Broad Market Update

This update isn't too much different than what has been posted intraday and the daily wrap posts from this week for the most part which are pretty close to on target from Friday's "Couple days" of upside left before turning sideways and starting the reversal process and pivot, although each average is a bit different. The important thing is that the signals are what they should be and that looks pretty darn good which is one of the reasons I went ahead (even though this is early in the reversal process) and added back my core short, FAZ which allowed me to keep the initial 8+% gain and avoiding a rough -11% drawdown which would have eaten all gains, plus this allows me to re-open the FAZ position which was my intention all along at a much better risk/reward area.


The key of course is the broad market... Hopefully the Daily Wrap posts as well as the cumulative market updates have already laid down the broad strokes.

 The increased downside leading negative divergence's rate of change is right at the expected area, this week (see Friday's "Week Ahead" post).


This is the intraday chart after the minutes were released (SPY) with the distribution in to the knee jerk as shown last night and as we move in to higher prices today, again there's distribution. By this time the pattern oif selling in to higher prices should be very clear as the upper standard deviation channel of VWAP has been the target zone.

This is migration to the 2 min chart specifically since yesterday's SPY knee jerk move after the minutes.

The Q's trend is right where I want to see it and where Friday's forecast for this week assumed it would be by this time in the week, much like the SPY.

The migration to the 2 min chart also shows the same trend, again starting this week.

The larger picture has been the 10-15 min positive divegrence charts, as you can see the deterioration that has been a bellwether  is turning dramatically lower on a strong timeframe at the exact place expected to see it.

The IWM has been lagging badly, it wouldn't surprise me to see some relative outperformance soon. This is yesterday's selling in to the knee jerk.

The IWM 15 min chart shows the major divegrence from the top of what I've been calling its right shoulder to the far left. Even for a bounce/rally, the move is well within the context of a normal retracement in a H&S pattern or any other downtrend, it's really not special in this regard for the IWM.

The most important signal for the immediate future is the divegrence going relative negative and this week leading negative.

Combine these charts with the Index futures and we have a pretty solid case that we are at a pivot area or an actionable area.

 ES 30 min chart from in line to leading negative, again most of this is during this week where it was expected to really deteriorate.

The same for the NQ 30 min chart

And we have clear signals as far out as the 60 min Index futures like this NQ.

The point of the above information is that we are now at the second pivot or an actionable area and the larger and more important of the two pivots (the first to the upside off the base and the second forming now to lead the market /IWM to a lower low which would see several major averages break significant moving averages).

Yields To Fall / Treasuries Higher... The market is trying to mask weakness

Yesterday as the minutes came out, the initial market reaction was a dip and then a knee jerk move higher in to distribution and declining TICK easily showing us it was a knee jerk reaction as they almost always are, in addition they are almost always wrong. However, one of the "fleeting glimpses" that you often catch while watching the market during important events was the uptick in accumulation of Treasuries, specifically the 20+ year TLT, 30 year treasury futures and 10 year treasury futures.

 This is the specific glimpse I'm talking about in TLT (20+ year bond ETF). The initial dump at 2 pm on the minutes release was accumulated, but this is part of a wider ranging trend.

As we go out in timeframes to say the 3 min chart, the positive divegrence becomes more clear, this continues as you'll see below and when we have a stack of divergences in multiple timeframes, often we come back to some of the fastest ones for timing indications which just so happen to be at the very same moment the minutes were released.

 TLT 5 min positive and by now you should be noticing the rounding reversal process from TLT's recent pullback.

TLT 10 min leading positive, the recent pullback and bottoming reversal process. Just remember that treasuries are often a "Flight to Safety", but in this market with scarce collateral and changing F_E_D intensions of what they'll do with assets on their balance sheet (first it was hold until maturity, now it's leaning toward shrinking the balance sheet), there are more dynamics at play than just flight to safety.

The 30 year Treasury futures (15 min) are also positive like TLT which is very similar.

 The 30 min 30 year T Futures is leading positive (also note the pullback and reversal process).

At the red arrow the 10-year Treasury futures dropped on this 5 min chart, they were accumulated as well leading to some upside this morning.

The 15 min 10 year chart's leading positive divegrence... I'm sure the picture is emerging.

In addition, VIX futures which have been seeing a positive 3C trend as we get further in to the bounce and toward the end, also gave a unique signal on the knee jerk reaction.

The initial spike higher matches the initial spike lower in stocks, the knee jerk after that sent stocks higher and VIX futures lower, but in to a positive divegrence, again a flight to protection also another hint we were witnessing a transitory knee jerk reaction.

The $USD which has been on a tear this week also had a strong knee jerk reaction,

 This is a longer 5 min $USDX chart with a relative negative divegrence working t a certain pace which was increased as the knee jerk reaction made a move higher in the $USD with stocks. *Note the overnight deterioration in $USDX.

And I pointed out the same thing this morning as the knee jerk in $USD fades and takes pairs like USD/JPY down with it.

The Russell 2000's reaction is also worth noting, it not only lagged badly yesterday as it too saw distribution in to its own knee jerk higher even though it closed nearly half a percent lower, but is underperforming today as well and the 15 min (formerly positive) base divergence that I've been watching as a barometer for the end of the bounce phase and the start of the reversal process and decline phase, is now clearly negative.

 IWM in to yesterday's post minutes knee jerk reaction with the broader market seeing distribution like the broader market.

And the 15 min (formerly) leading positive IWM base divergence is clearly turned to a leading negative divegrence after being nearly perfectly in line with price for the entire bounce except this week.

 Taken with the divergence in High Yield credit yesterday at the knee jerk move, the knee jerk move is a sure thing, meaning its failure is a sure thing as well.

This morning another sign can be found in the MSI which you might think would be squeezed to pop the market higher on the knee jerk, not so.

Yesterday's opening decline in the Most Shorted Index and then moving in line with price, this morning it has fallen out with the SPX again and is trending lower, it looks a lot like the split between HY credit and the SPX.

As such, while I have been waiting for an XLF move above it's range, which was only pennies away, these types of moves (even though it didn't end up creating much of a daily gain) are often useful to short in to and FAZ at this point seems like one of the core positions I want to have nailed down before we get a nasty downside turn.

I'll cover XLF/FAZ in greater detail,  what's important for now is this knee jerk move has holes all through it and quite poor performance for a knee jerk move. The initial move at 2 p.m. was the market's opinion as it looks like Yields are set to fall once again and stocks likely not far behind.

Trade Idea: (Longer Term Position) FAZ Long

XLF isn't quite at the area I was looking for, but it's only a few cents away, I'm going to be adding FAZ back in the line up, I'll leave about 25% room in the position to add to it, this is a core short position (actually FAZ long=3x short Financials).

A.M. Update

Overnight there was more evidence of a global economic downturn. The days of China's dynamo growth seem almost to be a lifetime ago. Overnight Chia'a HSBC PMI came in with the biggest miss on record. Following China, the Eurozone didn't do much better as Manufacturing PMI dipped from 51.8 to 50.8 vs expectations of 51.3. Eurozone Services PMI slipped from 54.2 to 53.5 on expectations of 53.7 which brought the composite PMI down from 53.8 to 52.8.

In other words, all the evidence of a cooling Chinese economy while running some hot inflationary trends continues just as does the prospect of a Eurozone recession to join Italy which recently entered its 3rd recession since Lehman.

In the US Initial Claims came in under the line in the sand of 300k , printing at 298k. Continuing Claims fell to the lowest print since 2007!


It seems some thought the market didn't like that, although I don't think it's quite out of its knee jerk scramble as evidenced by the panic pump yesterday after the minutes with distribution in to it and sharply declining intraday breadth, instead I think the reaction in prices was a simple move from the VWAP sell area.

 ES's dip looks like a simple correction from VWAP's upper (sell) band rather than a reaction to Initial Claims.

 AUD/JPY is in charge this morning (ES in purple) as the USD/JPY is lagging on the retracement of some of yesterday's knee jerk gains in the $USD.

AUD/JPY is in charge for now, however it may not hold up too long.

The decline/negative divergences in the $USD overnight are responsible in part for the USD/JPY falling out of favor today. This is an interesting correction starting from yesterday's knee jerk reaction sending the $USD flying higher.

Even though volatility still abounds and the knee jerk is not over, the more important perspective is the flattening out of the market which is what was expected after two initial days of gains this week.

I used the QQQ as it's a good average as SPY is a bit more on the upside, the IWM is sloppy and choppy on the downside. The turn to the right is what I'm most interested in along with the base divegrence charts shown last night, we'll see how they develop today.

It looks like several other asset classes are starting to move off yesterday's knee jerk, some aren't yet like Gold, however treasuries are starting to look interesting as they pick up some upside momentum this morning.

Daily Wrap, F_O_M_C Knee Jerk Style...

Watching the market intraday today you might have had the impression it was a strong day, after all AAPL did make an all time new high, but then perspective comes in to play such as AAPL's all time new high on a gain of +0.04%!

The averages themselves were all over the place with the Dow-30 leading at +0.35%, the NDX with a gain of +0.01% which is as close as you can get to flat and still color the candle green and the market leading Russell 2000 at a loss of 0-0.44%, the biggest move of the day in the major averages.

 That's the R2K in yellow on the day.

The big mover today and this week (on track for the best week in 9 months and just shy of 1-year highs), the $USD...

This is a daily chart of the $USDX, note the last 3 days (this week).

I warned about the F_E_D inspired knee jerk reaction as I always do and we got it just after an initial drop in stocks as the VIX was hammered lower, the market knee jerked higher, although I showed you the distribution and TICK index in to the move, thus it's easy to see why these knee jerk moves are almost always wrong and faded which started to happen in to the close.

High Yield Credit wasn't buying the knee jerk, there's smarter money at work in the credit markets.

HY Credit selling just as stocks knee jerk higher after the release of the minutes,  price action is rarely what it seems, not to say price isn't king, but if your not careful about reading it a king can quickly become a pauper.

Speaking of Credit, you've heard me say that HYG has been leading the market since the base started forming for this bounce on 8/1, I probably showed it a few times as well as I have shown the deterioration in HYG. Today was the end of the leading for HYG.

HYG, a main-stay of market manipulation leads the SPX the entire time since Aug 1, but reverts to the SPX today.

As the minutes were released a lot of assets moved, the $USD popped significantly higher, around 1% now on the week, Treasury Yields popped 3-4 basis points higher as T's fell, but that story looks like it may just be getting started as TLT put in a positive divegrence (shown earlier today after the minutes), HY credit seen above hit the worst levels of the day, Crude (WTI) jumped 1%, gold fell modestly, but don't forget about this post...GDX , NUGT & GLD Charts. And interestingly as we have been watching for several days, one of the most important metrics of the bounce...

 Index futures broke below VWAP on the release of the minutes, but you can't distribute below VWAP and expect to keep clients as a market maker/specialist.

So back above and back to distribution...

There was no single Dominant P/V relationship, the Dow saw Close Up/Volume Down with 15 stocks, this is the most bearish of the 4 relationships, the NDX saw the same with 42 stocks, the R2K was mixed with Close Down/Volume Down and Close Down/Volume up, the latter may create a 1-day oversold condition, although it wasn't dominant (co-cominant).

6 of 9 S&P sectors closed green with Industrials leading as you might have guessed and 133 of 239 Morningstar Industry/Sub-Industry groups closed green.

Today for the first time in a week or so, Pro Sentiment was down.

Pro sentiment takes its first dive since, well I believe since the bounce started.

As for market breadth, there was virtually NO CHANGE from yesterday either way.

I suspect we'll see the Knee jerk dust settle and I don't think the end result will be a pretty one. I think the performance of the averages today even with the knee jerk (and the Russell dislocated from the pack) show we are running out of gas.

The very short term intraday indicators may reset a bit, but the 5-15 mi charts should start showing some real acceleration in divergences, along the lines of intraday trends for the week...

SPY intraday trend accelerating leading negative divegrence should be appearing on the base divergence charts as it started on the SPY 10 min today,the QQQ 10 min (relative negative with the 15 min in a nose dive)...

 QQQ 15 min with the base 10 min negative today while...

The IWM's 15 min base positive also taking a leading negative role lower.

What the F_E_D Really Said & Has Been Saying

In the F_O_M_C minutes released at 2 p.m. today one of the bullet points was voting members were uncomfortable with forward guidance, this is nothing new, they were uncomfortable with it nearly a year ago when they changed guidance from quantitative to qualitative, which is like going from the old guidance of "Rates will be kept at ZIRP until at least Q1 2016", whereas Quantitative Guidance (which seems reasonable) allows the F_E_D to make it up as they go along. No one can count on guidance from the F_E_D as it's now "data dependent" which again seems reasonable, but the F_E_D has always forecasted based on the data,  this neat little trick allowed them to up-end guidance completely on an arbitrary basis as we all should know by now that the unemployment target of 6.5% which was suppose to end accommodative policy is easily manipulated by cutting extended unemployment benefits as was done earlier this year in the Congressional budget, 99 weeks was no longer funded and in Florida anyway, it's back to a measly 16 weeks, half of what it was before extended benefits (use to be 32 weeks). As the unemployed falL off unemployment benefits, THEY ARE NO LONGER COUNTED AS PPART OF THE WORKFORCE, (some 3.1 million this year alone).

In other words, lower unemployment now is largely a function of the unemployed no longer being counted as they are considered to no longer be a part of the work force and thus, "NOT UNEMPLOYED"!

The same tricks can be used to just about any data series whether through revisions or seasonal adjustments that are totally arbitrary, the F_E_D and government can create virtually any set of numbers they want with a little finesse.

The old guidance of 6.5% unemployment rate also considered their dual mandate of price stability which is around 2% inflation, however the inflation trend has been hot which seems to be one of the reasons the minutes were more hawkish today as inflation is just about at the F_E_D's mandate.

"participants generally agreed that labor market conditions and inflation had moved closer to the Committee’s longer-run objectives in recent months, and most anticipated that progress toward those goals would continue. Moreover, many participants noted that if convergence toward the Committee’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated. "

The F_E_D speakers and meetings have continuously been warning the market to expect rate hikes a lot sooner than later, take Bullard's "The Market is Wrong" interview on Fox Business in which he said the market doesn't realize how close the F_E_D is to attaining their mandate,  which means, the market doesn't realize how much sooner than formerly expected rate hikes will begin.

Today was another reiteration of the same that's been heard at least a dozen times, even from Yellen herself, if you missed it, you haven't been listening to what the F_E_D has been saying.

"Indeed, some participants viewed the actual and expected progress  toward the Committee’s goals as sufficient to call for a relatively prompt move toward reducing policy accommodation to avoid overshooting the Committee’s unemployment and inflation objectives over the medium term."

Put another way, the F_E_D is not concerned about overshooting on unemployment, but rather on inflation. You can go back about 5 months and you'll see I've been consistently posting that the one thing that ties the F_E_D's hands and leaves them no choice but to hike rates is the inflationary trend getting out of control,  this is nothing new, it's just being yelled now instead of spoken.

"These participants were increasingly uncomfortable with the Committee’s forward guidance. In their view, the guidance suggested a later initial increase in the target federal funds rate as well as lower future levels of the funds rate than they judged likely to be appropriate"

This speaks for itself... Participants are essentially saying in an official forum rather than FOX news that rate hikes are coming sooner than later and will be larger than expected. You may recall from Yellen's own words, the committee expected rates to be at 1% by the end of 2015 which essentially means rate hikes are right around the corner and they'll be successive assuming they are done in 25 bps increments,  this is a market slayer.

While we're on the subject of guidance ... there was this gem (although not the first time it has been mentioned)...

"The (FED's) Balance sheet should be cut gradually, predictably"

With over $3.5 billion in balance sheet expansion from accommodative policy, the Bank for International Settlements" in its annual report questioned whether "Leading Central banks" would have the ability to respond to even a run of the mill recession, in other words the F_E_D's balance sheet is tapped out which is likely one reason QE is ending other than the market bubble and inflationary concerns.  However, initial guidance from Helicopter Ben" was that assets on the F_E_D's balance sheet would be allowed to roll off at maturity, that's not the same as reducing the balance sheet. 

I'm not sure what the angle is here other than the fact the F_E_D has absorbed most quality collateral which has forced banks to use the 1-day reverse repo facility at the end of the month and quarter for window dressing to make it look like they had collateral when in fact they only "borrowed " it from the F_E_D for a single day, the last day of April and the last day of Q2 setting the second highest usage for the facility in April and a new record high at the end of June as they dressed their windows to make their financial condition look better than the mess it truly is. It seems among the 94 banks that participated in the "Art of looking smart" for the end of Q2 (the very last day mind you), there's about a 1/3rd of a trillion dollar shortfall in collateral at the banks. Perhaps this is one reason the F_E_D wants to cut its balance sheet so banks can pick up some much needed quality collateral, of course the inability to respond to a garden variety recession may be another as the balance sheet is bloated. A third reason may be the fact that the F_E_D (yes the F_E_D) has shareholders and is a "For profit" quasi-public/governmental corporation, not much different than Bank of America being given exclusive rights to print money and set monetary policy.

The F_E_D's unofficial mouthpiece, Jon Hilsenrath of the WSJ summed it up with this, 

"The minutes of the meeting, released Wednesday, provide fresh evidence of an intensifying debate inside the central bank about when to respond to a surprisingly swift descent in the unemployment rate and rising consumer prices."  Emphasis added, although probably more appropriately to "Rising consumer prices" otherwise known as inflation, just what we've been warning about as the one thing that ties the F_E_D's hands, although that was when they were still playing the "Accommodative policy in place for a considerable time after the end of QE" card, which is now clearly moving off the table.

The bottom lime is the F_E_D has been planning their exit the very same day they announced QE3 when they hinted at using a different yard stick, the initial stage was being set to move from quantitative guidance such as a specific date to qualitative guidance which as I said, seems reasonable, but qualitative guidance s used in putting forward quantitative guidance, it was really nothing more than a way to move to arbitrary decisions and remove the one thing the market craves, certainty.

Since that day when the debate about the yardstick started, the F_E_D has been on a steady path of extracting itself from accommodative policy even as they introduced the newest and last QE program.

If you wonder why market breadth looks the way it does or why High Yield Credit fell off a cliff, it's simply because they understand what the F_E_D had been subtly hinting at, now they are saying it up front and with a louder voice, it doesn't get much louder than, "The market's are wrong" from a regional F_E_D president, but for now, retail is more than content to keep whistling past the graveyard and buying the dip even though they apparently have no idea what supported buying the dip in the first place and the fact that it's rapidly disappearing at the rate of $10 billion a month and will end completely in October. That doesn't mean buying the dip is a good idea until October, the market ALWAYS front runs the F_E_D and this is a mess the likes of which the world has never seen, at least no one alive today.

Knee Jerk Follow Up

In a follow up to this post just after the F_O_M_C minutes were released, Hawkish F_E_D Minutes Cause Knee Jerks with Accelerated Distribution it's easy to get caught up in a strong price move and believe there's something more, however without even looking at 3C and just reading the highlights of the F_E_D minutes, it was an obvious knee jerk move which have their purposes.

I posted the initial distribution in to the move, here's what things looked like just before the close.

 After the immediate reaction to the downside on hawkish F_E_D minutes which basically say what we have already said and known for almost a year now, the knee jerk move higher showed immediate distribution and continued through the close, eventually overwhelming demand and starting a move down toward the close. However most retail traders will only see the move up, it wouldn't be surprising to see them to continue to chase it. Even though I think we are already in the reversal process, this is an extreme version of some of the volatility that should be expected, a nice predictable rounding top is not likely here as they want to keep the idiotic BTD crowd locked in for the first major break to the downside as they'll want someone to buy, it's like Pavlov's dog whistle.

Meanwhile the distribution in to higher prices was having a real effect on stocks.

The initial move on the minutes was an extremely bearish -1500 on the NYSE TICK Index, followed by the knee jerk higher in the channel and as distribution continued you can see the early warning of TICK falling out of the channel.

As I mentioned, an issue I'm very interested in, FAZ long and an XLF move above the range to enter it made progress toward that end. I don't think the break below XLF's range was coincidental, I believe it was the short squeeze, momentum generating move that was needed to break the level as smart money apparently has the same ideas about entering at the same place as I do, actually it's the other way around, I have the same ideas as smart money has.

As for XLF...

 The target XLF head fake move that I have waited for since June/July to fill out the FAZ long is now only ten cents away on a closing basis and $.13 cents away on an intraday high basis.

Patience pays...

And as for XLF, the earlier leading negative divegrence before the minutes makes sense as it forecasted a move lower, the move at "b" is the power of contradiction, this just continues to confirm that the best entry possible in XLF short or FAZ long will be well worth the wait.

GDX , NUGT & GLD Charts

For now this is a trading position as there are still longer term divergences that still suggest a pullback in GDX and if there's a break below recent support that ends up being a head fake move, I'll have some room to add to the position. Watch the chart of Gold Futures as it contradicts the knee jerk reaction on the release of the minutes...

 GDX intraday contradicting the knee jerk lower.

However I've been watching this for a couple of days as mentioned yesterday, "There are some short term positive divergences developing in GLD/GDX".

NUGT intraday on the knee jerk lower.

And NUGT's 10 min over the last several days.

 This is intraday Gold futures leading positive right at the downside knee jerk on the minutes release.

GLD 5 min as mentioned yesterday.

And GLD's 10 min chart going nearly vertical.

For me, this is worth a trade, I'm still very interested in a longer term position, but I'll wait to se how this resolves and if the pullback divegrences (longer charts) maintain their signals.