Markt Update

The fade of the gap seems to be working out well as the SPY is now only down 0.36%.

The 1-5 min positive divergences that held on Tuesday to our surprise and confirmed yesterday, are still in place, therefore, I suspect that weakness in price is being accumulated and we still likely have more on an upside move before a significant correction.

 The gap down today and how much has already been faded to the upside in the SPY.

 Stops/orders hit as intraday resistance was crossed.

 The 1 min SPY positive at the lows today, currently leading positive

 The 2 min chart never inched down to confirm the gap down this a.m., part of the reason I suspected the gap down would be faded.

 The 3 min not only did not confirm the gap down, it also was positive at the bottom and now leading positive

And the 5 min is in a continuing leading positive divergence.

It seems more upside is in the card, I'm keeping the SPY/IWM calls open for now.

As for the 15 min chart... There's still no improvement that would suggest any changes. So as of now, we are expecting some more near term upside followed by a decent size pullback.

UNG

Lots of action in UNG today. The recent question re: UNG is whether it pulls back deeper and gathers some strength to make a run for a breakout to stage to mark-up or whether it pulls back just a bit to do the same-either way it doesn't matter a whole lot to me as I look at it as a long term trade (without leverage as I don't think it will need it once it hits mark up).

Here's UNG so far today...

 The daily chart doesn't show you the volatility going on intraday, but does show you how close UNG is to a stage 2 breakout.

Here's the intraday volatility, and why? As for the downside, today is Thursday and the downside came at 10:30, the same time as the EIA Natural Gas report release...

Released On 7/12/2012 10:30:00 AM For wk7/6, 2012

Prior Actual Weekly Change 39 bcf 33 bcf

The initial disappointment came on an injection of 33 bcf with consensus expecting a smaller injection of 30 bcf.

As to the rest of the bigger picture and the rest of this morning's volatility...

 Longer term on the 60 min chart there's a very nice looking leading positive divergence, however, it's not making new highs here which leaves that question of a pullback still open to those who may be trying to trade around UNG or looking for an entry. I added a UNG long position back in May and have no intention of doing anything but holding it.

 The 30 min chart shows this most recent test of resistance vs the last test of resistance, both saw negative divergences form and a pullback after the first, I suspect the same now, how far, how long? We have to let the market tell us.

 The 15 min chart shows the same negative divergence since testing major resistance. Looking at the two charts above, I'd pretty much expect a larger correction which can be through price (pullback) or through time (consolidation).

 Now starting from the fastest intraday timeframes, the EIA Energy Reports seem to be leaked quite often, yesterday the BLS admitted their MAJOR market moving report is "consistently leaked". Note the negative divergence in to today's highs, there's a theme among the intraday charts that suggests this report too was leaked. Very short term on the 1 min chart there was intraday accumulation at the positive divergence at the lows sending UNG higher, I'm not sure I would read too much in to that as far as the bigger picture/ break out goes.

 The 2 min chart shows the migration of the negative divergence at the intraday highs, again suggesting a leak, the move off the lows was on a positive 2 min divergence as well and is in line with price, actually slightly better.


 The 3 min chart shows that the negative divergence was STRONGER than the following positive divergence and the move up in price fails to confirm on this more important chart.

 The 3 min trend showing the reversal last week and a relative positive divergence, I don't feel strongly that this is enough to move us to a solid stage 2 breakout yet.

 The 5 min chart registers the negative divergence in to the highs, again suggesting it was much stronger than the positive divergence at today's lows, 3C is just about in line with price.

Ultimately the 15 min chart is trying to improve, but it's not in strong position. I personally would not buy UNG as a short term position right now, If I was building a position and viewed UNG as a longer term trade, I would consider buying in this area, but I'd leave rom to add at lower levels.

We'll keep an eye on UNG for any developments that might change the outlook radically, but for now, I think UNG has more work to do before making a move through resistance, I will continue to hold the long position though as I view this as a long term trade.

Risk Layout Update-Interesting

I did find some interesting things in the Risk Layout update, I'm guessing we are seeing a shakeout right now, it may have originally been caused by Australian unemployment which put  lot of pressure on the $AUD which is an important currency for the market, but it seems that the move down is being taken advantage of (remember the near term 3C charts are almost all in some sort of leading positive territory). There's still some instability in the layout in areas I have been concerned about such as the Euro and Yields, but yields at least seem to be improving.

Take a look

 Commodities seem to be roughly in line with the SPX intraday, however...

 The relative momentum over a longer time period shows them holding up better than the SPX which is a bit interesting, especially given the FX legacy arbitrage correlation.

 Commodities are brown, the SPY is green and the Euro blue, according to this and the typical correlation, both the SPY/SPX and commodities are holding up much better than would be anticipated. This could be viewed as a negative divergence on this layout, but there's not widespread confirmation across it. We noticed some strange activity in 3C Tuesday and thought maybe it resolved yesterday, but seeing commodities hold up better than the SPX makes me wonder if in fact something did come out Tuesday that smart money is aware of, commodities would have a lot to gain from the dollar debasement that comes along with Quantitative Easing, although that's wild speculation right now, it could explain this chart and other strange activity this week.

 Very strange is the run UP in High Yield Credit this morning, this usually would lead the market and as such I expected to see it down today, not moving up aggressively.

 On a longer term basis, today's move is evident even on a longer term chart, it's pretty strong as well, which adds a little more credibility to the theory proposed earlier that price weakness may in fact be under accumulation and that may indeed be the very reason for the weakness. Again, these are bits of the puzzle, not the complete picture, but it would fit with recent 3C activity over the last 2 days.

 HY Corporate Credit is in line intraday, but it did see a drop overnight. I suppose there may be less risk in HY credit right now than HY corp credit.

 On a longer term basis, HY Corp Credit is still in a supportive area (not dislocated from the SPX), but in red you can see the drop.

 Intraday Yields which have been bothersome are seeing improvement, this fits with improvement in the market and fading the gap (again this is not the full picture, but a piece that fits).

 Longer term, here's where Yields dislocated negatively from the market, the market followed (this is why I like Yields as a leading indicator-they tend to attract the market like a magnet), but look at the recent improvement in that Yields are moving laterally instead of down.

 The $AUD intraday

 With quite a drop from overnight on weak Australian jobs data, however it still is not negatively dislocated from the SPX.

Finally the Euro intraday, pretty much in line with the market.

I have more homework to do, but as of now I suspect that we may be seeing some accumulation of price weakness that may have originally started with weak Australian jobs data and perhaps got a little helping hand to the downside.

Quick and Dirty Risk Asset Look

First, here's CONTEXT, which has some odd readings....

CONTEXT went positive yesterday morning vs ES and has stayed positive, even overnight. This is some partial evidence that supports my early theory that the risk off in ES overnight was not the result of news or a sudden and dramatic shift in sentiment based on things that occurred days ago, but more likely a Smart Money move, first I'd like to se if that can be confirmed, if so, then the next question is what is the play? A simple shakeout? Accumulation of shares at a better price point?

Fade of the gap starting...?

It looks that way. Early confirmation of the gap down wasn't there in 4 of 5 of the major averages including ES. AS the ROC slowed and momentum fell off, the positive divergence started to grow on the 1 min, here's an example...

 1 min ROC on the QQQ going positive

QQQ 1 min 3C (best used for very early trade) leading positive.

I want to take a look at the risk asset layout earlier than I normally would, but I'm interested in what may have or maybe did not occur there overnight.

Overnight and in to the open

Overnight as Europe opened, ES had already given up the day's lows as  German and Dutch 2Y interest rates just hit record lows at -0.021% and 0.033% respectively in a flight to safety rotation. The UK also issued 10 year debt at record low yields, another sign of a flight to safety.


The $AUD which is an excellent leading indicator among the currencies, dropped as Australian 
employment saw the sharpest drop of 2012.


Other Carry Trade currencies like the Yen were strong (the EUR weak hitting 2 year lows) sending the $USD higher, which puts pressure on stock prices.


Global growth concerns are being blamed as the reason for the sour sentiment, with PBoC/ECB rate cuts from a few days ago as well as further QE from England (all of which was expected and/or at consensus). This seems like old news.


Overnight the Brazilian Central Bank cut by 50 basis points and South Korea by 25 basis points (first cut since 2009), I'm not so sure though that is market moving in and of itself, the financial media is pitching the entire round of cuts as the reasons for dampened sentiment (overall CB cuts and QE).


China new Yuan loan data came in slightly higher than expected so there wasn't anything terrible out of China overnight, they do have GDP coming out overnight tonight.


What was interesting was the overnight ECB loan deposit facility that averages around $800 bn Euros, dropped overnight to $325 bn euros, this is something I speculated would happen or at least that the ECB was trying to engineer as banks take money out to issue loans when the ECB cut deposit rates to zero, but it seems strange to have such a massive outflow overnight days after the ECB cut the deposit rate to zero. It turns out the ECB's current account shows similar size inflows as the overnight deposit outflow, so on balance it would seem money was shifted from one ECB facility to another and NOT lent out.


If the bank money parked at the ECB at 0% deposit rate goes anywhere, I suspect it will be to stronger nations' treasuries, Germany, the UK apparently and the US, thus some of the record setting low yields (some below 0% or in negative territory even such as Swiss 2 year at -0.38 currently) as the ECB no longer provides even incremental yields, of course by design.


The fact is most of the damage or at least a lot of it is ES overnight, was done by the time Europe opened. The Financial media will always look to give you a reason why. It would seem if there's any reason at all, it is a sudden shift in global investor sentiment, however I tend to be skeptical (even though a drop below a key level can cause a snowball effect). I'm usually more inclined to look at what smart money is doing, as I often say and we see nearly every day, price is deceiving.


As for US Economic data, the biggie this morning of course was Initial Claims

Released On 7/12/2012 8:30:00 AM For wk7/7, 2012

Prior Consensus Consensus Range Actual New Claims - Level 374 K 375 K 355 K to 395 K 350 K 4-week Moving Average - Level 385.75 K 376.50 K New Claims - Change -14 K -26 K Initial claims did beat, which is a bit rare and the biggest miss to consensus since 2008, however last week's previous (as usual) was revised higher from 374k to 376k. The better than expected Claims are being blamed on a number of hings such as the holiday shortened week- From Bloomberg we get another line of thought (which was also spoke of by the leaky BLS)....

Low inventories in the auto sector are pushing back summer shutdowns for factories which badly cloud jobless claims data for the July 7 week. 


Continuing Claims came in a bit higher than consensus at 3306k vs 3300.


There is some concern with major banks being sold in front of tomorrow's NY FED release of the LIBOR Report as the scandal is widening and engulfing more banks.


In any case, I don't see a major catalyst for such a move in the overnight data and sentiment is an easy scapegoat, but sentiment rarely reverses on a dime, I'd be more suspicious of other motives.


Here are the overnight markets in to early trade.

 As you can see, the damage in Es started well before the European open as a negative divergence was in place after the 4 p.m. NY close, with ES responding around 9-10 pm EDT last night.




This chart picks up from 1 a.m. to the European open at 3 a.m. EDT at the green arrow and as yo can see, there's a rather large relative positive divergence in to the NY open. This is one of the reasons I suspect this gap down will be faded to the upside.

Quick Opening Update

ES, DIA, SPY and QQQ 1 min charts have not confirmed the move lower this morning, only the IWM.

In short, I would expect this gap to be faded and look for a near term upside move.

More shortly.

Market Update-Closing Indications

As I said last night, we just needed a little more time to let the charts develop and develop they did.

 DIA 1 min-for those of you using 3C, I just wanted to point out that relative divergences are often followed by the stronger leading divergences such as today's leading positive in to the close.

 Again, DIA 2 min from relative to leading positive

 DIA 5 min at a new leading positive high above price high of the 5th.

 DIA 15 min in a leading positive.

 DIA 30 min is where the leading negative and longer term pullback trend we expect after a move up is.

 IWM 2 min leading positive, very strong on today's price weakness, also at a new leading local high.

 IWM 3 min relative positive, look for a leading positive next.

 IWM 5 min relative positive.

 IWM 15 min leading negative-this represents the pullback trend we expect to develop after a move higher, although we always have to watch for changes and listen to the message of the market.

 QQQ 2 min leading positive in to today's price weakness.

 QQQ 3 min relative positive

 QQQ 5 min leading positive in to today's price weakness, pretty impressive move that quick on a 5 min chart.

 QQQ 15 min in line more or less with price/downtrend

 SPY 1 min really turned around fast today to hit a leading positive

 2 min SPY trend has remained leading positive, this is what started the curiousity yesterday that this trend didn't break down in to yesterday's price weakness, although difficult to understand at the time, it was a good signal and not noise.

 SPY 3 min with a great positive divergence at today's lows and a leading positive in to the close

 SPY 5 min has remained in lading positive, it never saw any damage like some of the shorter term charts (smaller distribution on shorter charts) and is hitting a new local leading high.

The 15 min lading negative trend. On price strength, we want to be looking for a place to unload longs and enter shorts in anticipation of this negative price implication/pullback.

Things were a little confusing yesterday, but cleared up pretty well today, this is why it's important not to marry your opinion and be open to what the market is telling you.