

The situation in AAPL is similar to the market today. Furthermore the XLK hart (Technology) that I showed in the random charts post, had a nasty 15 min leading negative divergence.

I could go on and on listing everything that seemed fishy today, but it's all there in today's posts.

Volatility- VIX/VXX

As you are probably aware, lows in the VIX are associated with complacency and often market tops, the VIX and intraday VXX both have an inverse relationship to the market.

 The 10 min VXX is showing a strong leading positive divergence, a move up in the VXX would mean a move down in the market.

 That 10 min strength in the VXX is now flowing to the 15 min chart as it starts a leading positive divergence, suggesting the VXX is about to move higher, remember the market's inverse relationship.

 On an hourly chart, there's a long term relative positive divergence in place in the VXX as well.

 Here's the VIX on a daily chart making intraday new lows that go back to late July .

In the white box, this shows that area in late July in the S&P-500. The two yellow boxes represent 1 confirmed head fake above the S&P's neckline and today's move above the same.The long wick on today's price candle shows higher prices being rejected. I would think a breakout above the trendline would shoe a strong finish, but remember we got to this price point largely because of overnight action in ES on low volume in a strange advance (see earlier posts). As a matter of fact, that overnight advance was the price advance in the market today, intraday, the market added nothing to the low volume overnight action that caused the gap up today.

This is what I mean about the intraday market...

The area in the yellow box on this intraday chart of the SPY is all the market added to the overnight low volume melt up. A breakout above an important resistance level should close strong, it had a jump start from overnight, essentially there was no follow through the entire day.

ES Update

Today has just had an all around fishy smell, something just doesn't feel right (I've shown you a lot of charts, but I have a strong gut feeling here too)

ES S&P E mini's intraday went negative off the open, the first real divergence all night, look at 3C leading negative now and the increase in volume as ES gives up the VWAP again. It just doesn't look good.

BAC Trade

For the BAC trade in the options model portfolio, I bought Feb $7 Puts

BAC Trade

I'm going to open a small PUT in BAC, it is speculative, it's not exactly here I want it, but there's changes occurring pretty quickly here and I am thinking I might get that gap fill in the a.m. The JPM chart looks worse, but it may be leading BAC.