Market Update-Quad Witching

There's clear intention this morning to try to move the market higher, there isn't so much clear intention in the way of accumulating and then moving the market higher as in a cycle, this seems to be tied very clearly to Quad Witching.

If I'm playing options and I look at this chart, what kind of strategy do you think I'm going to chose? Based on PRICE ALONE, where are the highest probabilities and you can't look at this in the way we generally play options, straight buying puts or calls, these are slightly more sophisticated, but just slightly...

 Above you have over 5 trading weeks in a range, if you are dealing in options, what is the highest probability outcome looking at price, forget the concept of a head fake move above a clear defined level of resistance? I'm playing the range in any number of different ways, but we aren't looking at this from "our" perspective, we are looking at it from a "Follow the moving average, price is king, Marty Zweig is my idol" perspective. In that case, you're going to play the range and almost all options can play this , even the single stock options. Look at the volume today, does it really seem like a risk on move considering Q3 GDP just blew away consensus and makes tapering at the next meeting all the more likely? 

No, this is Quad-Witching.

 The Q's have the same range, it's 4 trading weeks old

The R2K has the furthest to go, but it's also probably one of the most profitable max-pain pins to shoot for because it would seem to be the safest from an options trader's point of view, "Ah, that former high isn't going to be taken out, look how bad the IWM has been lagging the market!"

The Dow is a perfect example of making those options worthless, with that move, they are gone.

This is most likely why, in my market update notes I have "DIA has the weakest current 3C trade and IWM has the strongest", it makes perfect sense, the DIA already crushed those positions, they don't need to support it, they can in fact start selling short in to it as long as they maintain price above the resistance level long enough for those options to close, usually by 2 p,m,

The IWM would look the strongest as it has the most work to do.

This same action is in XLK,  XLF especially because it's so close and several others that have that same range bound look and it's not just a week, we are talking about 5 trading weeks.

This may very well be a gift today or Monday, it depends on if they keep acting or start acting like the DIA.

The VXX has purposefully been knocked down, but there's a strong bid under it, I'll likely add to it soon, just look at it vs the market and HYG has been activated as well today, why do you think that is, ESPECIALLY when we get such strong Q3 final data, that's "GOOD NEWS IS BAD NEWS", but it doesn't matter because today is Quad Witching, 4 groups of options types all expiring on the same day.

Regardless of knocking VXX down at neutral on the day, they can't get enough traction to activate the SPY arb as of yet.

So the key is still VXX / UVXY, however the opportunities are likely going to be everywhere.

More in a moment.

Trade Idea: Reiterating MCP Long

I thought MCP may take a breather and consolidate a bit, but it seems to be straightening itself out each day more and more. There's already huge leading divergences (positive) in the areas where it ultimately counts (30-60 min), it was the 5 min and intermediate intraday ranges where it looked like it may consolidate, but the intraday charts have been nearly tick for tick confirmation so I want to reiterate MCP long which is in the trading portfolio, also as a longer term trade and an options position (call).

Morning Update

There's quite a bit to wrap our heads around this morning, almost all of it we have warned about in the last month and a lot of it just last night. Where to start?

First the Carry Trades as they may have a significant impact on the market. In last night's Daily Wrap, I warned of the JPY single currency positive divergence and said,

"All of the carry trades (JPY-based) stalled out today as well, and most are sitting in near perfect symmetrical triangles, we know what that generally means so watch the EUR/JPY especially for a possible head fake move, after that if it is a head fake move, that would have severe implications for the carry trades and thus for the Yen as an unwind would be highly likely."

Take a look at the Yen, the divergence was posted last yesterday, but I did think it would take a bit longer to develop.

 This is the single currency Yen positive divergence, it looks like the carry trades may be about to be covered.

Last night I warned of the symmetrical triangles in most carry pairs and "You know what that means", which means a head fake breakout to the upside followed by a rapid downside move.

Take a look at the USD/JP overnight and today...

 This was one of the less symmetrical triangles, but still a bull pennant type of pattern, there was an upside breakout at which point BAC this morning closed their long! The result?

This is the USD/JPY this morning.

Here's a wider view of the pair. Target according to BAC, 96-97 through the psychological 100, what happens at the BOJ at that point may just start the Chinese/Japanese conflict for real, especially with China's possible banking sector implosion-more on that.

I can''t say this is responsible for the Nikkei, but I warned about the Nikkei last night as well,

"While the Nikkei has a sloppy in line 1-5 min 3C chart, where it really counts and accrues, the 15  min chart, also seems to agree with the Yen or at least be aware of it."

And I showed this negative divegrence in the Nikkei 225 futures as of last night

15 min leading negative. I'm not sure we've seen the last of this and there's more going on in Asia, but...

The Nikkei id down -.40% which is far batter than some other Asian averages.

I think my warning last night about watching the Yen and the carry pairs is something we really better watch the next few days, if what I suspect is right, then BAC is just the first to come out an admit they just unwound their carry trade and that doesn't have good implications for the US stock market.

I also have been warning and keeping an eye on the Chinese liquidity situation/inflation situation in which the PBoC is either withholding reverse repos that are regularly scheduled Tuesday/Thursday or as we just saw, they injected $300 bn Yuan through 7-day reverse repos the last 3-days as the interbank liquidity surged, then dropped -2% on the injections and then promptly surged to 9% which is the highest seen since the June (near) interbank liquidity crash/money markets.

Things are heating up which means watch for headlines this weekend of military hostilities between Japan and China or intense rhetoric over the barren rocky islands. The Shanghai Comp was down 1% and down for the 9th day in a row ! The situation with interbank liquidity is always hectic at year's end because of legal needs that need to be in place, but this has smelled like something else for months and back to June.

The EU was downgraded overnight by the S&P from AAa to AA+ so the love is being spread everywhere.

Finally the final US Q3 GDP came in blowing away consensus us 3.6 and prior of 3.6 for a final print of 4.1, very handy for the F_E_D to cut another $10bn next meeting. That means from the 1st Q3 GDP estimate to the final, there has been a discrepancy and gain of 45%. Seems a bit out of whack, no?

So although it's volatile Quad Witching and year end window dressing, there are some very serious events not on the horizon, but in port right now, beware and keep an eye on these, all of them.

So lets see what the market looks like as am trade burns off.

Daily Wrap

While I certainly can't say for sure with a possible lack of follow through, a possible knee-jerk reaction or  possible pin for Quad-Witching tomorrow, the Dominant Price/Volume Relationship yesterday did suggest today would be a down day or at least halt the advance. Three of four of the major averages were down today, only the Dow made an all time new high with a +0.07% gain. The SPX was down -.06%, the NDX down -.31% and the R2K lost half of yesterday's gains (and then some) at a loss of -.73% Besides the incredible amount of market dispersion which never use to happen, the R2K failing to lead or even worse, leading to the downside was not a good sign, nor was ANOTHER Hindenburg Omen, that's a nice cluster and the last two led to significant corrections, things are different now so what might this cluster lead to? The market crash they typically are a warning of?

Again this could be for several reasons, but any of those reasons were much stronger than the willingness to take on risk and this on a F_E_D double POMO today for almost $7 billion . In the past, as soon as the POMO was complete, the money was almost instantly in the market, what happened on today's rather massive POMO?

Again, as I've been saying for the past week whether up or down, the VIX short term futures have led the market and today they were doing their thing with stronger signals today than we've seen in more than a week.

HYG was a severe under performer today, virtually the opposite of the SPX, but we saw the distribution there yesterday, it's just not enough Beta for me to trade. With the VXX doing its thing, there was no SPY arb, even as they tried to ramp assets including carry trades and even HYG in to the close.

FCT was flat with the market, but our other sentiment indicator that has worked well, HIO was very clear in the professional sentiment there.

HIO vs SPX, what may be even more damning than the dislocation to the downside is the time of day it occurred, the same time the pros come out to trade.

VXX outperformed the SPX's correlation all day, it was quite clear that whatever money may have been taken from the safety trade for the 1-day risk trade, it's now flowing back in to a reach for safety.

Yields, one of the strongest leading indicators were at reversion to the mean today as the 5, 10 and 30 year all saw selling, this is the kind of action we see when the market is nervous about QE. In addition the typical correlation to QE, gold sunk to multi-year closing lows, even though on a day to day basis, the correlation is gone. The third asset, the $USD has a 5 min leading negative divegrence in the futures so that may fall as well, then we have 3 for 3 assets essentially reacting negatively to the taper yesterday.

HY credit was also totally flat on the day, over the last several weeks it's in a very negative posture. The more I look at these assets, the more I'm convinced the F_E_D pulled another private email to private equity firms and others or whatever mechanism of transmission, I'm sure they didn't want to get caught red-handed with the email evidence again, you'd think they'd be a little more sophisticated in passing on such market moving information.

As for the 3C signals, you know what I know, you saw the IWM post and despite the IWM's losses, it was no different in divergences than any of the other averages, as I said, it was a perfect proxy. You also saw the VXX / UVXY information, what you may not have seen was the VIX futures finally on the move again after they had been so blatantly held back (we commented on this earlier in the week, one Daily Wrap before the F_O_M_C was almost entirely devoted to the action that was clearly manipulating VIX futures and trying to prop up HYG credit.

 VIX futures finally see a 3C positive divegrence after a week of nothing.

It was strong enough to move to the 15 min charts, in fact right after the market topped.

The 4 hour, massive positive divegrence is still there with no damage done at all.

All of the carry trades (JPY-based) stalled out today as well, and most are sitting in near perfect symmetrical triangles, we know what that generally means so watch the EUR/JPY especially for a possible head fake move, after that if it is a head fake move, that would have severe implications for the carry trades and thus for the Yen as an unwind would be highly likely.

In the Spot Vix...

Our Bollinger Band Squeeze is still in play. I warned about the candle at the yellow arrow looking like a pullback, I warned numerous times about the F_E_D knee-jerk and other volatility this week (red arrow), but otherwise, that BB pinch didn't just end up there coincidentally, I believe it will continue to play out and you know the correlation with the market. This isn't just academic as today only two partial positions were opened with the probability of full size positions, you know which the first one was and why it was partial which was justified later in the day.

The Dominant Price/Volume Relationship today was Close Down/Volume Down which is the most benign of the 4, generally taken as "Carry on", but carry on what exactly? Perhaps an op-ex pin tomorrow?

You saw last night's SKEW Index, it just moved to a new high for the year today as if last night's signal wasn't scary enough for market bulls, that puts the SKEW Index right at the $138 level, entering the red zone.

As for market breadth, no good news there either. The NYSE Advance/Decline moved lower and still hasn't taken out the October A/D high, also in the same boat is the Russell 1000, Russell 2000 and 3000. The NASDAQ 100 and Composite both moved lower, both are still not able to take put November's A/D high.

All measures of " % of NYSE Stocks Trading Above, 1 Standard Deviation Above, 2 SD's Above either the 40-day or 200 day moving average" are all down, all of them have made lower highs and lower lows since October, for example,...
Percentage of NYSE Stocks Trading Above their 40-Day Moving Average"

Indicator (green vs SPX red) is making lower highs and lower lows, better known as a downtrend since October, EVERY Measure of this indicator, whether 40-day or 200 day, whether at the average or 1 or 2 Standard deviations above are ALL in a downtrend since October. Can anyone seriously wonder why we have a cluster of Hindenburg Omens just from a breadth point of view? This is something I've been pointing out all year.

Beyond that and what was already covered today, we just have futures to look forward to for any additional information, don't forget about the typical way op-ex Friday's trade, even a Quad Witching Friday like tomorrow, it's the 3C signal that is important from 2 pm to 4 pm.

As for futures, one of the most interesting to watch is going to be the Yen, it may signal a total unwind of the carry pairs. Today alone the 5, 15 and 30 min 3C charts were all leading positive, this is the 15 min.

There may not be a large enough divergence to make a move in the Yen yet, but as soon as the Knee-Jerk on the F_O_M_C was completed, these divergences FLEW, it kind of smells like the carry trades are about to be closed out.

While the Nikkei has a sloppy in line 1-5 min 3C chart, where it really counts and accrues, the 15  min chart, also seems to agree with the Yen or at least be aware of it.

You know the process has to take place and the divergence build so if we don't have an immediate reaction overnight as we head in to Quad witching, at least know that it's there and it's likely going to build, this is where I remind you, DON'T GET LOST IN THE LINES.

THAT'S GOING TO DO IT FOR NOW, I think I already mentioned the NQ and TF divergences building (negative) while ES is still in line for the moment.

We had some nearly perfectly timed shorts, then longs and then out yesterday near the highs and I'm happy for that considering today's activity. I'd urge you to stay patient, those same signals that have been leading us are already back in play after being out for more than a week, things are moving again, just don't jump the gun and don't let "New DOW Record High" headlines discourage you, after all it was 0.07% that made that new headline high.

If I see it tonight, you know I'll let you know.

Futures and Tech

Both Index Futures and the Tech sector (my choice for a trade there is TECS) both look pretty bad.

It's actually a bit difficult to sit still right now and not take a position, but I think it's most prudent to let the charts develop a bit more. There's always the chance of missing the trade, but over the long haul and years of doing this, I think you'll find there's always another bus and it's a more prudent strategy.

EOD Market Update: Patience

One of the things we look for in a move like yesterday to establish whether it has legs or not is a concept called follow through, it''s very simple, the excitement of the previous day follows through to the next and we have another strong day. I haven't seen many of those in some time, it seems by the time we get to the next day there's already been significant distribution in to the first day up.

As for right now, as suspected, VXX / UVXY are pulling back a bit and that's fine, I'd much rather run a full position size, but I want to do it smart and phasing in like this is actually part of my risk management. The same can essentially be said about the FAZ long entered as a half position size.

My gut feeling is still that the market is in an area in which it will likely open close to tomorrow to execute an options expiration pin on all 4 option classes that all expire on quad witching. I'd expect the same general principles to be in effect, most contracts should be wrapped up by about 2:30 or so, we will likely see a pin (they do move as the open interest changes through the day) until 2:00-2:30 and then the market does whatever it wants. In my experience what happens after 2 p.m. in price has very little bearing on how the new week opens, but the 3C signals over the last 2 hours of Friday tend to pick up right where they left off on the next day of trade, even over a long weekend so I'm more interested in the 3C signals the last two hours of tomorrow than price, price is deceptive, it's a billboard at this point.

We also have window dressing coming near and end, I haven't looked at a calendar for the exact date, but the rule of settlement is Trade Plus 3-Days, so that's about when all of the window dressing has to be wrapped up and then half days, etc. all play a part as they want to wrap it up while they are there, not one a half day that they can turn in to a 4 or 5-day weekend at the Hamptons.

My personal position right now is patience. I was going to post a sample of all the averages, but the IWM is a good proxy even though each average is different, the same idea applies.

 1 min

2 min

5 min

10 min.

To me it looks like intraday steering of price while larger distribution is taking place.

As for Leading Indicators, HY Credit is underperforming on the day, HYG Credit is underperforming significantly but we saw that in 3C yesterday. VXX is outperforming the correlation, again we saw that late yesterday. 5-year yields popped as the 5 year sold off so the SPX is at regression to the mean right now , today with Yields so there's no magnetic force there short term, longer term it's down.

Sentiment indicators are split, one is in line, one is VERY negative.

That's about it.

This isn't the kind of market in which I want to try to guess what will happen although I have my opinions, so do people playing Black Jack who want a hit, I want objective data. We do have a lot more than yesterday, it's leaning the way I suspected, but it's not enough to really go hog wild here. Being patient or on the sidelines is a Position too.

JPM is Tempting

With FAZ exposure already I think it's too much in Financials, but with a little more work, JPM core short looks good as a new issue or add to. On a trading basis it looks real darn close to losing its grip.

Trade Idea: FAZ Long

I'm also adding a half size position to FAZ (3x short Financials) long to the trading portfolio as well as again this is likely a shorter duration trade.

I'll add the second half if in essence FAZ creates a second half of a wider base.

 FAZ 2 min

FAZ 3 min

FAZ 5 min

VXX / UVXY

 5 min and 15 min above VIX futures holding up well.

VXX and UVXY are both just under what would be a head fake level, whether intentional or not, the effect is the same when stops are hit.

A pullback to create more of a "W" shape would cause me to add to the position as long as the divergence continues to grow.

Trade Idea: Opening UVXY Long Equity

This is the 2x leveraged version of VXX, VIX short term futures. If it pulls back and/or the signals grow even stronger, I'll add more to the position to full size, this will be in the trading portfolio.