USO Update and Trade Idea Follow Up

Yesterday I closed the USO December $35 Calls that made +71% I said if it were an equity long I'd probably just sit tight, but I also followed that up with a USO Trade Opportunity yesterday.

Looking at USO today, I'm glad to have closed the calls yesterday and I still think we get the pullback, in fact I'm considering some VERY short term USO puts for the pullback, but the bigger trade is letting the pullback come to you for a USO long, whether USO or a leveraged ETF, I prefer an equity long for a more sustainable up trend.

Make sure to see yesterday's analysis linked above. As for today, We're still on track and I'm considering puts, although it's very speculative.

I'm not going to make the case for USO long again, I've posted that dozens of times, I think there's a link in yesterday's follow up post to one, I'm just covering where we are now and where we expect to be looking at USO long.

 We want to see accumulation in to the pullback, but first it has to start so we still have negative intraday divergences that should pull USO back- 2 min.

Here's a 5 min, also how we used a head fake/ stop run below support to enter at the lowest price with the best risk profile and where we sold before momentum faded and the calls lost half their value.

Also note the positive that started the move (white).

 Longer term 15 min large positive, we have much larger than this though so a pullback is very reasonable here.

The O-Over system that was short and now going long. After the first long signal, the first pullback is almost always to the yellow 10-day moving average.

This is where I suspect it will be by then. You can use the blue 22-day as a stop, but on a new position I prefer a wider stop so I pulled out my Trend Channel.

A 10day stop would be at $34, it will move up by then so if you need an update, let me know, but not much.

I prefer a wider 2-day channel sot a stop, even though the 1-day held the downtrend short perfectly for the entire trend. The 2-day would be at $33.65 so you'd have very little risk buying at the pu;back, and you have some stops so you can figure position size.

To reiterate, I LOVE this trade for a longer term position trade.

Market Update

It's funny how the last 2.5 days there has been this fog over the charts, but a few things have stood out, one was the CONTEXT model I put at the end of last night's daily wrap showing ES as being undervalued, but it only popped up in the last day or so, while everything was foggy.

Then if you recall, I showed a chart of yields vs the SPX yesterday and said that yields (which were above the SPX) act like a magnet and pull the SPX toward them until regression to the mean is achieved. Then there was the comments last night that they have (the invisible hand) have gone through some trouble to pin short term VIX futures right where they are for the last 3 days and have struggled to keep the market ramping HYG Credit stable (from it's previous decline) for the last 4-days, but most of all, the comments made BEFORE WE EVEN HAD A BREAKOUT in the VIX, that the Bollinger Band Squeeze in the spot VIX will lead to a highly directional move (I believe up because the actual VIX futures have a never before seen, large 4 hour positive divegrence in 3C),  but most importantly and I said this BEFORE we had anything more than a Bollinger Band pinch, was that...

"After the initial breakout with a VIX Bollinger Band Squeeze, price tends to loiter (hang around) the area for several days before pulling back to the 20-day moving average and then the directional move takes off" 

I even posted a chart of all the smaller BB VIX squeezes this year and EVERY ONE of them did the same thing, well.... These are some interesting charts given today's NFP and remember my warning of the last two days about the NFP...

"Beware the knee-jerk initial reaction, it's not as bad as F_E_D events, but it's an emotional data point and the knee jerk is often seen".

The knee jerk move means the initial move is the wrong direction and gets faded, a VIX run to the upside correlates almost identically mirror opposite and the market drops to the downside.

NOW THAT WE HAVE SOME CLARITY IN THE CHARTS AND WE HAVE A NICE PRICE MOVE, I'LL LIKELY BE ENTERING MORE THAN JUST THE VXX CALL TODAY.

HYG Credit (used to ramp the market on its own or with VXX down through SPY Arbitrage).

 I noted they were trying to keep HYG flat and from its previous downtrend as HYG moving up fools algos in to thinking smart money is risk on.

However, even though HYG made the move needed as a market lever of manipulation, look at the 3C signal, the clearest of the week in HYG, distribution in to the higher price. If HYG had more BETA, I'd probably short it here.

 And just for comparison, HYG (blue) vs the SPX (green) is far from leading institutional risk, it gets much worse than this the further out you go, but I wanted to show the last several days and today.

Remember Professional Sentiment was sinking this week and wanted nothing to do with any move higher in the market? This is sentiment for today and recently, no move at all with SPX in green.

 Our second Leading Sentiment indicator is giving the same signal, wants nothing to do with this move.

 This is the real VIX futures and while I don't normally put much faith in 1 min charts for anything other than intraday purposes, I think the 3-day pin of the VIX/VXX is ending as accumulation is seen here as well as VXX and UVXY, the reason I opened a half position VXX call earlier today and will likely fill it out later if we get a little better prices.

 Remember High Yield (the illiquid kind) Credit was leading positive vs the SPX yesterday and I said, this too is strange... Well today it's red and selling off in to this move (vs SPX in green).

 And my SMOKING GUN, the spot VIX Bollinger Band Squeeze which indicated a highly directional move (I don't think traders could be much more complacent so down is not likely and we have other evidence), but as I said BEFORE we ever had a first sign of a breakout, "These tend to breakout and then hang around the area, pullback to the 20-day moving average and then take off. Today spot VIX, after having started the breakout, pulled back to the 20-day moving average as you can see above.

 And why do I think VIX sees a highly directional move to the upside other than bulls couldn't be much more complacent?

This VIX Futures 4 hour leading positive divegrence, not only is it one of the largest / strongest VIX divergences I've seen, but it is also on the longest/strongest chart I've ever seen.

And if that's not enough...

The daily VIX 3C leading positive divegrence in the area with confirmation from long term TSV, a cousin indicator, but often different signals, not this time though, positive all the way.

Remember, the market trades opposite the VIX so a directional VIX move higher means a market move lower.

 As you know for Index futures, 1 min charts are useful for intraday trade, but as far as a trend or trend change, I look to the 5 min chart. ES (SPX E-mini Futures) is showing a transition from what was earlier a slightly positive divegrence to a negative divegrence today.

TF (Russell 2000 Futures) 5 min is clearly moving toward a nice clean, not foggy, negative divegrence.

So, I will be entering additional positions today I'm quite certain, we need movement to get good entries and we have that, we also have an unemployment rate that Bernanke testified would be "around 7% " when QE would end or taper.

I think the F_E_D wants this, I think the balance sheet unwind is dangerous and they know it and the larger it gets, the more dangerous, especially when you have a market bubble that is all liquidity induced, when you take away the liquidity...

Trade Idea / Trade Follow Up: BIDU (Short)

BIDU which was one of our best examples of letting the trade come to you and using the head-fake to allow for the best entry, the lowest risk and best timing and it made good money as a short in a short duration.

Recently BIDU was added back as a core short position, except it was meant to be phased in to. I still have 2/3rds of a position to fill out to bring it to a full position and since first entering, it's only seen draw down -3.84%, well within even the tightest risk management.

I believe BIDU is going to come to us again, I see one of two possible entries, the second is looking more probable, but I'd prefer the first. First off though, lets review BIDU.

This is the original October BIDU 1/3rd Entry post : Trade Idea: BIDU (Short)

This is the same day analysis of BIDU, which  is interesting for a couple of reasons BIDU Trade Idea Update

First, it takes a quote from a September post talking about shorts like BIDU and WHY at that time in September we were expecting a market move higher before we ever had any 3C confirmation of the accumulation for the move which was about 3 weeks just prior to the October 9th low cycle we are at the top of. This is the start of that post...

"I don't know why I didn't do this before, but I had been reminding you after the fact that before the bounce off the 10/9 lows, I had been looking for a strong rally to the upside and this was BEFORE there was any 3C indication of it.

My reasoning was that there were "Hundreds" of shorts on my watchlists that were just so close, but they needed that extra little push and that wasn't happening without the market driving."

"The comments from Sept. 25 as this is relevant to BIDU (Bold was from the original post)...

"In fact, the best reasoning I see for a market bounce is hundreds of individual stocks themselves and the vast majority have their own signals to bounce.

HOWEVER, LETS NOT FORGET THE OTHER SIDE OF THE COIN, that's why I took the time to remind you in the post linked above, what the averages look like and they are no joke. Those aren;'t divergences off in the future, those are divergences we are in the middle of right now so now is a time to pick and chose your battles, to be patient and know when to paddle in or when to swing that bat."

These comments are from Friday Sept. 20th...

"Last night I was trying to communicate that there's almost always a goal behind a market move, like when I said, "That Bull-Flag didn't appear by chance " yesterday. I explained the reason as well, the hundreds of beautiful short set ups that are just 1-4% away from near perfect entries, but more than that, from the kind of demand (higher prices and volume) Wall St. needs to position in the size they trade, so I haven't changed my tune at all since August when the accumulation range started forming, I'm saying right now and last night the exact same thing in August that I thought would happen and thus far has."

Now fast forward to the present, remember the BIDU Core/Trend Short is only at 1/3rd size and needs to be filled in, this is why I was waiting for better prices to enter the rest of the position.

 This is a weekly chart of BIDU (where I like to start my analysis to get an overview). The area at "A" is a classic healthy bull market, volume is expanding with price; note when that stops.... right at the 2009 QE 1 lows.

The purpose of 1, 2 and 3 is to show how a trend in stage 2 mark-up accelerates and gets very vertical going in to a top, many times the most bullish looking price behavior is a major red flag, as I often say, "Price is deceptive".

At "4" we have a large symmetrical triangle, this is WAY too big to be a consolidation pattern, larger triangles after an extended uptrend or downtrend are most often tops or bottoms.

At 5 we actually have a new high, this "could be considered a large scale head fake move because the new high is what retail is buying, that's the reason (or one of several) for a head fake move, to create demand and better prices, just like the gap down in VXX today created supply and better prices.

 On a daily chart, we knew the triangle to the left had major distribution in it, we also knew it was highly likely that there would be a head fake move in the form of a false breakout to the upside before any significant downside, that makes a perfect entry.

We were patient with BIDU, we let the trade come to us and when the breakout came in a small triangle, we expected one more because that's how predictable technical traders are and Wall St. uses that against them every day. We entered BIDU short in a phased in position all in the yellow box in 2012 and then rode BIDU down.

At "B" you have a perfect head fake with a bullish "Bull-flag" that technical traders expect to breakout to the upside, many will enter on the price pattern alone and then we have a large gap down leaving retail technical traders (bulls) holding the bag.

At "C" we have a new "Bullish price pattern, an ascending triangle, but it's too large to be a consolidation/continuation pattern already, it's likely acting as a top and has good head fake potential.

This is the same ascending triangle, first month Technical traders learn these triangles and know an ascending triangle is expected to breakout to the upside and start a new leg higher, so long as we know there's distribution already present in BIDU which we know from out initial entry, we know the chances of an upside breakout being a false or failed breakout are very high, but the breakout provides us with a short entry that is a better price, much less risk and much better timing as head fake moves usually come right before a change in trend.

 Looking at Don Worden's Money Stream, we see MS confirming BIDU's uptrend in 2010 and MS going negatively divergent (distribution) in to the large triangle top we first shorted in 2012 in the yellow box. Since then, MS has been in line confirming BIDU's downside price action, but as soon as BIDU lifted to the upside in 2013, the Money Stream divergence grew even larger, to confirm Money Stream should be making a new high on the chart, instead it is leading negative and this is a daily chart, so that's a significant divergence.

 Here's the daily Trend version of 3C, although 3C is also an underlying trade money flow indicator, it is nothing like Money Stream in it's formula or code, however, like Money Stream it too confirms the 2010 uptrend and then goes negative in to the 2011/2012 triangle and leading negative at the head fake breakout we entered short in the yellow box. 3C also confirms the downside action after the short entry and when BIDU moves up in 2013, just like Money Stream, 3C goes leading negative (distribution), in fact it looks almost exactly the same as Money Stream, these are two VERY different indicators and the only way they'd look so close is if the underlying trade is actually doing what they show it to be doing, distribution.

The 60 min 3C chart of BIDU which is a VERY strong timeframe is leading negative in to the uptrend, remember with each faster timeframe we get more detail, but the longer timeframes show the larger trend.

Specifically in the yellow box where the ascending triangle is we see a strong leading negative divegrence.

The 30 min chart shows more detail, how BIDU moved with some accumulation on a smaller scale that doesn't show up on longer charts, it's enough to get BIDU moving up so they can sell those shares in to higher prices and once demand kicks in they can also sell short in to higher prices, the same thing we want to do.

 The 10 min chart is more local, although if we could see enough of the trend, we'd see the trend leading negative in a much bigger way, but here we see numerous smaller acc./dist. steering areas and a very strong leading negative divegrence in to the triangle.

The intraday 3 min chart shows an accumulation area (very small as it doesn't even show up on a 10 min chart, but that is how they created the ascending triangle, that bullish triangle is not there by coincidence, it was put there as price was falling institutional money or even market makers stepped in and accumulated enough to halt the slide and send BIDU up so they can sell in to higher prices and the distribution is very sharp, much more than the accumulation that sent prices higher, in fact leading negative to a new low.

 This is an intraday 1 min chart, the weakest underlying flow, but the most detail, note distribution at every top to form the flat top of the triangle, also note that each one (as the market is fractal) is a head fake move that was distributed as it is above the yellow line where a new high or some other buying feature is present.

My first choice entry is "A", a breakout to the upside above the $170.78 level, the breakout would usually be quite strong, it has to attract the attention of bulls and convince them that this is a strong move, they are selling a lie, so they must really make traders believe so don't just expect a move to $178.85.

Once we confirm distribution in to a breakout, we know the probabilities are very high it will be a failed breakout and "From failed moves, come fast reversals", this is the hardest to short emotionally, but it is the best price, the least risk and best timing so holding your nose and jumping is actually rational even though emotionally it is hard to short a strong looking breakout.

Option "B" is if we don't get an upside breakout, I don't think this scenario is probable because why build the bullish ascending triangle knowing most technical traders have limit orders set just above resistance, if there's no breakout, there's no increase in demand to short in to (as large institutions need large demand to short/sell in to) and no higher prices.

However, if it is "B" and we see a break below the triangle first (consider it may be a Crazy Ivan shakeout), I don't want to short the first break below the triangle, that's where retail will be shorting. Typically they (smart money) will run price back up inside the triangle and with a Crazy Ivan, even above the triangle and force the shorts to cover, when shorts cover they are buying so they are creating demand once again and if the move is above the triangle we have bulls joining to create even more demand so it's that move I want to short in to.

I'd set alerts on both sides of the triangle, I'll be on top of it and let you know what we see, but since there's already such large distribution, the chances of any breakout being real are very low, the chances of a head fake move are very high and that's also where out HIGHEST PROBABILITY TRADE IS.

Trade Idea: VXX / UVXY Long

Just earlier this week I closed a VXX December $45 call for $3.50 with profits of 30+% and 90+% for an average of +65%.

I said then that I would replace the December $45 calls with January $45 when the price comes down, I can now get January for about the same price or less than the December ones sold for a large gain.

I'm going to enter 1/2 a Call position in January VXX $45 Calls, I'll likely add the other half later if it looks reasonable.

The UVXY long I left in place and it's still at a profit.

I would have no problem going long VXX or the 2x leveraged UVXY either, but since I already have UVXY open, I'm replacing the call position as I had said. Remember the 4 hour 3C chart of VIX futures with a leading positive divegrence.

Opening Indications

VERY EARLY indications, nonetheless none of the averages have seen 3C confirmation of their gap. Short term VIX futures have a positive divegrence and....


Honestly, could this have been forecasted any better?

For the last 2 trading weeks I've been saying this spot VIX Bollinger Band Squeeze will produce a highly directional move, a breakout in my opinions which sends the market lower. I also said in every mention of it, "After the initial breakout from the pinch, price tends to loiter in the area and then takes off". More specifically I said in each of the last 3 Daily Wraps that "Price tends to pullback to the 20-day moving average after the initial breakout before shooting higher." 

That's the 20-day average VIX is at, so again, could this have been forecasted any closer than that?

More Color on the NFP...

Here's some more color on the NFP from 8:30 this morning.

Released On 12/6/2013 8:30:00 AM For Nov, 2013

Prior Consensus Consensus Range Actual Nonfarm Payrolls - M/M change 204,000  180,000  140,000  to 200,000  203,000  Unemployment Rate - Level 7.3 % 7.2 % 7.0 % to 7.3 % 7.0 % Average Hourly Earnings - M/M change 0.1 % 0.2 % 0.1 % to 0.4 % 0.2 % Av Workweek - All Employees 34.4 hrs 34.5 hrs 34.4 hrs to 34.5 hrs 34.5 hrs Private Payrolls - M/M change 212,000  173,000  145,000  to 200,000  196,000  First the NFP came in on top of the top end of the consensus range (203k vs.200k). Second the unemployment rate came in at the bottom of the range at 7% with consensus at 7.2%, that's a pretty good clip. The work week and Average hourly earnings came in spot on, they aren't headline so they can come in at consensus. Private payrolls dropped from 212k to 196k, but beat consensus of 173k. The number of people not in the labor force declined modestly to 91.3MM from 91.5MM As mentioned, October was revised down from 204k to 200k, but September was revised up  to 175k from 163k so the net revision for the two months was +8k. Out of 8 of the major Money Center banks, only 1 of 8 came close, Barclays forecast 200k, everyone else was below from 165k to 190k with the median around 180k. After the print, it seemed there was some confusion between the Carry tracing algos and carbon based traders, the algos following a higher USD/JPY as the USDX gained on the data (actually not good in this case, a higher USD is a sign of Taper on), vs the humans who knew that.

 $USDX up, a sign of Taper on/QE off as the $USD isn't being diluted by printing.

However the USD/JPY was the carry trade ES was following all night. Actually all carry (yen based) pairs are up on the print.

*Remember what I said yesterday about the emotional knee-jerk reaction

So ES followed the carry trade, even though the reason for the rise in the carry was a "bad news" reaction from the $USD, when Taper of QE looks probable the $USD rises, gold falls and treasuries fall- at least that was the typical reaction, but remember gold came unhinged from QE in 2011. Gold futures actually look pretty decent here as the market seems to have adjusted to the new "normal" correlation.

 Gold Futures...

Interestingly, Bonds 10 and 30 year look similar in their reaction...

10 year Treasury Futures. When the open comes, we often see another jerk in another direction. In any case, if I have time I'll try to pull the complete U1-U-6 employment series.

BEAT

NFP came in at 203,000 on consensus of 185k. The consensus keeps getting beat with Non-Farm Payrolls, last month it was a modest 120k consensus with a print at 204k which was revised down slightly to 200k.


The Unemployment rate dropped from 7.3% to 7% (consensus 7.2%)

This means one thing for a F_E_D taper, MORE LIKELY, but if you're looking for the truth, this is "Seasonal Adjustment " season and the numbers the DOL Excalibur 2000 spits out are goal sought, just input what you'd like and it will figure out how to make that happen, this happens until about April, all the Eco-data looks a lot better, then falls off a cliff after the seasonal adjustment period ends.

That means it's likely the F_E_D wanted a print above 200k. As for the Unemployment rate dropping, remember the size of the work-force is dropping as people drop off extended benefits and thus drop off the labor force, so the unemployment rate shrinks because there are fewer people eligible to be counted as "unemployed", but they're still unemployed.

The market right now is very volatile with wide swings to hit all of those buy/sell orders. Make no mistake, this is TAPER ON/QE OFF NEWS the bulls didn't want to see.

A.M. Observations

Remember that CONTEXT ES model I ended last night's post with? Take a look after overnight...

 Now the model is only about 2 points rich as overnight trade narrowed the model's gap.

Why?

Overnight the chairman of a board that makes recommendations regarding Japan's Government Investment Pension Fund said they should add 18% stocks, reduce bond exposure now, reduce domestic bonds by  52% and local bonds to as little as 35% and said the government will act on the panel's advice.

The only hiccup is this was already thrown out there over the summer and GPIF has done what? Nothing, just something to sink the Yen overnight which lifted the USD/JPY below.

 1 min chart of USD/JPY

Which in turn lifted Index futures

ES 1 min lifted about 7.5 points since yesterday's 4 pm print.

However all of that will mean precisely NOTHING in about 10 mins. when the Non-Farm Payrolls come out...

Interesting about the CONTEXT model though.

Daily Wrap

I'm going to keep this brief because really tomorrow is what really matters, at 8:30 a.m., the NFP. Beware the knee jerk reaction, they aren't as reliable as the F_E_D knee jerk, but this is an emotionally charged issue and the market is all perception.

For once we have a Dominant Price / Volume Relationship and it's huge, more than half the components of each average, so a very dominant relationship. Even though we saw above average volume today on the 5th day of losses in the market, the Dominant P/V across all the averages was Price Down/Volume Down, for example it was 333 of the SP-500, 71 of the NASDAQ 100, 21 of the Dow 30, so a VERY dominant P/V.

Price Down/Volume Down is the hallmark relationship of a bear market, what it means in this situation is that the market is not at an oversold point, it can keep going lower. 

As we saw earlier our Sentiment Indicators closed negatively, HYG they've been trying to hold in a range for 4 days while at the same time trying to constrain VXX for 3 days now.

One moderately bullish Leading Indicator is Yields as the are like a magnet for equities...

 Yields vs the SPX.

However, the normal relationship of rising yields is due to risk on and selling in bonds, if you look below, bonds have been selling off in a very QE-OFF or TAPER on way

30 year Treasury futures, 10-year look the same, they are acting as if QE is going to be pulled, not their normal market relationship right now.

A few other odds and ends...

 Spot VIX is looking more and more like it may just make that directional breakout without a pullback to the 20 day moving average.

Still NYSE A/D line can't break above October and is actually looking like it has topped.

My award winning Trend Channel has the entire 10/9 cycle in the channel, the stop is just a hair below.

The Dow has already been stopped out by the Trend Channel.

I've found price tends to bounce in the channel after a stop out, but I have always seen it is better to exit on the stop out, sometimes you'll see higher prices in that volatility just after, but you almost need dumb luck to hit them and then there's typically a move down like a 1-day gap that can take out a month or two of longs in one morning.

The point being, when the Trend Channel is stopped out, I've found it's better to stop out and move along to something else or risk the market's wrath.

 RSI as many of you have noted is divergent, this is still one of the traditional indicators I like for divergences. The volatility stop that introduced the 10/9 cycle just ended it as well.

 This is VXX with the SPX (green ) inverted to show they pounded the VIX futures late in the day so ES could make it back up to VWAP at the close.

We actually saw this in 3C.

Finally I was wondering what Don Worden's much respected TSV had to say, I reduce noise and use a longer period of 55, note the positive divergence  before 10/9 lows and leading negative recently? It looks a lot like 3C in many ways.

I did find this interesting, CONTEXT for ES has ES undervalued by about 10 points, sometimes they reset it in the a.m. as they try to incorporate the new correlations, for instance we saw the long correlated EUR/JPY vs ES go completely inverse today, CONTEXT isn't built to accommodate that, they have to do it manually.

For now, not too much happening, but 8:30 all heck will break lose, hopefully we find not only some answers there, but some neat trade set ups. Get some rest, tomorrow is going to be interesting.

MCP Charts

Sorry, trying to get this done...

 Base, breakout and consolidation...

Long term base, very positive 60 min

Intraday 1 min accumulation

2 min acc

3 min acc. that's migration.

The 60 min on the last or first breakout. I think it's ready to make another leg higher.