XLF Put Add To

I probably can't add much to XLF April $22 Puts and I have a FAZ long position, but I really like it and if I did have a little room I'd be trying to decide whether there's a chance of a better intraday entry and if it is worth waiting for that chance.

Yesterday we had a VERY flat support range right at $22.31, I talked about this and was hoping to see an intraday break higher to enter the XLF position, you can see that from yesterday here and here.

That area I was looking for a break above saw a break of a meager 1 cent, not at all what I was looking for and not useful, today we have a move a bit higher that is more on the level and we still have great signals.

 This was the range from yesterday, VERY clear resistance makes for a very obvious head fake move as that's where the orders are, the yellow arrow shows the 1 cent move above the range which was useless, today is a bit different and we have a continued negative divergence in to the move today so that's what I was looking for yesterday.

 The 2 min chart shows the same, distribution like the rest of the market in to the opening gap, although Financials are a more solid performer today, I've looked at several and they look like XLF (take GS for example).

 The 3 min migration is beautiful, the two ranges, one I was looking for Wednesday and  got Thursday and the second today. The straight line resistance can't and support can't be ignored, you know what's going to happen at these very obvious places which sets up opportunities if we can confirm that they are not what they appear as we see above.

 The 5 min chart with the last real accumulation zone which happens to be the Jan 27 i Feb 5th like the rest of the market, I'd say looking at the run this week, that cycle is exhausted which makes me very comfortable with positions like yesterday's XLF puts, other puts like IWM are already at double digit gains on a move that hasn't even started and which I think will be more volatile than the last decline and the last rally as volatility has picked up on each one successively.

 This is the area I mentioned on Wednesday saying, "If we get the XLF move, look for FAZ to move under this trendline, but it has done so on positive divergences and FAS confirms as well.

I'll likely keep an eye on these in case any one is considering them and looking for timing.

And like the 5 min XLF negative through this week, FAZ which is totally unconnected from a 3C standpoint as price is tracking XLF, but volume is completely different, has the same or mirror opposite confirmation signal.

This looks to be one of the areas today that has a decent tactical entry.

Market Update

I don't know everything I'd like to know about credit markets, I know they are far more sophisticated and better informed than even smart money equity markets and there are quite a few forms I don't have good access to so I may use my own indicators on them, but HYG is one of the largest after banks started dismantling their credit holdings in the wake of 2007/2008 making it very difficult for institutional investors to put on a diversified credit position as they banks didn't have the assets to lend until HYG came along.

What I do know about credit from first hand experience is that it tends to lead the markets, think about the credit freeze up (which is apparently taking place in China now) of 2008 and what happened to the markets, thus it's easy to see why they say, "Credit leads and stocks follow" and this is true like so many other things in the market that operate on a fractal basis (meaning the concepts work on a daily chart as well as they do on a 1 min chart).

Another thing I know about credit and HYG in particular as it is one of three assets (HYG, TLT and VXX) that make up the SPY Arbitrage scheme that is used to manipulate markets by making algos think the assets are reflecting a risk on or off position (usually on), is that it's not good when a positive divegrence is set up in HYG and it fails massively.

I don't know for sure if yesterday's positive divegrence in HYG was meant for a "Bang" or "Ramp the close" move or if it was meant for a little longer support, but this morning it has CLEARLY failed and when that happens, when a divegrence in an asset like that gets run over, it's not a good sign, think AAPL and the -45% decline.

 HYG and 3C with yesterday's afternoon divergence , but instead of up we see a swift move down this morning as the divergence appears to be completely run over. The red trend line is yesterday's HYG close.

Looking at the decline in HYG today vs the SPX (green), it's quite obvious that credit is leading the market on the downside.

However the bigger problem for the market is one we've been tracking for several weeks now, AS YOU MAY REMEMBER THE ACCUMULATION OF JAN 27TH THROUGH FEB 5/6 WAS EXPECTED TO PRODUCE A VERY STRONG MOVE TO THE UPSIDE, ON FEBRUARY 4TH IN AN ATTEMPT TO ANCHOR EXPECTATIONS BECAUSE I KNEW WITH THAT MUCH ACCUMULATION THE MOVE SERVED A PURPOSE AND THAT WAS TO CHANGE SENTIMENT FROM BEARISH TO BULLISH AND I EXPECTED IT ALSO TO BE THE SET UP FOR THE NEXT STRONGER TREND DOWN, IN AN EFFORT TO KEEP MEMBERS FROM PANICKING UPON SEEING THE MOVE I WROTE EXACTLY THIS ON THE HEAD FAKE MOVE TO THE DOWNSIDE THAT WAS BEING ACCUMULATED AND WELL BEFORE THE FIRST POINT TO THE UPSIDE (AGAIN TO ANCHOR EXPECTATIONS)...

Tuesday February 4th

" When I said we expected a head fake move in my Friday post (to the downside to set up the move up), "Come Monday", it was a head fake move to the downside, they need to be real, they need to be convincing, just as a bounce to the upside, I wouldn't expect a 1 or 2% move, I'd expect something that will fill my inbox with emails asking, "Are you sure the market is still bearish Brandt, this looks awfully bullish"."

The importance of this warning in trying to anchor expectations of what was coming was because the way I saw it and still see it now that we have objective evidence, the move to the upside is there to set up a larger move to the downside, thus my wanting to anchor expectations so you could use the move to your advantage.

 This is the bigger situation in HYG's divergence with the SPX.

 This is the short term pro sentiment this morning, t has been collapsing for days.

 This is the 15 min chart of VIX futures, last night when I said there were a few assets I was not comfortable or ready to take a position in as of yesterday's close, VXX (new positions) was one of them, that may VERY WELL change today as it is VERY clear protection is bid as I've had members with VXX calls say that they have held their value.

As for the averages both short term and a little longer, today may not be an official head fake move or it may have been, it is a failed move though and it's the same concept as to what happens to failed moves, they typically bring fast reversals and we saw that in premarket futures.

 SPY 1 min with a deep negative divegrence on the open of a failed, possible head fake move.

SPY 2 min migration

I keep noting Monday because we tracked accumulation all day Monday, ironically we had Putin's comments sending the market higher Tuesday so I don't think that was a coincidence, but the market hasn't done much of anything since Tuesday except range and see deeper leading negative divegrences on longer timeframes over such a short period of a week like this 15 min leading negative.

 QQQ 1 min also negative on the open and distribution of the gap up.,

 QQQ 3 min with Monday again and we have already taken out the accumulation zone from Monday

This is the larger move that I warned of above on Feb. 4th that had accumulation from Jan 27 to Feb 5th/6th, this is the one I said would fill my inbox with emails asking"Are you sure the this is a head fake set up for a bigger move down, it looks very bullish?" The 3C chart alone on a 30 min basis should answer that question through the rally.

 IWM also seeing distribution on the opening gap

IWM 2 min migration/trend since Monday's accumulation, nearly pure distribution in a flat range  which is where we often see underlying trade intensify as the market is lulled in to complacency.

And the Jan 27-Feb 5/6th accumulation and the move warned about as being very strong in an attempt to anchor expectations for the next trend this is meant to set up just like the head fake move lower through Jan 27th-Feb was a set up for the rally.

The Chinese Credit Situation

When you hear "Credit" and "Situation" with a negative connotation, it's hard not to think about Bear Stearns and that period of dismal lies in 2008 in which banks said they had no more exposure to sub-prime only to declare a month later another multi-billion dollar write off.

You may recall about 3-4 weeks ago China pushing massive liquidity in to their system as the threat of the first Trust default was looming large, then a week or so later at one of their regularly scheduled PBoC monetary operations (Tuesdays and Thursdays) they suddenly withdrew an unprecedented amount of liquidity from the market and had warnings over the copper and coal mining industries regarding potential defaults.

For years Bond/Credit investors in China have had a sort of Bernanke put covering their positions that caused them to ignore risk and that was any problem companies had with debt payments were taken care of by municipal governments in China or the banks themselves so the threat of default seemed very low causing investors to take excessive risks, this is somewhat akin to the US sub-prime market in some ways, at least the massive risk taking without appreciating the potential downside, well all of that suddenly changed as China just had its first ever mainland default in Chaori Solar that missed a Bond interest payment overnight.

However this is not new, the credit markets in China have been roiled for the last three months since the issue popped up on the radar.

Upon the Chaori default, upwards of a dozen deals that were set to go to market have been cancelled today and many others over the last several weeks for lack of funding. I'm guessing at this, but Chinese credit creation is now the main driver of growth moving forward and it has now been utterly stifled, I'm guessing that they would not allow this to happen over a simple interest payment unless they were worried about something bigger, namely the hot money flows in China that are driving inflation, it may be possible they are trying to reset the credit markets and make investors reprice risk which they are doing as external money is flooding out of the country as I write this. This of course is just a guess, but this is a BIG DEAL along the lines of Bear Stearns.

This new dynamic of the Chinese not bailing out companies at all costs seems to not be coincidental, especially because Chaori's debt payment wasn't that large that it couldn't have easily been taken care of.

Obviously as a result (and one that has been ongoing for several months, the credit markets in China are falling and stocks are following, remember the maxim, "Credit leads, stocks follow".

The problem is apparently not in the banking sectors available liquidity as evidenced by Shibor at multi month lows/ very low repo rates, the money is available in the banks, they aren't lending which is a huge risk to Chinese growth as it depends on an expanding credit model. 

It's clear by the numerous deals that have been cancelled just in the wake of the Chaoori default that companies CAN'T ACCESS CAPITAL. In addition commodities that have been long used as collateral are falling in price. Iron ore prices are collapsing. Copper which has also been used as collateral for cash is seeing a huge unwind and copper prices have seen the largest drop since late 2011 as borrowers are forced to sell copper to meet cash calls, exacerbating the credit crisis even more as investors are fleeing the credit sector.

We don't know how much worse this may be yet, but to say it may be China's Bear Stearns moment is not hyperbole.

Gazprom Brings up the Ghost of New Years 2009, Stocks React Poorly...

As I said, the overnight developments in China potentially have vastly more far reaching negative consequences, but what seems to be moving the market and not just the US, but EU/German stocks have fallen significantly since the event and safe haven assets are bid, that would be the Russian state owned gas giant, Gazprom making some very scary threats right at the time the market faded...

Here's the actual statement from Gazprom's CEO, Alexi Miller...

"The debt that Ukraine's Naftogaz Ukrainy owes for Russian natural gas has risen to $1.89 billion, Gazprom CEO Alexei Miller told journalists.

"In fact, this means that Ukraine has stopped paying for gas," Miller said.

"This is completely at odds with the provisions of the contract and international trade practice. For our part, we have always met and will meet our contractual obligations. But we can't supply gas free of charge. Either Ukraine repays its debt and pays for current deliveries or the risk of returning to the situation at the beginning of 2009 will appear. We will notify the Russian government concerning the situation that is taking shape," Miller said.

Gazprom announced that today, March 7, was the payment deadline for February's deliveries of gas to Ukraine. Gazprom has not received payment on the debt. Including the price discount in effect in the first quarter, the overdue debt for gas has increased significantly and now totals $1.890 billion.

The US approved a Ukrainian bailout package yesterday of $1 billion dollars, however it was not meant to go straight to Russia via Gazprom and it's only about half of what the Ukraine owes as their last installment payment was a mere $100 million of the $1.89 billion dollar debt.

The situation of 2009 was New Year's day as Russia was exerting influence over Ukrainian politics again, Gazprom had said it wanted $400 per 1000 cubic of natural gas up from $250, Kiev refused to pay and Russia promptly cut all gas supplies to the Ukraine and only pumped enough for their customers in Europe, of course then as now, the EU and US were in the middle of the Ukrainian / Russian affair and shortly thereafter Russia accused Ukraine of siphoning off gas from the pipelines that traverse the Ukraine en route to Europe and then shut off all gas supplies including to all of Europe. This effected the poorer souther/eastern countries as some declared state of emergencies as there was sub-zero weather at the time, others had to shut down all major manufacturing. Western Europe, particularly the Northwest had been stockpiling gas supplies for 3 years so they were less effected, but the wholesale price of natural gas soared. THIS IS ESSENTIALLY WHAT RUSSIA VIA GAZPROM IS THREATENING WITH A DEBT LOAD OF $1.89 BILLION WHICH THEY NOW SAY IS DUE TODAY, ADVVANCING THE PAYMENT SCHEDULE FROM THE 10TH, OBVIOUSLY THE UKRAINE DOESN'T HAVE THE MONEY.

 Isn't this this convenient the day after Obama made threats to Putin which Russia said was, "Taking an extremely un-constructive position" and with the EU just canceling talks on entry Visas that make it easier for Russians to travel to the EU.

Putin said, "Russia will not accept the language of sanctions and threats and will retaliate, shortly thereafter, that's when Gazprom brought out the ghost of 2009 this morning.

Bonds in the Ukraine have seen their yields hit +47% this morning, that's up from about 7-8% this January, as mentioned, German stocks fell right at the time of the threat.

It seems VERY clear the Tuesday Putin overtures of de-escalation were far, far from the end of this crisis, the silly market ought to know better when it comes to Putin and their former Soviet satellite states that the US and Nato have been picking off one by one since 1998.

Futures Fall below NFP Levels, PUMP and DUMP

While I think the Chinese situation overnight is more important and dangerous for world markets , the immediate threat right now sending stocks lower is out of Russia.

Here's the relation between USD/JPY and Es shortly after the NFP when prices started to fade, it's not as clear here, but ES was again (like yesterday) underperforming USD/JPY.

ES in purple, it topped first, it didn't gain as much, it faded first and deeper.

Here's a different view...

 USD/JPY, also note the very recent negative divegrence after the knee jerk higher, the move clearly wasn't on the beat in the NFP as that does nothing to slow down the rate of cuts to QE, but the rise in the unemployment rate from 6.6 to 6.7 could delay rate hikes which the last F_O_M_C meeting minutes had several members say, "Should start mid 2014" which is just a few months away and as of yet, the F_O_M_C has only talked about how to communicate rate hike guidance, they haven't given any new guidance so officially the 6.5% unemployment level is still the area where the F_E_D hikes rates which the market is far more worried about as rate hikes or tightening has led to numerous bear markets.

ES looked like this at the exact same time in pre-market

 Note that ES does look like there was some accumulation before the NFP in the early hours of the morning as if a knee jerk was going to be sold in to because the accumulation area isn't large enough to support much more than that.  ES didn't rise as much and fell faster.

Just a bit later in to the open...

 Es had almost retraced the entire NFP knee jerk reaction, remember what I always say and think about parabolic moves, "They can't be trusted and often fall as fast as they rise", but even here you can see a proportional reversal process.

As of my last capture a few minutes ago at 9:43, ES had retraced the entire NFP knee jerk reaction, NQ (NASDAQ futures had as well and TF was well on its way to doing the same.

As of now, USD/JPY is falling and has retraced almost half of the knee jerk, a little less than half, but Index futures are once again underperforming, ES is now below pre-NFP levels while NASDAQ and Russell 2000 Futures are WELL BELOW the NFP levels...

 NASDAQ futures well below pre-NFP and overnight levels...

Russell 2000 futures well below NFP levels and the relative performance vs a falling USD/JPY is horrible...

USD/JPY currently, apparently risk sentiment in stocks is fading much faster than the correlation that usually drives them and this seems to be because of a Russian threat to US/EU sanctions, more on that, let me get these charts out...

NFP Knee Jerk and Fade

It looks like the initial knee jerk reaction to the jobs report is fading quickly, I usually want to allow some time for the initial knee jerk to resolve and the dust to settle.

The NFP beat consensus, but the real news was the Unemployment rate ticking up from 6.6% to 6.7%, 6.5% has been the F_E_D's guidance for a rate hike, however Bloomberg reports the unemployment rate as being unchanged at 6.6%.

In any case, the safe haven flows overnight in to the Yen and Bunds was interrupted as the USD/JPY knee jerked higher on the NFP, but much like yesterday it seems Index futures are fading faster or not keeping pace with the USD/JPY.

ES is fading the initial knee jerk as is NQ which has taken back about half already and TF. USD/JPY has not faded as much.


I'll of course update the situation as we move toward today's op-ex open.

Perhaps more importantly, I'll cover the unprecedented first mainland Chinese default overnight as Credit markets in China are slammed before the first default occurred, investors are now repricing credit risk in what may be China's Bear Stearns moment as well as the harsh rebuttal from Russia over US/EU sanctions.

USD/JPY & ES Update

I know I mentioned SPX futures (ES) not keeping up with he USD/JPY correlation in to the afternoon and close, I "think" I mentioned that the carry currency pair looked stalled and likely to reverse as it broke above $103, right now we have both situations with this chart reflecting ES's inability to keep correlation with USD/JPY which is usually the other way around and the carry trade FX pair breaking down, it just passed below$103 and looks to have hit stops as downside picked up a bit.

 Es is in purple, you can see it hasn't kept pace with the carry currency / pair.

You can just see it breaking down, that's when I captured this chart about 5 minutes ago, since then with stops likely hit under $103, this is what we have (the second time I've captured this chart as it's moving pretty quick)...

USD/JPY at $102.954, the current price is $102.95

As the earlier post on the pair noted today, the bigger picture should resolve the pair to the downside being the JPY has a much larger 30 min divegrence.

I essentially thought the $USD would bounce intraday and later see downside because of the Yen's larger positive divegrence.

We'll see if this leads to anything.

Daily Wrap

We had a sort of strange close, the fab 5 of stocks and other momo names didn't perform very well, you saw the levers being used to ramp the market at the end of the day to get a mixed close with the SPX and Dow up +0.18% and +.41% respectively and the NDX-100 and R2K down -.14% and -12% respectively.

Despite the monkey hammering of the VIX at EOD, it closed up on the day, with momo stocks down it seemed like hedgers were nervous about tomorrow's NFP at 8:30, however there has also been a late day rumor circulating that Russia plans an overnight invasion of parts of the Ukraine while Crimea next. The acting Ukrainian president called the Crimean vote illegal and disbanded the local parliament, although I doubt they care, the question is, "What happens if this escalates beyond words as Kiev clearly sees this behavior in the south and east as illegal.

Perhaps the Russian invasion rumors had something to do with the EOD because I noticed ES is not keeping pace with USD/JPY as of the close. You saw TLT and spot VIX closed up, protection was clearly being sought, once again momo names were down, take the Fab 5, each one had a head fake of sorts... 

 NFLX with an opening head fake that failed, tried to test and failed on momentum which is basically a microcosm version of how a head fake move works in this case (upside head fake).

NFLX closed down -.64%

PCLN also threw an opening breakout that failed and closed down -.44%

 FB's head fake and failure was also clear,  closing down -1.01%

AMZN did the same  with a close down of -.06%

Only TSLA that also had a head fake type move closed green at +0.04%

XLF did exactly what we were hoping for...

 It even broke the intraday range by 1 cent, I'm not crying about it, but there was clear increased deterioration around that time and in to the close.

Here's another version showing closing weakness picking up and that carried right over to Goldman (GS)...

The red arrow is the XLF intraday 1 cent head fake if we can actually call it that and then additional weakness.

The 5 min chart really shows additional closing weakness

As does the 10-min chart so we may have hit GS right on the head.

Both our BIDU and IWM puts closed green as did our 3x short IWM SRTY, XLF puts weren't far from green at the close.

There weren't earth shaking changes in leading indicators, but a few that are more than worthy of noting...

 Even though they were working on HYG end of day for the SPT Arbitrage as a lever of market manipulation, it still closed even lower on the day vs the SPX extending the trend down in High Yield forms of credit traded as risk assets by smart money.

The longer trend in HYG vs the SPX with Monday in white as we saw accumulation there the day before Putin's peace overtures...

And just so you see how much HYG has been used to prop up the market and how it's dislocating now...

High Yield Credit also fell for another day, a change in character not seen in a while.

And other forms of High Yield Credit had no interest in playing along with stocks at all as they sold off on the day.

 Short term professional sentiment was also off on the day again.

While we figured out it takes about 3 hours to change retail sentiment in a fast moving market, the long term trend of retail sentiment shows bearishness at all time lows since records were kept, this is significant because of the break down in market structure I've talked about so often, however someone did a far better job articulating the same issues I often raise especially HFT and the liquidity trap, Universa's Mark Spitznagel.

Here are a few excerpts as to why this market is more dangerous even without the divergences that are worse than the 1929 Dow.

-On HFT..."high-frequency traders are making markets more jumpy"
-As to the idea of HFT as a liquidity provider is a fallacy , that liquidity won't be there when they most need it," 
-As for  'cash on the sidelines', "the idea that corporate balance sheets are so strong right now is entirely wrong,"

Since HFTs have replaced market makers and specialists as the net providers of liquidity and have no legal mandate to provide it, they can shut it off instantly the minute the market goes against itself. 

When you add the fact that there are barely any bears left, it gets worse, a lot of managers won't buy a stock that doesn't have a healthy short interest and the reason is, shorts represent a future commitment to buy and when do they buy? When the market is falling they cover to take profits and provide demand to sellers, that's not there, as for the one way flow of HFT liquidity, we already got a sneak preview of what happens when that is shut off, remember the Flash Crash?

Maybe I'll go in to this further at some point, but the main point and I took this up when the chart of the market about a month ago was compared to the 1929 top, you'd think I'd have been onboard with that chart, but I wasn't.

It's dangerous to assume the market is the same and it will react the same way, globalism is here like it never was before, who would of thought the US crisis would effect Chinese growth years later? Who would have thought liquidity would actually be a problem until HFTs came around? Who would have thought candlestick charting's gaps that worked for nearly 400 years would become absolute?

My point was not that the market isn't dangerous, it was to not assume that this market is anything like we ever seen before because it's nothing like we've ever seen before.

In any case, the market is definitely nervous about something, here are a few of the IWM and QQQ charts as you saw the SPY...

 The Q's also saw a little head fake on the open then tested the level and failed falling off pretty fast at the red arrow above price, in the process setting a new leading low today.

Here's a closer look at what happened as this is a type of a head fake move or failed breakout, From failed moves come fast reversals"...meanwhile the 10 min made another new leading negative low.

The IWM intraday did the same on the downside...

As did the horribly positioned 3 min

And even worse 5 min, note that other than Tuesday's gap, the market hasn't done anything.

I'm not sure if the market is truly worried about a Russian invasion, supposedly the sinking of the Ukrainian Navy vessel last night to block the mouth of the harbor to a Ukrainian naval base was one of the pre-emptive actions taken before an overnight invasion to last in to the weekend according to Pravda. 

I do find the EOD ramp attempt interesting along with the flight to safety and protection with momentum stocks falling at the same time, but even more interesting to me is ES's inability to keep pace with the USD/JPY, although there are a few assets I'm still not willing to enter just yet, something feels a little out of place.

I'll be watching futures overnight (as long as I can keep my eyes open) and let you know if there is a sudden surge downward on a Russian invasion which I personally think is Kiev saber rattling believe it or not. On the other hand, the sinking of the Ukrainian naval vessel in the mouth of the harbor, blocking it is a little strange as well.

As of now, USD/JPY looks like it has lost momentum and may be ready to turn, this after breaking above $103. As expected, the disappointment that Draghi will not be cutting rates or printing money which sent the EUR/USD higher this morning has waned and the Euro is flat since 12 p.m., it always seems like the knee jerk reaction there is about as short as BOJ intervention.