More on S"pain"

As you know I don't want to be a newsletter summarizing all of the day's stories, but I do believe it is crucial to understand the basic fundamentals of the world economy so you may put things in their proper context. For instance, yesterday the market move up was attributed to Spain selling some short dated debt with a good auction, this is irrelevant considering the debt falls within the 3 year LTRO window. Tomorrow's Spanish 10 year debt auction is what the market is really interested in as well as the 10 year yield and the dangerous 6% level.

One must understand that the combined firepower of the EU bailout mechanisms, EFSF and ESM is grossly overstated as it includes money already committed and counts that as part of a bailout fund, the money is already spent, it is not available. From my best recollection, the combined fund has about $500 bn available. Italy is already backsliding, Greece has already stated they may need more help, Portugal and Ireland have made similar grumblings. However Spain, yet to receive a bailout, is simply too large for the EU to handle should it fall just like Greece, then Ireland and Portugal and Greece again fell. Spain is the "S" in "PIIGS" (Portugal, Italy, Ireland, Greece and Spain), these are the countries that have been causing concern for two years and thus far, everyone has taken a big hit that has required intervention up to this point, except Spain. There's no reason to believe Spain is not next up. However Spain is only 1 part of the problem, when one country has problems, they all do and the rest of the PIIGS are fragile again.

What is really upsetting the market is not only the yields on Spain's 10 year debt near the 6% "unsustainable" level, but the increasingly dangerous non-performing loans in Spain that have in the past been about 1% of the banks loans, they are now at 8.16%, levels which have not been seen since October of 1994. The hole that leaves in Spanish banks' capital is about $144 bn Euros or roughly 10% of Spain's $1.4 tn GDP and there's no end in sight, this percentage of non-performing loans is expected to continue to move higher and at a faster pace then the past.

This is just Spain that we have touched on. Yesterday I mentioned Italy as well.

Today news is out that Italy their bad loans also surge to levels not seen since 2000. Italian non performing loans are now at 6.3%-you see the trend unravelling here?

Tomorrow will be a big day for Spain as well as France as both have auctions of debt. Spain is not expected to do well, should France come in worse than expected, watchout, that nasty word, "Contagion" will be all you hear about in the financial media.

Quick Market Update

Well the action seems to be after the E close or just after noon time. There isn't a whole lot of 3C movement except there are some 2 min charts that look like they are trying to support the market here, among the best looking is the IWM, the DIA is second place and the Q's last place.

I'm not including charts because nothing has moved so much to make note of it.

There are some 15 min charts starting to head down, the QQQ is one, it is in line with the market action in the Q's, however if the Q's bounce from here and the 15 min chart continues down, then we are closer to that clean signal that I hope we get, but as of yet, have not expected to be as clean as previous signals.

The DIA is by far the worst, I would consider it a clean signal right now, but we have to keep in mind the averages move directionally together most of the time, even if they are showing differences in percentage gains.

The SPY 15 min is doing the same as the Q's, so this could be the start we are looking for on the 15 min charts.

I see the market is starting to respond to those 2 min positive divergences mentioned at the start of this post.

Options Expiration

In looking at the options expiration, and assuming that as is usually the case, retail is the predominant buyer of options and smart money is the predominant seller, it looks to me that Friday's options expiration pin would be somewhere around $140. There aren't a whole lot of calls outstanding in the open interest with the largest block being at $140.

The puts on the other hand are numerous and thick between $128 and $140. A close around $140 in the SPY would seem to do the most damage to the put side, since the open interest between calls and puts at $140 are about the same, I don't think it would be a big deal if the SPY closed within $.50 or so of either side of $140 (this is all as of today's open interest).  If I were the one pulling the levers I might prefer to close the market just below $140 so those puts are knocked out. If the calls at $140 were exercised, a drop on Monday would pretty much knock those positions out, although the contract could still be called.

With the 15 min charts still holding up, I think $140 is an area we have to consider for an options expiration pin.

That would mean the SPY would look like this as of Friday's close...

I drew in the candle to the far right that would represent a $140 close in the SPY, this would also have the intended consequences that this bounce has been all about, it would likely set a large bull trap, the shorts would be shaken out and a simple 2% move down, which is well within our volatility range, on Monday would put the SPY at $137, knocking out the longs.

Considering the 15 min charts are still holding, the timing seems about right as well. We'll know more as the day progresses and we see what the 5 and 15 min charts end up looking like, but this seems reasonable as of now.

EIA Report

 Again, like last week we see a build and thus far the market has reacted somewhat positively. I really wish they would print consensus for these reports to give it better context.

USO since the report released at 10:30

There's a little bit of 3C negative pressure in USO, however it started around 10:00 well before the report came out, so I'm not so sure it has much to do with the report. I'll be holding USO for the time being.

Chaotic-Market Update

I received an email from a member this morning describing the market as "Chaotic" thus far today, this is short of what we were expecting and I'm leaning to adding to the short positions already started (longer term positions, not the in and out trades) on any strength, even if I have to sit through some draw down. The situation in Europe really needs to be covered in its own post with a lot more detail, but things are unravelling quickly.

Take a look at the Q's

 The volume in the QQQ yesterday makes sense as it rolls over, however the member's description of "Chaotic" really struck home looking at the volume in the red box.

 Here's the accumulation on a 1 min chart for Tech rotation from Monday and the distribution in to any form of strength yesterday.

 The 2 min chart shows this trend more clearly.

 And it is now leaking in to the 5 min chart.

 The DIA 1 min looks like it wants to fill today's gap, after that, it's anyone's guess here.

 The depth of the leading negative divergence on the DIA 5min surprises me that we haven't seen more damage on the 15 min chart.

 The IWM 5 min chart is the worst looking out there on a leading basis and a relative basis.

SPY 1 min has made no attempt to follow price higher in to the gap this a.m., this is typical of the distribution seen on the last 3 failed bounces.

I suppose I am still looking for that 15 min chart to fall apart, until then I will be looking to selectively add positions with wide stops so I can add to them if more strength materializes as those 15 min charts are still holding up.

I don't think the signal this time will be as clean as the last 3 failed bounces, we have options expirations as well, I need to look at the chain and see if there's a likely pin.

Buying USO Calls

I'll be adding USO May $39 calls as soon as I'm done with this post in advance of the EIA Energy report at 10:30 today-pretty much all we have on tap in the US.

When I closed my May $38 Calls yesterday morning, I said I would be looking to buy on a pullback and accumulation, below are the 1,2 and 5 min charts, all positively divergent.

ES Opening Indications

As Europe continues to crumble before our eyes (yesterday Spain's auctions were the cheer of the world, today their banks are the Armageddon) , it appears at least in the early going someone is trying to support ES and thus probably the markets in general in the very near term.

ES positive divergences.

Overnight Sentiment summed up: Spain

The Spanish Ibex is down 3% to 3 year lows, we talked about Spain a lot lately, things are happening faster then I can keep pace. Yields have stayed below 6%, but tomorrow Spain will "attempt" a 10 year auction, these are outside of the 3 year LTRO protection window and as such, seen as a likely failure.

Furthermore we have the IMF in its World economic outlook warning of the collapse of the Euro and "full blown financial market panic"-sound familiar?


Overnight Spain released a report showing the growing number of non-performing loans.

There are a lot of details I may cover later, but everything overnight is more or less centered squarely on Europe and Spain especially. France is seeing contagion is their CDS spreads, what a difference 1 day makes.

My Rant

Today the market did or at least got started doing exactly what we expected back on April 10^th, everything that has happened thus far happened according to our analysis of April 10^th and most of that was before 3C started to confirm that analysis later that day. This is how predictable Wall Street has become and it is simply because technical traders are so predictable that Wall Street uses that against them.

The market was up pretty dar big today, was it the falling yields in Spain overnight? Why didn't the miss in Industrial production and the slide in housing starts create head winds and send the market lower? Even the EUR/$USD pair wasn't as supportive today as it was yesterday, yet we had a big move. For those of you who remember, we saw the rotation/accumulation in Tech yesterday and that was well before Yields in Spain fell and the economic bad news didn't matter, Wall Street had already set up the game board and they moved their pieces as they planned to. This is why I have to chuckle when someone says, “The market was up because of XYZ”. You know if the market was down today they would have blamed Industrial production, people want reasons; it all comes back to, “Do you want to be right or do you want to make money”, because they are not one in the same.

How is it that on April 10^th we could have predicted where the market was going in the near term? I don't have a crystal ball, it's just observation and evolving with the market, being a lifelong student.

How did I know to take profits in USO this a.m. As it slid the rest of the day? That was 3C, we have the advantage of seeing what smart money is doing a lot of the times, however if we wait for the reasons why, we miss the $$$. The rotation in to tech was another big call and AAPL was another that we hit right on the nose, again, Wall Street showed us something and 3C picked up on it.

How did I know volatility would increase weeks ago? That's just study of past charts and understanding where the market is, if you caught any of the recent market breadth posts, the market's position right now is clear as day, it's in huge trouble. We can't account for what the F_E_D may or may not do or whether the market will care, we can only make decisions with what we know today and luckily the last month or so we have had some really great signals to guide us and during this time of extreme volatility and 2-3 day moves, we have had great success in adapting to the environment and making 7%-200+% in 1-4 day quick trades, while most everyone else chases each move up and down and is stopped out on huge volatility moves like today.

This has to be one of the most difficult markets I've seen in a long time, yet I've been getting more emails then ever from members who have adjusted quickly and are off making their own trades armed with a simple market update, I couldn't ask for anything more and I'm invigorated to now that Wolf members are not sheep, they care about learning, they learn, you adapt and you make the trades your own. Think about the name of the site and my intensions when purposely choosing that name. I have come to see my members go from random luck in the market to making their own purposeful and profitable trades, I can't take credit for that, I can only thank the lord that I have such a fantastic group of traders that really aren't looking for anything more than the chance to learn and apply the concepts we unveil every day to their own trading. I am so proud to be blessed with such incredible members and it makes me want to work all the harder to make sure I don't let you down.

Just keep in mind through these volatile days, that this is the biggest exercise in emotional game playing that we have seen in a long long time. When you find you are getting too close to getting caught up in those emotions, look at the longer term charts, look at the breadth posts, keep your eye on the ball. We knew what Wall Street was up to before it even began and it was all based on creating an emotional response, that's why I said, “There's no point in even running this bounce if it doesn't break the resistance levels and create an emotional response from both the bulls and the bears”. So don't get caught up in it, we knew why it was going to happen before it even started, remember that and keep your bearings.

Today (Tuesday) an oversold Europe (that's hard to say-oversold when looking at the trend since December) saw its best day in 5 months after turning down much quicker than the US markets, why, because Spanish 10 year yields fell below 6% for a day and they had a few auctions that were less than the 3 year LTRO that came in better than expected? I don't think so, how could 3C show us the bounce and rotation to tech a full day before that happened? No, this is all shakeout and volatility that is associated with market tops. As mentioned earlier, last week we saw the biggest 2 day gain of all of 2012 and ended the week with the largest weekly loss of all of 2012. I feel bad for those who are still wondering where the market is going and those who chase breakouts and breakdowns as they have been slaughtered in this volatility, while we put on trades and close then 2 days later for 30% gains. The big picture though is what is really important and using price strength for tactical trade entries. It's a lot of fun to make 30 or 50% in a few days, it's even better when the market really starts to trend and leave this choppy madness and just as we adjusted to this madness, we will adjust to what the market throws at us next and I think we all have a good idea of what that will be.

The trend in US economic data has either changed for the worse or has just been uncovered for what it really is as the early part of the year, the seasonal adjustment fudge factor allowed the government and F_E_D to hide a lot.

Europe was out of the news for a while giving the markets a break, I warned about 3 weeks ago that the EU was about to come front and center again and weeks later Spain, the one “S” in “PIIGS” saw their 10 year yields hit 6+% with Italy not far behind. I'm not sure even the EU gets it, most US pundits don't seem to understand that 6% is where debt is unsustainable, it's the yield that caused Greece, Ireland and Portugal all to seek bailouts. The problem is the EU doesn't have a firewall or a rescue mechanism big enough to contain Spain. Once Spain goes, the EU goes and we are already seeing contagion of the core, France is no longer FrAaance, but rather FrAance. For Germany the Eu only makes sense as a free trade zone, when it costs more to keep the EU together than they make in exports, the EU will see Germany quietly looking for the exits. Did anyone see the Reuters piece today that said, "Italy will delay by a year its current plan to balance its budget in 2013, according to a draft forecasting document to be approved by the cabinet on Wednesday." ? Or how about the Bank of Spain quietly putting the bad news out on a risk on day that Spanish banks face a $29.1 bn Euro capital shortfall? I wonder how Germany or rather Germans feel about footing the bill for Spanish banks, because if they don't do it now, it will just cost a lot more later? It's funny how bad news gets buried on days like today where the headlines are all about what AAPL did. I'd be willing to bet that more people are aware that Spain had a few successful auctions today (of course all shorter than the 3 year LTRO loans) than know about the Spanish banking crisis emerging and today's news out of Spain.

China has been a known problem to us way before it was a known problem to the media. Months ago we speculated that the weakness in commodities could be traced straight back to China, we received confirmation over the next two weeks on sub “50” ISM prints in manufacturing and services. Why? China's biggest trading partner happens to be none other than the EU. So using simple common sense, where do you think China is heading?

EU banks have huge gaping holes in their capital structure and even if there were a 3^rd LTRO, what assets do the banks have left to pledge and what happens when the 3 year LTRO is over? Where do the banks get the money to repay those loans as austerity drags their economies down further along with continued contagion? The best is yet to come in the EU, not that we can say the US is much better off after everything the F_E_D has thrown out there in the way of liquidity. One of the stupidest things I've heard Uncle Ben say was that QE created a “Wealth effect” for Americans. What a laugh. How many unemployed or struggling Americans are successfully speculating in the stock market? For once, the “dumb money” is actually heading for the exits and has been doing so for nearly a year. Insiders, those that know their company's potential better than anyone have been selling at an increased pace and why? Not because they think they will get more for their shares next month than this month.

I don't speculate too much on what the F_E_D may or may not do, but for those hoping for QE to save the day, just look at oil prices during QE1/QE2 and look at the price of gas and food inflation right now. It would seem to me that putting a bunch of liquidity out in the market to bid up commodities (evil speculators-created by the F_E_D) is probably counter productive and I'd say a good argument could be made that QE did very little for Americans and did a lot for bans that may have otherwise needed some help.

Well on to today. As noted above, European equities had a good day, after all, Spain did sell some debt and what's better than being able to add more debt successfully to your already overburdened debt to GDP load?

The European top 100 bounced 2.12%, but still notably below the 50 day average that is turning down and hey, after retracing nearly all of 2012's gains, even the EU gets a bounce once in a while.

However, equities are just the market's way of taking money from average citizens, tif you want to know what is really going on, pay attention to the credit markets, as I have shown, they lead equities. EU credit markets were not as excited as EU stocks. European Credit went sideways with a drift downward, of course this is exactly what we expected to see, even though we are watching the US markets more specifically.

We knew Monday Tech was coming in to rotation today, the positive divergences were very clear, however what we have expected is distribution in to higher prices, here are just a few examples in the Tech arena...

 AAPL distribution today in to strength...

 AMZN is looking pretty bad here, I wish I had looked at this one earlier.

 Accumulation in BIDU on the 10th, a head fake move in yellow and a large leading negative divergence through all of it and especially today.

 PCLN is in a leading negative divergence-they needed some price strength obviously before they could sell in to it, AAPL is probably the exception to that concept as it appears hedgies have been all trying to fit through the same door at the same time.

I threw WMT in there just because it looks so ugly.

Monday I showed you the CONTEXT model and how it was supportive of further market gains, but warned, it would be flipping to a negative divergence soon, that happened today.

ES can certainly diverge more than this, but it has started.

Commodities leaked off during the afternoon...

 Commodities vs the SPX (green)

All of this weakness was not $USD related as I have added the Euro as it is easier to see than the inverse $USD relationship. Even as the Euro bounced around 2 p.m., commodities continued to slide. The plain and simple fact is a risk on rally should see risk assets rally, including commodities. To give you an idea of how hollow this entire rally has been and how bad things are in China, take a look at commodity performance over a longer period.

Enough said... Well, maybe I should add, "Think China" and don't let those be good thoughts about their future.

While High Yield Corporate Credit still is hanging in there with the 15 min positive divergences...

 Remember this is 1 day.

On a daily chart, there's a big difference. All you really need to remember is that Credit leads equities and Credit has been selling off for some time making a recent new low. The other thing to remember is the concept of reversion to the mean. Credit should give us a clear signal when the bounce is truly dead.

The marke today was rallying a lot stronger than the implied $USD legacy arbitrage correlation, like I have shown you many times before, when Wall Street sets up a bounce, they will run it, FX correlations be damned, but the divergence is still a warning and if it gets worse, it's just another piece of the puzzle alerting us to the end of the move in stocks.

The $AUD has been an excellent leading indicator for the market as it is a carry trade currency.

Here are the last several bounces in the market, note the $AUD has alerted us by way of negative divergence to the reversals every time. Today as the SPX moved above the highs of 4/12, the $AUD did not, it made a lower high and thus has started another negative divergence just like the las three that have given us warning to the market's reversal from risk on to risk off.

Yields serve the same purpose for us as the $AUD and looked a whole lot like the $AUD.

Note where Yields are over the last several days in the red box, they have come unhinged from the SPX-another warning signal.

High Yield Credit (the same concepts apply to HY credit as HY corp. Credit) was supportive of the market this week, not today.

The funny thing is, for large institutional trades, HY Credit is extremely cheap, yet they aren't biting.

ES, the S&P E-mini futures are basically flat so far, but Europe opens in a few hours.

ES closed at 4 pm at $1385.75, it's roughly flat since the close.

As you know, 3C on ES is one of the very best intraday indicators, calling moves very well. The only time I have seen 3C in a persistent negative leading divergence in ES, has been during the last 3 bounce that all failed, this tells us that ALL price strength in ES is either being sold or shorted.

And there it is, I've only seen this a handful of times, the last three times were the last 3 failed bounces in the market.

As for the market, I've shown you where we are, we are seeing negative divergences wherever there is price strength. We still have 15 min charts that look decent, these can fail in a matter of hours so that's what I'll be watching.  Other than that, in my opinion it's all about phasing in to shorts on price strength here. Breadth is worse now then it was at the October lows even though the market or the SPX is over 26% higher, once again I remind you of the concept of reversion to the mean.

We've had excellent results calling the moves in this very choppy, volatile market. I said on April 10th, from looking at market breadth, I believe this is the last bounce we will see before the market breaks. Where do I think we head, I think we take out the October lows. Over the long haul, I have maintained for some time that I believe we will be the first of any humans alive to witness a secular bear market in equities and ultimately, that is where the greatest opportunity is. Whoever figures out how to trade that market first, wins and looking at technical traders, they haven't adapted to the changes on Wall Street over the last decade, I don't think they'll adapt to a secular bear. 

So tomorrow, and for however long it takes, we'll be looking for the definitive signal of the reversal of the bounce. I'm willing to start building short positions here as I started today with XOM. You must have wider stops initially, but I don't want to miss the first big crack down and my risk management is wide enough that I can ride out any short term draw down, in fact I'll just add if that is the case.

Enjoy this relative chaos while it lasts, the market is about to get a lot uglier which is fine with me, Fear is stronger than greed which means markets fall a lot faster and harder than they rise, don't believe me? Look at the 2002-2007 5 year bull market, the entire thing and then some was destroyed in 18 months with most of the damage in 8 months.

See you tomorrow! 

A quick look at volatility

I mentioned I would look at volatility and although there are a lot of different ways to measure it, just eyeballing the charts is probably the easiest, but here are a few observations.

 Just using a 1 day percent change indicator, this is the second biggest move in AAPL this year and after a 5 day decline of -4.26%, today.s move was +5.03%, talk about a shakeout! Note both our targets were hit today, the support trendline and the centennial mark at $600.

 AAPL's 10 day Average True Range is up about 500% since the rally around the start of the year, yet AAPL is up .55% over the last 4 trading weeks. This is the volatility I talk about with regard to topping action. If you look at AAPL on a monthly chart...

Not only is the hugely parabolic move very apparent through 2012, but there's a near perfect doji star, you might look at the longer term chart as a depiction of churning and you know how I view parabolic moves, they almost always end worse and more intense than they started.

 On April 10th at the market lows or at least the SPX local lows, we saw stronger divergences in financials, Tech lagged badly until the positive divergence popped up unmistakably yesterday in Tech as we have been expecting, today's NASDAQ 100 move was the biggest move up all year at +2.01% and this after a -.93% decline since April 10th, again, that's the shakeout move we anticipated on April 10th.

Just look at the volatility from the start of the year through March and then from March through the present. After all of that volatility, this leaves the NASDAQ 100 up +.98% over the last 5 trading weeks, compare that to the compare that to the +22% gain from the start of the year until the last week of March; again, a depiction of churning.

 The SPX saw the second largest move today of the year on a shakeout, ironically, both through the same price level and trendline. Note the extreme volatility in the 1 day price percentage change yet we are no higher now then we were 5 weeks ago. If Financials still had been leading sector rotation today, we would have likely seen the biggest 1 day move of the year. Don't let me mislead you and leave you with the thought that I think this is bullish activity, it is just a reflection of the volatility I warned about several weeks ago, saying,"The market will continue to get more and more volatile".

The 10-day S&P-500 Average True Range is up 200% since February when all seemed well with the rally. Even back then, I pointed out the market wasn't making very big price moves, it was just making consistent moves up.

I suppose the moral of the post can be summed up with 1 chart that while on a much different scale, addresses parabolic moves and extreme volatility and what typically follows...

That would be the 2000 Tech bubble. I don't mean to compare the situation now apples to apples, but the market is fractal and what we see on 1 min charts we see on quarterly charts.

I'll be doing a some more poking around. I took a quick look at today's Price /Volume relationships for the 4 major averages, 3 of 4 were dominant in Price Up/Volume Down which is the most bearish of the 4 relationships, especially given the price percentage moves. Only the Russell 2000 had a dominant relationship of price up/volume up, which is the most bullish of the 4 relationships. None of the 4 averages were so dominant that they looked like they could present a 1 day overbought condition, however I still have some other internals to look in to.