ES Update

 ES is putting in a leading positive divergence, for the moment I assume this is just a move within this consolidation/congestion area as you'll see below, the Euro is at support. Should this divergence continue leading, then we may be getting ready for a break out in the Euro.

EUR/USD at long term downtrend line support, it appears ES is preparing to bounce off the idea that support will hold and the Euro will move back toward the resistance area. However as mentioned, should that ES divergence become unusually strong, then something is up.

Market Update

It seems to me the theory proposed earlier (Market/FX reversion to correlation) is still underway.

 Since yesterday's close, when zoomed in the Euro (red) is making higher highs/higher lows as the market seems to try to stay in a holding pattern, apparently hoping the Euro will make the trip up rather than the market making the trip down. Europe is closed now, but as you will see there are some resistance areas for the Euro right now. We'll see if the Euro up, after the European close holds water today, I suspect that is what the market is waiting to see as well.

 The true depth of the divergence in the correlation, as mentioned, yesterday's rally in the afternoon got ahead of the legacy arbitrage correlation.

 SPY 2 min isn't going anywhere right now, each move up sees an intraday negative divergence, apparently not wanting to let this divergence between FX and the market to grow even wider which would create a lot more instability.

 The Euro/FXE 2 min today saw a negative divergence at the intraday highs, I'll show you why.

 The Euro/FXE 3 min chart is still leading positive (white box) and the intraday action is exactly in line with price (green box).

 Euro- 5 min is still leading positive, it hasn't moved around like the shorter term charts, I suspect the divergences aren't strong enough to show up here as of yet.

 ES trade.. Again it seems like there's a range that is attempting to maintain.

Here's a close up of the EUR/USD since the NY open at the lower green arrow. Remember in the earlier charts I showed you support (the long term downtrend line) and near term resistance (horizontal trendline), the Euro is stuck between the two in its own little consolidation, it will need to break out above resistance or the market will have to come down to meet it or maybe a bit of both-"meet you halfway".

That appears to be what is driving trade this morning and in to the early afternoon.

OIH Update

I've had several requests for an OIH update so I figured I'd just post it here, it's just another piece of the puzzle so even if you aren't interested in a trade, you can probably find some value in the charts.

 First OIH vs the Euro (red), the Euro has seemingly had some influence on OIH on this 15 min chart as the Euro turned down as OIH kept moving higher in the first red box (FX negative divergence) and now, like much of the market, OIH is off its risk asset legacy arbitrage correlation (the same issue we are dealing with shorter term in the market's this morning).

 This is speculation at this point, but there is a bit of a triangle pattern developing, on this timeframe and trend, the size of the triangle would suggest a probable bottom rather than a consolidation/continuation pattern. RSI was positive at the lows on 5/18, volume is falling off, it' a bit too early to say, but I'd guess that may be a bullish triangle. If so, that would have some direct consequences for expectations re: the duration and strength of an upside move in the market unless the Energy sector just becomes totally unhinged from the broad risk assets/stocks, etc; which would have to be based on something more fundamental in Energy.

 The 1 day trend channel holds swing moves in OIH, the red trendlines are the stop/cover, you can see one at the orange triangle, a sustained break above $37.90 would suggest a swing move up.

 On a 2 day chart, the Trend Channel holds moves of several months, you can see the long stop at the orange arrow and a move above $38.75 would suggest a decent move up. Judging by the size of the possible triangle, this chart would make sense as to the duration of the move, they fit together pretty well.

 The 1 day 3C chart shows distribution at the top, confirmation of the downtrend and a recent positive divergence, again suggesting if that is a large triangle, it is a base, not a continuation pattern.

 The 60 min chart confirms the daily, distribution at the May 1 highs and a positive divergence developing in the area of the suspected triangle.

 The 30 min chart also confirms the same.

So now we have a decent idea what it is, it's a matter of timing. Here's the 2 min chart, it is acting just like the broad market which isn't surprising as most risk assets have the same EUR/USD correlation, certainly energy does and services shouldn't be too far behind.

 The 3 min chart shows something that argue for that price pattern being a triangle, as price moved too high, there was a short term divergence knocking them back down to an area in which they would be accumulated, there's a positive divergence at that area as well.

The 5 min chart shows the same.

My guess is this is a triangle base, it would be very bullish in the near term if the base broke out in this area with about 2/3rds of the triangle complete, should the triangle complete to the apex, that would have some longer term implications for the size/length of a market counter-trend rally (bounce).

I personally wouldn't take a position in OIH right now, but it's definitely worth keeping on the radar.

Continuing Market Update

Looking at a few more averages, it seems to me my opinion in the last update is the most probable course intraday in the near term (reversion to the FX correlation/arbitrage). Keep in mind Europe is closing soon, we often see some Euro strength after the European close on the hopes that everyone will keep their mouths shut (which rarely happens-but it is one of the trends we have observed).

 DIA 2 min showing yesterday's positive divergence at the lows, remember the DIA has had the weakest 3C underlying action of all of the averages over the last few weeks. On the open the DIA was already seeing a small intraday negative divergence, on that little pop out of the consolidation it went even deeper negative, but keep in mind this is an intraday timeframe.

 The 3 min DIA chart shows the trend/situation more clearly, in green there was price confirmation, since the close to this morning's highs, there's a decent negative divergence in place, I'm pretty well convinced it's the EUR/USD holding things up right now.

 DIA 5 min trend with the positive divergence at the lows yesterday and the entire chart remains in line so the weakness from the shorter charts has not bled over to the 5 min, at least not yet.

 IWM 2 min shows the same theme, positive divergence at yesterday's lows, confirmation of the move up (which is also in a leading positive position) and a negative divergence from yesterday's afternoon highs to this morning's attempt to break out of the range (given the look of the Euro, I'd be betting the move this morning out of the consolidation was nothing more than a small bull trap, which would suggest they may be working up some downside momentum for a move toward correlation with the EUR/USD).

 IWM 3 min shows the same theme

 As does the IWM 5 min-the R2K was yesterday's best performer so it has a little more froth to work off in a move toward reversion to the FX mean.


 QQQ 3 min with yesterday's positive at the lows and confirmation , even this morning it's still in confirmation of price.

 The QQQ 5 min chart is not negative this a.m., it's in near perfect price confirmation.

 SPY 2 min went negative in to that attempt to break out of the congestion zone. It really isn't a very big opening range.

 As for the Euro itself, it seems to be the most important aspect this morning, it went from positive to leading positive to a negative divergence this morning (1 min).

 The 3 min since going very positive yesterday is still in a large leading positive divergence and price looks exactly right for this type of divergence.

The 5 min is leading positive, as for this morning's action, the 5 min is in confirmation.

I'd guess we either stay choppy in a range here (congestion) looking for the Euro to make a move higher as European markets close and if that doesn't come, I'd expect the market to probably pullback a it toward the correlation. The market's just got ahead of the correlation on yesterday's afternoon rally.

SPY Update

While no real damage is being done to the underlying trade, it looks to me as if we are stuck at a consolidation range/resistance for the rime being, the EUR/USD correlation seems to be what's holding things up. It's not just the SPY that looks like this, but as I mentioned, a bunch of stocks and ETFs with longer term very positive divergences look very choppy in 3C thins morning on the short timeframes.

 Euro vs SPY (green). The excitement from yesterday sent equities above their FX correlation and I suspect before we can get much more upside momentum, there will be some arbitrage until the FX pair and the market sort of revert to some mean (whether the Euro moves up or the market moves down toward the mean).

 That 1 min SPY chart I was wondering about, DID NOT confirm the little move up out of the congestion area from the open.

ES (pre-market in light blue background) showed a positive divergence pre-market leading to some movement, it never really went negative as it fell in to the open where another relative positive divergence was made near the regular hours lows. The little run up out of the congestion area is confirming price action, but as price is at roughly the same relative level as pre-market (red trendline), note so is 3C, if 3C were leading I'd say more upside to come, being they are at the same level, I think consolidation or a pullback are probably most likely in the near term intraday.

We'll see, you remember how fast the market moved yesterday only a couple of hours after it went positive (inside information sure is a great huh?)

Quick Update

I've been looking at some charts for members and in general and noticed they look very choppy on the short term timeframes, so here's a quick look at the SPY this am

 Note the very small divergences this a.m., looks a lot like a consolidation, the question is whether the current area in yellow is going to lead?

 There's no damage on the 2 min just confirmation of the consolidation.

The 3 min is leading positive.

Since capturing these I see there's a break out, I'm going to recheck.

Overnight and in to the open

Yesterday's late surge which was moving slowly up with the EUR/USD correlation, broke free of the correlation heading higher as rumors circulated about a Euro-area deposit guarantee (trying to stem the tide of bank runs) and the F_E_D's Kocherlakota making some plausibly deniable hints at QE (Interesting isn't it how things progressed from the Goldman Sachs "bearish on the market note", G-Pap, Kocherlakota). The problem regarding the deposit guarantees is that European Council press conference I mentioned yesterday had not a single word to say on the issue. As mentioned Sunday night, rumors, rumors of rumors, denials, we've seen them all this week.

If that fails to get your interest, then how about this chart of accumulation yesterday at the lows (one of the reasons we started picking up spec leveraged longs yesterday before the move higher)?

 I'm sure the events and positive divergence yesterday were completely disconnected... (sarc.)

The next rumor is coming from the German press, "The Greek EU exit is a done deal". Of course there were counter-stories such as "EU urges Greece to stay in EU", even "F_E_D's Bullard says an orderly Greek exit possible", the typical EU sewing circle.

Overnight HSBC's Flash PMI for China (which has been divergent with Chinese Flash PMI for several months), fell from 49.3 to 48.7 month over month (anything below 50 is considered contraction). This makes 7 consecutive months of contraction in the HSBC Chinese Flash PMI and 10 of 11 months in contraction.

From there on to Spain and this Reuters report... (Remember about a month ago we posted several countries in which their debt to GDP was much higher than the official EU numbers? Well, Spain was one of them and the truth is seeping out.)

"Top Spanish officials are at odds over how to help the country's highly indebted regions refinance 36 billion euros of debt this year, government sources told Reuters on Wednesday.

The figure, revealed in the budget plans from 17 autonomous communities, compares with previous public data of around 8 billion euros of bonds maturing in 2012.

The difference is due to bilateral loans from Spanish banks to the regions worth 28 billion euros that were not made public previously. It could unnerve further investors concerned by the capacity of Spain to curb its public finances and reform its banking sector."

Yes, $28 bn Euros more and they haven't even finished counting contingent liabilities, expect more of the same and the number to grow even larger.

This morning out of Europe we also saw some pretty horrible Manufacturing and Services PMI. The consolidated Euro-zone PMI was the weakest since 2009. The UK also came in with weaker Q/Q and Y/Y GDP data. The German IFO Business Climate report also came in weaker than expected. However we are in the season of bad news is good news and it can be summed up in one headline, "ECB's Nowotny says the full ECB arsenal has not yet been utilised."

In the US this morning, we had Initial Claims...

Released On 5/24/2012 8:30:00 AM For wk5/19, 2012

	Prior	Consensus	Consensus Range	Actual
New Claims - Level	370 K	371 K	361 K to 378 K	370 K
4-week Moving Average - Level	375.00 K			370.00 K
New Claims - Change	0 K			-2 K

Claims came pretty close to consensus, but once again as has been the trend, the previous was revised from 370k to 372k so as usual the media will report a decline in IC, even though EVERY week they do the same thing, Claims miss? They revise the prior week higher and call it a beat.

JPM followed GS's and Papademos this morning with their opinion that the ECB will conduct a 1 year LTO in July-remember, bad news is good news and the Euro on that report?

And the latest rumor (not out of the EU, but about it), from the Bank of Russia (?) 

• GREECE HAS PLAN FOR PARALLEL CURRENCY, SHVETSOV SAYS
• RUSSIA'S SHVETSOV SAYS `NECESSITY' FOR GREECE TO LEAVE EURO
• SHVETSOV SAYS GREEK EXIT WOULD BE GOOD EXAMPLE FOR OTHERS
• BANK OF RUSSIA’S SERGEY SHVETSOV SPEAKS IN INTERVIEW IN MILAN

The sewing circle just increased in size by a continent!

As for the Euro and ES, ES held up pretty well over night, there was some volatility, but lets take a look since the open.

 ES goes negative in pre-market, there's the start of a relative positive divergence, all in all, enough to gap the SPX up this a.m.

 The longer term trend in EUR/USD with the new resistance area and old support.

 A closer look

 And since the open...

The CONTEXT model is showing ES over-valued right now, I'll be checking our own indicators shortly after a market update.

Euro Head Fake Day? Brought to you by GS

Today we went from a SPX loss of 1.52% to a close in the green at +0.16%, an intraday move off the lows by +1.72%. The NASDAQ lost over 1.7% and rallied back to close green +.30% with a +1.9% rally off the intraday lows. The Russell 2000 lost -1.5% at the intraday lows and rallied back to a +.71% gain and a move off the lows today of +2.3% While the closing gains weren't huge (The Russell 2000 maybe being the exception), 3 of 4 of the major averages clawed their way back in to the green with the Dow-30 down by only -.07% and the intraday move in all of the averages was impressive considering most of it came starting at 2:15.

3C gave some good signals today, that's the reason I used the weakness to move forward with the plan I was considering yesterday to increase the spec. long positions to more of a hedge. The TNA position added today made over 6%, TYH made +4.11% today, ERX was up +5.65% and FAS +4.7% today.

The AAPL June $540 calls are up +107%, the new July AAPL $560 calls bought yesterday are up over +21% also some July 555 calls from yesterday are up +25% and yesterday's PCLN July $625 Calls up 29.70% in a day; ranking the options model portfolio #10 for the week of 2002 weekly portfolios. I don't even make these trades for rankings as if I had entered larger positions the rank would probably be closer to #1.

While I'm prepared for drawdown in the core short positions, every one of the 5 (remember I covered GOOG yesterday and glad I did as I would have had a smaller gain covering today) are in the green from +7% to +16% and are now pretty effectively hedged. Should things go according to plan, the leveraged longs and Calls will be sold at a large gain and I'll move back to adding long term short positions (no leverage) for what I believe will be a very sharp next leg down. That's the plan, we'll see if any fundamental economic events or news change that, but I feel better not only hedged, but with excellent probabilities in making gains on the upside rather than just waiting and I still have all of my core shorts. Of course there are a lot of ways you could hedge positions, with the time that I have available for these positions, this was a good option.

None of the profitable leveraged long ETFs today were entered by chasing them, most were picked up near the lows of the day, let the trade come to you. I can't help but think back to Sam's sentiment email update today...

"Judging of how bearish everyone is and I don't know if you recall I told you about co-workers buying apple at $600 and selling at a loss well they just told me they are short the market by ETF's..."


While it's way too early for a victory lap, it seems that chasing the market has once again proven to be a losing proposition. Furthermore today was ugly;  judging by the model portfolio's weekly rank (in the top 0.5%) and the gains in the leveraged long ETFs along with Sam's update of traders shorting the market, I think it just goes to show that emotions are not helpful in trading. The positions entered today are certainly contrarian, but not for the sake of being contrarian; those positions were entered based on hard data, not contrarian psychology. Even if the market moves lower from here, those positions are all at minimal risk because of the entry. I know a lot of you are keeping trading journals which I think are invaluable tools for teaching yourself and finding your place in the market, for me the lesson pulled out of the pages of my journals was, "You need to be patient". When I was trading exclusively for a living I often felt pressure to "make" something happen. I entered trades too early, I exited them too early and knowing what I know today, I was lucky to survive the experience. I still need to work on patience and knowing when to be still in the market. While I think 3C gives us a great edge, I think the greatest edge all of us have over Wall Street is we can pick and chose our battles, we don't have to be in the market all of the time; think about that and use it to your advantage.


While I probably sound like a broken record right now, I think one of the most significant events this week was the GS short call which as you know I would say the call is useless at best and very dangerous on average. Papademos talking about preparations for a Greek / EU exit were the final straw considering G-Pap is Goldman alumni. This is also why I NEVER watch CNBC unless there's a news event like an F_O_M_C policy statement. Some of you have been around since before Wolf on Wall Street  at Trade-Guild and some of you may remember my short call on oil after nearly 8 years of gains. We got the top of the oil move within about a week to 2 weeks. What I remember most clearly was Cramer on Mad Money telling his viewers to buy oil on the next negative EIA petroleum report, which he called a "Contrarian trade". Within a week of Cramer saying that, oil rolled over never to look back. I remember the strong 3C signals and remember thinking, "How can millions of viewers all doing the same thing possibly be considered contrarian?". I also remember thinking about Cramer's admission on the Street.com of how he manipulated the market as a fund manager, how he said it was fun and if you weren't willing to do it, you shouldn't be in the game. I thought about Cramer's own allegiances as a  Goldman Sachs alumni and immediately thought, "This guy is a lot smarter than this, he must be helping his buddies at GS by providing GS demand to sell in to by way of his vast audience".


Like I said earlier today: even having a good edge and idea of where the market is going, no one ever said Wall Street would make it easy, but this is the market we have.


Today's charts coming next...

Now That Looks Like Short Covering

That action in the green box looks like short covering and there's a good reason for it. I'll be back After market with more analysis.

I'm glad I used today's weakness to add those leveraged long ETFs. As is usually the case, the hard thing to do is often the right thing to do.

Revisiting the Euro, "Someone Knows Something We Don't"

You may recall last Tuesday (last week) I noticed something strange in 3C in the Euro and $USD and asked the question, "Does someone know something we don't?" The market was goosed higher early this week which seemed to be a natural progression from the May 15th 3C signals in the Euro/$USD.

There seems to be an immediate desperation to get long quickly, which could certainly be worth it even with the big picture very bearish. Market as a snap back rallies, bounces or counter-trend rallies -whatever you want to call it (As a reminder, bear market rallies are some of the most impressive rallies we see including during full-on bull markets), would certainly be worth going long for nimble traders and Wall Street, especially if there is an answer to the question I put forth on May 15th, "Does someone know something we don't?"

This is 100% speculation, but based on some facts. European banks are facing probably the worst capital crunch they have seen during this entire crisis. The ECB is not conducting LTRO operations currently to give the banks capital, the banks have few assets left to pledge as collateral (specifically European banks), just like during the credit/liquidity freeze of 2008 in the US, European banks are not lending (overnight lending) to each other for the same reasons capital froze up in the US during the Lehman crisis- COUNTER PARTY RISKS. This means one bank won't lend overnight or at any other term to another bank because they are unsure of the counter party (other bank) risk. With the downgrades of EU banks, the bank runs, diminished assets, secretive off the books trouble, etc. banks aren't lending to each other. As mentioned, the ECB is not providing the liquidity the banks need-I doubt they have the "Bazooka" needed to do so. So EU banks are turning to the only source of funding they have left, which is also the most expensive: Cross Currency Basis Swaps.

What this all means? The EU banking sector is experiencing a liquidity and credit freeze.

Why would Goldman want to get long and long fast? One possible answer is that we are about to see another globally coordinated round of intervention as we saw last November when EU banks were in a similar situation. The ECB and F_E_D participated, the PBoC also eased, but it is not for certain whether that was coincidental easing for Chinese reasons or whether they were acting in concert with the other 2 central banks, I suspect it was a bit of both. Lets not forget that at that time China wanted to do all they could within what they considered reasonable to keep their number one trading partner afloat. China has since (recently) given p on Europe and is looking for opportunities in Africa.

The point being, Goldman and Wall Street see this crisis, they know how the Central banks acted before in a similar, but less severe situation and may be in the know regarding another round of coordinated easing.

Such an action (depending on the size -the ECB's balance sheet is in a lot of trouble) would provide the near term catalyst to give us that last strong move I have been suspecting and it would fit well with the trends of Wall Street short term market manipulation.

Just food for thought, however if there is a round of easing announced, we will have answered the question asked on May 15th.