USO Update

 The Euro in white (used as a proxy for the $USD as it has a correlated relationship with oil whereas the $USD has an inverse correlation making divergences a bit harder to see-the EUR/USD pair accounts for 50% of the Dollar Index so it is by far the strongest correlation making the Euro suitable for comparisons). Intraday on a 5 min chart we see some strength in the Euro vs USO which seems to be leading USO higher intraday.

 The 1 min 3C chart shows a relative positive divergence at the white arrow and a leading positive divergence (which is the strongest divergence) at the white box. This suggests some intraday strength is building. New divergences almost always start on the shortest timeframe (1 min) and if they are strong enough, they will migrate to the longer time frames and become more powerful divergences.

 On a 2 min chart of USO you can see the relative positive divergence, there isn't a leading divergence yet because the 1 min strength is just starting to migrate to the 2 min chart.

 The 5 min chart isn't showing anything yet because the 2 min divergence is not strong enough (yet) to migrate to the 5 min chart which is much more influential then the 1 or 2 min charts.

Here's the USO set up we have been watching and trading on and off. First we had a very clear channel and in the first yellow box, a Channel Buster, which is a head fake move outside the channel, it looks strong initially, but they almost always fail as this one did. As I pointed out last week, it is common for these patterns to bounce and "kiss the channel goodbye" which USO did the next day, that also happened on a bearish shooting star candlestick and large volume suggesting bearish churning. At the red arrow, you can see a bullish candle with a longer lower wick and heavy volume, as I pointed out earlier today, this is often a reversal signal, it carries no implied target, it just tells us the current trend will see a reversal of some sort.

I'm guessing USO will loo to fill the gap from the downside move last Thursday, which is highlighted in orange. Once in that area, if we have negative divergences, it should make for a good short set up, high probability/low risk.

AAPL and Head Fake Moves...

In last night's post I tried to give you a couple examples of head fake moves and how a failed move creates a fast move in the opposite direction and thus the reason we see head fake moves so often before a reversal, granted we are looking at an intraday chart, but the concept is the same.

 First, we typically see this kind of action in reversals whether intraday or daily, when we see a long lower wick candle (a rejection of lower prices) on heavy volume (with the caveat that it must be in an established downtrend which we have on an intraday basis here), it almost always is a washout and turns in to a reversal; that's just a side note.

Here's the AAPL triangle that the longs would have certainly bought as a bullish continuation pattern, this morning's move outside of that triangle would have brought in more longs, the failure of the breakout sent AAPL plummeting and this is the idea of a head fake move, of course the longer it lasts, the longer the time frame, the more powerful and meaningful it is. It looks like we just got a shakeout of the longs which Wall Street could be using to accumulate shares for the daily upside head fake breakout I suspect we will see as per Friday's and last night's post. We now have a relative positive divergence at the white arrow in AAPL on a 5 min chart (the longer the timeframe, the stronger the divergence).

Take a look at the volume on the breakout and then compare with the volume on the first chart above as AAPL declined.

So here is yet a 3rd example in the last week of what a head fake breakout can do and why they are important to add fuel to the downside fire.

Here is the link to the AAPL trade

It was just Friday that I bought the puts, late Friday is when the positive divergence developed and my theory on the head fake breakout, so the weakness this morning put those March $550 puts at a 15% gain, which I'll gladly take for a day's work.

Here's the link to the trade on Friday

As mentioned, I'll be looking for a place to reposition, I'm expecting and hoping for a head fake breakout move first.

Closed AAPL PUTS

Last week I bought some AAPL puts, considering what I expect to happen, I just closed them for a 15% gain. I'll look to reposition on a head fake move.

Risk Assets/Credit Indications

For newer members, risk assets and Credit are some of the leading indicators we follow as Credit typically leads and equities follow. Risk assets in general should rally with a risk on trade in stocks, a failure to do so is a red flag.

 This is the 10 min intraday SPY chart since it put in the Tweezer Bottom which thus far has acted as support for the market.


 All of these risk assets are compared to the S&P-500 which will always be in green. Be sure to note the timeframes. This is a chart of commodities overall vs the SPX this morning,  thus far they are trading in line with the market, no divergences.

 This is a long term daily chart of commodities, I almost always use the same annotations on a chart, green means in line with the market, as you can see commodities were during much of 2010, red arrow means there's a negative divergence, commodities were weakening at a faster pace then the SPX and failing to post new highs, instead making new lows, this was a warning, they especially broke down in July 2011 when the market dropped 18%. Right now they are severely dislocated from the market, part of this reflects trouble in China, part of it reflects the rally doesn't have the underlying breadth and strength that price alone seem to suggest.

 This is High Yield Credit today intraday, it is in white which is usually a positive divergence, so credit looks moderately supportive of an intraday move higher in the SPX.

 Longer term, High Yield Credit hasn't made a higher high since Feb. 2nd, while the market continued higher, this is a negative divergence.


 Yields  are like a magnet for the equities market, intraday yields seem to be stronger then the SPX, which should lend intraday support to the SPX/market for an intraday bounce, we'll have to see what these look like later.

 Longer term Yields haven't made a higher high since January, a negative divergence with the market.

 Yet even longer, Yields warned about the 2011 top and specifically the July 18% drop in the market, they also called the October bottom, now they are at the worst divergence I have seen for Yields.

 The Euro intraday as mentioned looks supportive for the market thus far.

 More recently on a longer term basis, the Euro has not kept pace with the market and has put up some red flags that led the market lower.

 Longer term, the Euro went from confirmation in Green to a negative divergence in red.

 High Yield Corporate Credit is in line this morning with the market.

 Recently though it has failed to rally with the market, this was a red flag and the makret lost ground from there.

 This is financial momentum in white which is more positive then the market, again this should lend some strength to the market intraday.

 Over the last month or so, Financials have been falling apart and are negatively divergent with the SPX.

Here is this morning's sector rotation thus far, for the most part, it is more defensive with Utilities, Healthcare and Staples outperforming, Financials at the bottom have held their own. Tech is still hanging in there with Discretionary, Industrials are losing ground.

Quick Update

I'm not big on early morning signals because of the a.m.manipulation, but here's the update any way...

 We had some early churning on the gap fill attempt sending the SPY lower, but the high volume at the lows looks like an intraday reversal.

 On a 10-min chart we have a tweezer's bottom

 Early 3C shows the SPY with two 2 min relative positive divergences, the longer term of course looks horrible, but we are looking at an intraday reversal.

And if this was the extent of AAPL's head fake breakout, it would be one of the smallest ever seen.

ES & EUR/USD

Here's the overnight action in both ES and EUR/USD...

 Since my ES update last night, ES continued lower until a positive divergence showed up about an hour after the European open.

The red trendline is where EUR/USD opened the week, so the $1.32 level is still in play. ES looks a bit worse the EUR/USD so I wouldn't be surprised to see ES gain some ground on the FX pair's relative strength.

What's going on overnight?

As mentioned, the PSI is hanging on a thread, this article from the FT goes in to further detail, but basically not much has changed since last night of note.


European composite PMIs came in at 49.3, down from 50.4 in January (a reading below 50 signals contraction), and below the preliminary print 49.7 released on February 22. Eurozone Service PMI printed at 48.8 on expected 49.4, this was where much of the weakness came from.

As mentioned last week, Ireland will hold a referendum on the EU fiscal treaty and possibly make themselves ineligible for future ESM bailouts, not good with this news...


 Moody's announced that Ireland is likely to need a second bailout when its current aid program ends, and that it too may need a PSI just like Greece (Or at least covets one).

Moody’s also warned a No vote in the upcoming fiscal treaty referendum would bar Ireland from receiving further funds from the European Stability Mechanism (ESM). The agency predicted the Government would have to rely on the ESM for additional funding after the existing bailout program expires in 2014. "We expect Ireland to face challenges regaining market access in 2013 and it will likely need to rely on the ESM, at least partially, when the current support  programme expires,” it said." As a reminder, if Ireland proceeds with a referendum on the Fiscal compact, and the referendum fails, it will have no ESM support, and thus no second bailout potential.

 Last, a bit surprising, but not unexpected as this was covered last week and last night,  the ECB deposit facility usage soared to an all time record of €821 billion overnight, confirming that the LTRO 2 is not being used to finance Carry trades at all.

Since December 21 when the net funding from LTRO 1 hit the bank system, total ECB deposit usage has risen by €556 billion, or more than the net liquidity benefit from LTRO 1 (€210 billion) and 2 (€311 billion), so not only has the entire net LTRO cash been internalized but another €35 billion has been added from operations!

And thus the reason the ECB will likely not proceed with LTRO 3 and the liquidity addicted market will have nothing, at least out of Europe, while the F_E_D quietly continues reverse repo operations draining liquidity from the US financial system like they did last week.

FXP Trade Follow Up

Here's FXP this morning,

 On 2/29 I posted FXP as a high probability, low risk trade at the green arrow on a shakeout of the pattern.

This morning, it's up nearly 5% already.

Here's the intraday chart.

As we have been suspected for months and continued to receive confirmation, China is in trouble.

The latest came overnight:

China Cuts Growth Target to 8 Year Low

The target was cut to 7.5%, as mentioned, China is now fighting a two front battle that any fix for one is trouble for the other, inflation and a housing sector falling apart, not to mention the manufacturing and services sector losing ground.

 Here's the positive divergence on the shakeout on 2/29 on a 15 min 3C chart.

 The longer term positive divergence on a 60 min chart...

And for this morning's move, thus far we have confirmation.

I'll keep an eye on the trade.

AAPL Update

You know how I feel about early trade, but I thought this was at least worth noting after the AAPL analysis Friday and Sunday,

 While the SPY has gotten off to a not so great start...

AAPL is working on that breakout...

The Week Ahead...

Picking up where we left off, my last post was about AAPL. If you haven't had a chance to read it yet, try to make a few minutes for it.

The gist is as always, a top is rarely an event, but rather a process, we have seen that process playing out, no where is there a better example then the Russell 2000/IWM chart which has now joined the transports (Dow-20) in diverging from the other market averges.

In the top window my Trend Channel which has held the entire uptrend and the consolidation, stopped out the trend at the yellow arrow in the price window. Also note a Channel Buster in the red square.

The red indicator in the middle window is a 5 day price percent change. The white indicator is a 10 day average of the ATR (Average True Range) which has been warning for some time as the range )5 day average of the move from high to low or the range has dropped from over 20 points a day to half that, in essence momentum has failed. The light blue indicator in the lower window is a 5 day average of the close within the daily range (a high close is bullish, a low close is bearish), you can see the indicator started down around the time of the Channel Busting move, as the Trend Channel depicts a lateral trend in the R2K (now moving down), note how the close within the range deteriorated steadily.

Still, as I pointed out in the AAPL post from Friday linked above, our best timing indication is almost always a head fake move, GLD and USO are two recent examples.

 Remember we suspected a head fake move in GLD before the breakout even began (the day before in fact). After breaking through resistance on what appeared to be a bullish breakout, 3C continued showing a negative divergence confirming what we already suspected which led to one of the biggest 1-day reversals in GLD since 2008 and a nearly 215% options trade in about 4 days.


Never mind the Channel Buster in USO, as we suspected, USO would kiss the channel good bye, which it did on Thursday, it was also a breakout through resistance on a 60 min candle that failed within the same hour as the break out on heavy volume, depicting bearish churning.

The point being, as I stated in Friday's AAPL post linked above, I'd estimate that reversals are preceded by head fake moves about 80% of the time. AAPL being the most scrutinized stock and the most influential stock in the market, I theorized on Friday is going to give us a head fake breakout. The charts in Friday's post lay it all out, but the the most important charts are as follows...

 First the longer term 3C outlook, I still believe the 15th was a key day in AAPL, since then the 30 min chart has been leading negative. This is also how GLD looked before it made a bullish "looking" breakout which was a head fake move leading to a downside reversal.

 Second, AAPL's range has narrowed significantly in an obvious triangle that everyone in technical analysis will expect to be a breakout, thus enabling Wall Street to trap a lot of longs, which is the point of a head fake move as it gives extra downside momentum to the reversal as seen in GLD. The Bollinger Bands are very narrow as well, suggesting a highly directional move. This looks like the head fake breakout I talked about in AAPL Friday as at this point, AAPL essentially IS the market.

The short term 3C (5 min chart), while being in a leading negative position shows a late Friday positive divergence (relatively speaking), which is likely the middle men prepping AAPL for the breakout move. This is an exciting find because it is the closest thing I've seen yet toward definitive timing of  reversal. As stated many times, we see this at least 80% of the tie and I can hardly imagine a stock as popular as AAPL not seeing a head fake move.

A couple of interesting events we have this week, Apple unveils the Ipad 3 on Wednesday, although the Bollinger bands are so tight, I don't think the breakout will wit for Wednesday. A little known or talked about problem AAPL has is in their next visionary product, Apple TV. There is speculation Apple TV will be launched on Wednesday as well, a failure to launch Apple TV may be seen negatively as AAPL is having some little talked about problems. Content providers are not cooperating the way AAPL would like, they don't want to hand over so much control of content to AAPL. This is not a perfect analogy, but close enough. When APPL launched the I-Phone, they needed a network that was willing to upgrade their system so I-phone features could be utilized, AT&T stepped up and was rewarded with a 5 year exclusive contract. Imagine if not networks stepped up, this is sort of akin to the content problems AAPL is having, thus the failure to launch Apple TV Wednesday with the Ipad 3 could be seen as a problem with negotiations with content providers.

We have a bevy of other potential game changing issues coming due around the same time, specifically the Greek PSI deal is slated to be completed Thursday this week and the consequences carry the entire bailout. Here are some of the issues...


The bond exchange “invitation” is set to expire at 3pm EST on Thursday March 8th.  This is the so-called Private Sector Involvement or PSI

Greece has other steps to take during the week, and ultimately the Troika will determine how to proceed with the bailout, but not until the results of the PSI are known. Last week we already saw the Germans saying that Greece was not taking this seriously and failed to make del breaker changes needed to secure the next bailout. Remember what I also tried to point out, the circular nature of the decisions of the major players. The Greek bond investors want to know that Greece has secured a bailout, the Troika wants to see the bond deal done before backing the bailout and the IMF is waiting to see what happens while the Troika are waiting to see how much the IMF is willing to contribute. Greece is waiting for the Troika to give the okay on the austerity changes made and so far they don't seem happy with them. No one wants to move until they see what the others will do, I'm not sure how this will play out with everyone waiting on everyone else while the clock ticks away.

 Some of the Greek bonds are denominated in currencies other than the Euro.  These bonds had stronger bond-holder protections than Greek Law Bonds. So these bonds have some rights that give them more protection in theory than Greek law bonds, and more importantly, any lawsuits by hedge funds building a blocking position could be decided outside of Greece, the hedge funds could get full par on some of these bonds such as English law, which will be a major pay day as they bought them far below par.

How do Portugal and Ireland react when they see Greece receive big debt forgiveness?  This is another question and we are already seeing rumblings, but without the PSI, there will be no deal.

 Remember that Germany has made it very clear that if the PSI fails, the bailout is off and this is set for this Thursday 3 p.m. EDT. Interesting timing with the AAPL launch.

Just this weekend, Bloomberg reported that the German Der Spiegel citied ECB sources as saying,

 "Greece may fail to garner enough investors to participate in a voluntary writedown of its debt"

Last week we heard some pre-emptive talk of contingency plans as well.

Sentiment continues to be perfectly positioned for a massive move down, dumb money as seen by the chart below is still wildly bullish.

This is an amalgamation of 4 sentiment indications by retail money that have historically been wrong;  1) Investors Intelligence; 2) MarketVane; 3) American Association of Individual Investors; and 4) the put call ratio. 

Then we have the Rydex Total Bull/Total Bear weekly chart...

The indicator in the lower panel measures all the assets in the Rydex bullish oriented equity funds divided by the sum of assets in the bullish oriented equity funds plus the assets in the bearish oriented equity funds. When the indicator is green, the value is low and there is fear in the market; this is where market bottoms are forged. When the indicator is red, there is complacency in the market. There are too many bulls and this is when market advances stall. Currently, the value of the indicator is 71.72%. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops. It should be noted that the market topped out in 2011 with this indicator between 70% and 71%.

So this will be an interesting and perhaps definitive week. During the week I will continue updating the normal indicators that we use, Credit/Risk Assets and their divergence from the market, 3C of course which has been signaling this as a very dangerous market as well as other leading indicators from currencies to specific correlated stocks, ETFs, the VIX and others.

Don't be too quick to judge initial moves, price above all is deceptive and the underlying and leading indicators have all converged to a very bearish level as well as investor sentiment. The Macro economic environment is also at a major crossroads this week.

I'll also continue to provide, as usual, both short term and longer term trading ideas as well as updates on positions already mentioned.

Not that I think they matter a whole lot right now considering the bigger picture, but here is how the EUR/USD and ES have opened tonight.

 Here is ES pre-market Friday, Friday normal market hours and since opening tonight. As you can see, there was a negative divergence on the open, a positive mid-day divergence off ES's lows and a negative in to the close. Tonight there was a negative divergence sending ES lower and it is currently trading in line or confirmation with 3C. We are now below Friday's close.

 Here's the EUR/uSD opening, originally gapping a bit lower and testing the $1.32 area from late last week and recently failing on this 5 min chart.

 This is a rough approximation of the consolidation/continuation pattern from Friday is the pair, right now trade is below that level, but I suspect we will see some changes at 3 a.m. EDT when Europe opens.

This is the pair since last Sunday's open.

It will also be interesting to see what the ECB's deposit facility looks like, as of last Friday after the LTRO, the facility hit a new record with virtually all of the new net liquidity from the LTRO going in to the deposit facility. The ECB has made some noise that this will be the last LTRO as it has not gone according to plan, however their excuse is that they don't want banks leaning on them too much. The reality is the 3 year 1% loans were "supposed" to be used to finance sovereign debt carry trades where the banks borrow for 3 years at 1% and buy sovereign debt yielding 5% or so and keep the 4% carry profit, instead the banks have chosen to take the money out of the financial system altogether and put it to work in a negative carry trade by which they pay 1% on the loan and get .75% from the ECB's deposit facility, ultimately financing a negative 25 basis point carry trade, or in other words, they are losing money to the tune of about $6 billion a year collectively to keep the money in the deposit facility rather then finance "profitable" carry trades, but who can blame them after the ECB essentially created a senior and subordinated bond market in which the more ECB debt held for any particular nation, the greater the private sector loss will be when those countries seeks to get the same fair treatment as Greece in a debt swap "hair cut". Just as I thought, the ECB's bond swap two weeks ago with Greece, putting the ECB a safe distance from any retroactive collective action clauses or "losses" Greece may invoke, has seemingly already turned to bite the ECB in the rear end. The results of the PSI, activation of the CACs and the decision as to whether CDS are triggered or not will be the ultimate say in the European PIIGS bond market and any one of those events could easily send yields soaring again to the 6-7% or higher level creating a fresh new crisis in the PIIGS and further contagion of the core.

Have a Great Week, see you in a few hours.