The S & P 500 is the After Party

What a week is was.

Right out of the gate I have to admit that the #santarally playbook was an even more powerful force than I gave it credit for last week and the week before. I was strongly biased to follow the playbook after a great deal of research, a bunch of which I posted in the previous weekly entries and also on Twitter leading up to the actual event.

It would be safe to say, given the evidence, that you will ignore and/or discount end-of-year seasonality at your peril. The 2014 #santarally turned out so much like 2013 it’s kind of scary:

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santarally2013

Santa Rally 2013

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santarally2014

Santa Rally 2014

 

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OK, but where does that leave us now?

S & P 500

With a short trading week, if there is any real selling business to be done it will most likely happen on Monday. Again, if the past is a guide liquidity/volume will begin eroding as Monday wears on it will drift down to maintenance levels on Tuesday and Wednesday. The kind of trade we saw over the Thanksgiving holiday a few short weeks ago.

Some selling may happen, but it should be year-end squaring and profit-taking kind of selling. Which is to say the kind without much urgency. The macro situation at the moment is simpler than I think I have ever seen. If you’re feeling bearish, please figure out WHY. Rationalize your point of view. Not the hindsight kind of rationalzie. I mean find plausible, germaine evidence for your view of the future. Not just because a moving average “says so.”

Because near new highs, it’s always the intermediate term forward outlook that drives prices. It’s quite, er, accommodative, at he moment. Here’s my synthesis of the market’s outlook, quoting myself from a Saturday tweet (sorry):

If u think the markets are fragile now, u couldn’t be more wrong. Global central banks providing best foundation for risk assets in history.

The central banks are asking market participants markets, nay, commanding them, through low bond yields to find returns in risk assets (such as equities). That’s it. It’s a simple, direct order. Whether you want to obey, dissent, disobey or just abscond is up to you. Consequences and all. It’s shouldn’t be a tough order to obey if done in a considered way. We’re not (historically) overvalued in the SPX and there’s not even a hint of “froth.” Just a coordinated, tectonic battle against deflation via easy money policies.

As another point of evidence, it’s worth noting that the Russel 2000 began picking up steam over the course of last week too. Broadening participation generally indicates strength, not weakness, in a rally:

Russell2k

So the support levels I’m watching for the week on the downside are the thick area of volume from around 2045 down to 2041. If we see more selling pressure than this, I’d expect to run down to the very prominent 2028 high volume area (HVA) area to become plausible, which proved to be an important level over the past 2 weeks. There’s really only a couple interesting levels between 2041 and there, namely 2037 and the VPOC at 2033:

 

ES Support

 

Any more selling pressure than this (2028 area) and something’s probably gone awry (macro #forcemajeure) and it’ll be time to reformulate expectations accordingly.  On the upside it’s not unreasonable at all to expect fresh all-time highs, and of course the level everyone is watching is 2100. While nothing is inevitable, breaking above Friday’s 2075 area and holding almost assures it in my view. Here’s one of my long-term charts of the SPX (not the ES). It looks very ready to resume it’s typical uptrend grinding position:

SPX Big Picture

WTI Crude Oil

Still not calling a bottom. 2 weeks ago I described the 4 things I’d need to see a short term bottom. Not one of them has materialized. That said, I am watching for another test of the 59 area sooner rather than later. It’s been rejected several times and it becomes less likely to provide resistance with each subsequent test. The balance of power may then begin to shift. For now the bears, from all appearances, can have whatever prices they want as long as buyers provide the liquidity to move it there.

I probably won’t be trading much past Monday this week. Have a great holiday everyone. Enjoy your downtime with family and friends and we’ll catch you on the flip side…

The Needle and the Damage Done

Yep, I’m doing my homework out loud again this week. Not sure it’s going to become a habit. I usually don’t have to time it takes to write all this up. But it’s been useful to me given the intricacies and the strange times of late. And I’ve had lots of positive feedback on it too. So I’ll do it again this week.

And yep, the title’s a Neil Young song about heroin addiction. When you think about the relationship we have to oil and kind of damage oil price convulsions can do to the other US markets it fits, no? So let’s start there.

As I tweeted on Friday (and every day last week after the close) in terms of the big-picture numbers Reindeer Air Flight 12-25 from the North Pole is still on theoretical schedule. The S & P 500 finished the seasonal weak week discussed last week down 3.8% at about 2002. This is well within the norm of a 2-5% drop prior to a so-called Santa Claus rally.

In fact, from one point of view there’s a kind of of poetry to the finish of this week. Right at the end of the day Friday the ES closed a weeks-old gap around 1998. Just like the Corleone family from The Godfather, the ES hates leaving family business unfinished. The WTI crude oil contract broke through the $60 dollar mark and bumped its way down to  the high $57s. Lots of loose ends in these two important markets were tied up. Which leads me to ask whether we’re all done and ready to hear Jingle Bell Rock over and over and over in every mall store, xmas tree lot and gas station in the US for the next week and a half?

Well, after another peek under the sleigh tarp I saw a few interesting things happening. Let’s start with the correlation of price action in the ES and CL:

 

ESvCL-Week50

First this is a TPO Evolution chart which assigns a color to each trading day and then builds a profile for the week as the days progress. It tells a story which can’t readily be seen in a regular profile. With the exception of a surprise show of bull strength which caught many traders off guard on Thursday morning (upside erased later in the day), the rest of the time the ES followed the CL contract around as if it were the tanker trailer and CL was the semi tractor. Note the similarity of day by day progress as well as the overall shape. This kind of real-time, short term sympatico is unusual and caught my attention.

Friday I saw many traders looking for an afternoon rally and trading that direction. Normally this is the right thing to do given the circumstances. But not Friday. Friday was a day to react to the chart and not act on your bias. I could see all size-trading ES eyes were clearly focused on CL. Now before you call hindsight bullshit on me, I tweeted this twice when the ES reached critical junctures in the day and said to watch the CL for direction (see my tweet history if you care). The last one was theeee big trade of the day and the move started just moments after that tweet at 11:20 PST. Once the ES returned to the range mid, open, ETH and RTH VWAP near 2014 the table was set for the CL close and I tweeted as much. If CL did puke into the close there would be painful margin calls, just as there had been the prior 2 days. The fact that is was Friday also increased the odds of forced liquidation, amplified by the Russel 2000 as it neared zeroing for the year. And sure enough….

I was kind of flip about it in the tweet, I admit. I was tired and there was little time to get all that in a tweet. Sorry.

Anyway I bring this up to illustrate how I use Twitter. Some people like to tweet entries and exits, etc. Why, I don’t really know. Without having risk/reward, sizing and rationale underlying those entries and exits announcing them is just so much noise in my view. No one’s going to learn a thing from those kind of tweets. I mean, the occasional victory dance tweet can be fun. I do it sometimes. But mainly I tweet at inflection points and when I see unusual real-time correlations and contradictions which may swing the action one way or another. It’s mostly a way for me to crystallize thoughts quickly (see definition: congnative dissonance) about the action as it unfolds. If it’s useful to you too, all the better. There is an element of esprit de corps and a real time sentiment gauge in my stream that I find valuable and to which I try to contribute. I also say funny things from time to time.

By my reckoning, I usually have between 5 and 30 seconds (tops) to make a decision about entry/exit and size of a trade I have anticipated at the best prices. There’s no time to tweet anything like that kind of information anywhere near the point of an actual trade decision, either before or right after. To do so is much the same as texting while driving in my view, a dangerous activity which steals focus from where it should be.

‘Nuff said. Back to the charts.

So given that we’ve taken care of some overdue ES family business, what’s next? For some clues let’s compare the 2014 #weakweek to 2013:

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ESw13

Weak Week 2013

 

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ESw14

Weak Week 2014

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Regardless of the why, the fact is that we have the same pattern of starting off higher and ending far lower. Except this year the magnitude of weakness was far greater – about 2x. If you put your finger over that big selling tail the stories are even more similar. So is that a difference with a distinction? In this case I think it will be, at least early in the week.

The SPX closed just above 2000, an important psychological level. The ES finished much lower, but remember the ES is not the instrument it’s the derivative. That big blue tail above was created by liquidation from positions which had gains in order to offset margin losses (as far as I can tell) and not because of sudden bearish force majeure. That’s how margin investing works. You have to sell things which have gains to offset losses, sometimes when you don’t want to. Friday at the close was a settling of this kind of business. This liquidation created some extra downside momentum and it will no doubt cause a level of short term nervousness for many who suffered this liquidation. And also for the retail crowd who only sees a big red candle and doesn’t really understand the (pretty rational) mechanics of what happened.

So again, what’s next? Believe it or not, my favored scenario is that the Santa Rally Playbook will still be in use, though the execution could be kinda warped. I’ve done tons of macro homework over the last few weeks and I see no reason why there won’t be short term equity bargains to be snapped up as a result of this downside. Longer term, I have some thoughts I’ll save for later. But let’s look at how the post-#weakweek week played out last year (say it 10 times fast):

ESw13+1

In a nutshell, we tested lower but quickly caught a bid for the bargains which lifted the whole ES boat and created range expansion on both sides. Similar dynamics appear to be in play this time around too, albeit with a fair amount more force.  So I am expecting Monday to see some continued early selling, especially with a good chance of market on open (MOO) sell orders from large players squaring and frightened retail investors. There is support in the form of a composite HVA starting around 1987, though it’s not a big area of prior balance (see chart below). I am looking for the potential for the open gap and naked VPOC in the 1981-82 area to be taken out. If the rout in oil continues with ferocity,  I even expect that we could be taking a hard look at – and second-guessing – ourselves all the way down to the notch at 1965. The scorched Earth target would be the cluster of gaps and VPOCs and prominent balance area at about 1950. If oil and the liquidation forces were not asserting themselves so aggressively, I’d say this level of downside is likely beyond the pale. If it does go that far though, I am expecting the big selling tail from about 1990 to 2010 to be a prime target for any upside in the week and also to spend some time balancing there and (re)assessing the circumstances. There is tension building between low(er) equity prices and the (positive economic) effects of lower oil prices, and at some point that tension will be released. As long as the the world remains sanguine on geopolitical situations (again force majeure) this should be a trade-able tension release.

What exactly is this tension I mention? Well at some point the large US equity players have to starting sucking up the bargains. That’s how they make money and the year-end clock is ticking. They can’t make their numbers on the downside or in cash. Plus liquidation may weaken some player’s numbers enough to give other players an opportunity to outperform and enjoy the requisite spoils of war. And that’s a fundamental difference between the equity and oil markets. Oil (or other commodities) can go keep going up or down until liquidity goes away because both sides have the potential to make money by naked exposure or hedging. Then one side just quits. Totally different supply/demand motivation and dynamic in equities. But I digress. Should the equity players stop caring about the oil slick or should there be a cease fire in CL for the time being I’m expecting that we could very plausibly end the week somewhere in the lower volume area between 2031-2057 with the gap at 50.25 being the prime first target.

ES

 

In my view, given what I see right now, this is not a week to take big risk unless you are feeling lucky, punk (a Dirty Harry reference). That may change as the week progresses. It may make sense to press some bets. But don’t forget too there are a couple additional jokers in the deck this week in the form of FOMC and Japanese election news flow which, really, could start at any time now.

As for oil, I’m not going to try to call a bottom. In fact, as I tweeted on Friday I’m starting to think that sellers are going to have to plain run out of willing buyers (liquidity) in order for this to bottom. There’s no structure down here. You’re kidding yourself IMO if you think years-old  low prices and trend lines are a trade-able feature. The situation is so radically different now than it was then. I do expect a character change, however. This week I imagine continued downside to be pool-and-drop, level by choppy level, rather than a mass of water spilling over a broken dam like its been for so many months. My read is that there are more other time frame (OTF) players involved in the market now than even a few days ago. This alone would palpably change the action of such a low-volume contract.

So to sum up, the Russel 2000 state, Japanese politics, crude oil, the Treasury Bond yield curve and options expiration/contract rollover could all have a hand in the large cap equities action this week.Possibly lingering effects too. Save God and the central banks, no one knows for certain what the future holds. But this week we know one of them is talking.

I leave you now with this CL chart. It’s the first interesting cumulative delta divergence I’ve seen in weeks. It’s not huge, but worth mentioning:

CL

 

Trade ’em well this week, amigos.

‘Tis the Season(ality)

How’s your weekend so far?

We had all kinds of chatter this week about the Santa Claus rally. So I thought I’d sneak a quick peek in the back of Santa’s sleigh to see what we might expect, historically, across the US indexes, agricultural commodities and the current red-headed step child of the markets – West Texas Intermediate  (symbol: CL) crude oil.

 

S & P 500

The upcoming week was at least a little weak, prior to  Jingle Bell Rock time,  7 of the last 9 years. The pattern is even more pronounced across the last 50 years.

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SPX Seasonality

Since 2005

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B4L052xIcAAx2Uc

Last 50 Years (via SentimenTrader)

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Nasdaq Technology 100

8 of 9 years saw some weakness or 2-way trade in the upcoming week:

QQQ Seasonality

Since 2005

 

Dow Jones Industrial Average

Only 6 of the last 9 years saw some kind of weakness or rotational trade in the upcoming week:

INDU Seasonality

Since 2005

 

Russel 2000

Again 7 or 8 (meh) of 9 years saw some kind of weakness or rotational trade in the upcoming week:

IWM Seasonality

Since 2005

 

Agricultural Commodities – Corn, Cattle, Coffee, Cocoa, etc.

Pretty much a 50/50 proposition on weakness in the harvest basket (symbol: DBA):

DBA Seasonality

Since 2007

 

West Texas Intermediate Crude Oil

8 of the last 9 years were weak or rotational in the upcoming week:

USO Seasonality

Since 2006

 

Will We be Weak this Week?

Of course only God and the central banks know the future for certain and they ain’t tellin’. But it looks like the S & P 500 (symbol: ES, SPY, SPX) is trying to follow the dominant historical pattern. There’s certainly some droopiness in the number of issues above the 200 and 50 day moving averages, as well as in the advance/decline line:

 

sc

 

To me, WTI looks pretty determined to test the much-headlined $60 mark. That’s despite the obvious attempts of buyers to balance out the market (short term) at a few ranges of price last week. There’s lots of profiling jargon happening on this chart, but at the bottom line the oil market is still accepting lower prices. See how the points of control (POCs) are positioned on over the last month:

 

CL Weekly

 

I think we’ll need to see 4 things this week to call it a short term bottom next week: little/no additional capitulation from the long side; a significant balance area broken to the upside with gusto volume or just rocket-to-the-upside action (aka secure/strong low); the short side’s die! die! die! blood-lust bravado turning to fear and loathing in West Texas; and at the end of the week we need a higher POC/VPOC. Probably somewhere between last week’s and the week before’s, should it happen.

We’re at multi-year lows with these prices, so this is one hell of a holiday sale if you’re shopping for crude oil.

Now, strangely enough, a Twain quote comes to mind:

History never repeats itself but it rhymes.  –Mark Twain