Don’t be like Ron Burgundy

Unless you’ve been asleep at your DOM wheel no doubt you’ve noticed a substantial change in the equity market character since, really, the first week or so of December.

I’ll put it this way, many macro chickens are coming home to roost. We’re not just staring up the same sort of wall of worry that the bulls scaled in 2013 and 2014. The game has changed and the recent market price action is reflecting participants’ struggle to grasp the new rules.

I’ve written thousands of words on this topic over the last few weeks, analyzing this, that and the other macro circumstance. For the first time in a while I don’t think I really have to do that. The monthly and weekly time frame profiles show we’re back to a balanced state having done the needed repair work:

ES-Monthly

Dec – Jan Monthly

 

ES-Weekly

Dec – Jan Weekly

 

Yep. Pretty clear. So now work in this range is largely done it’s probably time to explore other prices. We have been in the 2050 region literally dozens of times over the past few weeks. And now the fairest price on both time frames is all the way down in the 2015-17 area. So….

In the SPOOs, bulls have but one mission – move that intermediate term fairest price back to the 2060s. On my current volume composite from October 15th 2014, the VPOC moved from 2060 all the way down to 2028 on Thursday. This is a big deal because it’s been up at 2060 since late November. If the bulls have any hope of new ATHs they must regain this ground sooner rather than later, achieve acceptance (widen/reaffirm the balance area there), and use that acceptance as a base for even higher prices.

ES-RTHpng

 

At this point I don’t think it’s of so much of technical importance that bulls have to move price up. We’ve been in this range for what seems like forever. What’s the harm of hanging out a while longer? Well, I think their mission instead is to generate the psychological confidence needed among retail equity buyers to act (stir the fear missing out) even in light of the macro backdrop perils and doubts. And there are plenty: details of the ECB’s monster bond-buying program still need clarification; there are well-founded questions about whether the ECB QE program’ll even work to reflate the Euro and EU economies; more than a few think it’ll just slam the door shut on a so-called liquidity trap.  I won’t even start on oil price-induced issues in Saudi Arabia, Russia, Iran, Venezuela, the turmoil in Yemen, Chinese random economic number generation, industrial metal and ore prices, blah deflation blah blah disinflation.

So I’m looking at the 2033-30 Alamo level, near the bottom of the LVA notch shown above as the proverbial line in the sand. If Monday we test the 2046 Alamo – or even 2056 area – and fail, bears can plausibly take price down to 2033-30 level very easily. If we don’t see a decisive buying response, we’re almost certainly looking at late longs from last week providing fuel for a descent to the 2020 area, then potential continuation to the 2013 LVA. Further and we’re potentially all the back to the bottom of the large volume balance area and wedge around 1985 or so.

The 2033 area and levels below should provide good R/R long opportunities for the bold and the quick. That said, in my view our likelihood of  trend down day(s) increases with every handle below 2030. Should the 1985-80 level break we could be in for a more substantial correction, the likes of which we haven’t had in 3 years or so. This would effectively signal no confidence in the ECB moves, and I’d need to re-calibrate my expectations if and when this happens. No need to get ahead of ourselves. This kind of down move/failure can easily take more than a day to play out.

On the upside, we still have the 2063 – 2075 area to test and repair. Chances for sellers to step in increases as we move up given the context and Friday’s close in my view. Since we’ve already had one test of the 2061 area, the best short opportunities should come in at the first test of the 2075 area. If bulls manage to reach and repair this region (shown on weekly profiles above) the next target is the 2086 gap area. This clearly puts new all time highs in sight with the 2100 level being the first obvious source of charismatic upside attraction.

WTI Crude Oil

Since we have so much volatility available in the ES recently I’ve stopped trading oil for a while. The SPOOs/ES is my main squeeze. My one true love. Oil is my sumthin’-sumthin’ on the side. I’m definitely watching though. I just don’t have a need to analyze and select targets.  Sorry if you were hoping to compare notes.

Anyway, suffice to say my view is that the bottom is not yet in. The fundamentals, put simply, stink. All reports confirm we’re drowning in oil, RBOB and there will need to be some substantial shift in the supply situation (with status quo demand) to bring this downside to a halt. Only the first hints and rumors of future supply reductions are beginning to surface, but in my view they don’t really matter just yet. The king of glut will probably take months or even quarters to resolve. That said, we’re seeing the kind of pool-pop-and-drop price action I’d expect out of healthy price discovery.

 

Trade ’em well this week, amigos…

 

Crimson and Clover, Over and Over

As I hypothesized in last week’s post, this week’s trade was everything I figured it was going to be, and more. Also less and faster. Then slower. Higher. Then lower. Ugh.

My focus markets – SP500 and WTI crude oil – this week were, at times, conflicted, conniving and contango-ed with occasional touches of queasy constipation. That’s what happens when all they are serving at the all-you-can-eat market buffet is boiled cognitive dissonance and turkey noodle casserole surprise.

Enough to make you gag, or even puke. Speaking of…

WTI Crude Oil

There’s been exactly 618 kinds of news this week on crude, not the least of which is showing that we’re about out of places to store what we’re pumping from the ground. Now (again, actually) we’re going to start storing it in flotillas of tankers. Which is a kind of windfall for shippers and tanker owners. It’s gotta go somewhere, and global producers say they aren’t going to stop pumping current levels just yet. Demand and price be damned. There’s also several interesting perspectives on the rude crude from last week in Futures magazine. Check ’em out.

I don’t spend a lot of time looking at CFTC Commitment of Traders (COT) data (for a bunch of reasons I won’t bore you with), but in strange times it can make sense to check under obscure rocks for fresh ‘n tasty data snacks.

Lo and behold, the January 6 COT report showed an interesting position skew, long vs short. Large speculators are as of last Tuesday long 270K versus 82K short contracts.  Small speculators are long 82K versus 71K short contracts and the most critical group, producers/commercials, are long 205K v 286K short contracts.

You probably already understand that the producer group is not really short in the sense speculators are. If not, then know that they are the ones actually delivering the commodity (or hedging their actual business interests) and they are providing considerable selling pressure to the market, to which we’ve borne witness. On the other hand, the speculator group, both large and small, are net long. This is telling us that they believe we are near a short term floor price. Or that they are trying to create one.

There were a couple of tests lower this week which were swiftly and mightily defended. It’s pretty easy to guess who might have been providing the defense given the COT report:

CL

But I wonder about two things. First, despite the sharp response brought to these downside tests, the charts are reflecting weakness, and (pretty, LOL) unequivocally so. Price struggled and lost to the bottom of the weekly VWAP on several occasions. We ended the week on the low end of the range and early days this week pushed the profiles’ VPOC (fairest price of the day) lower until creating a balance area Wednesday, Thursday and Friday:

CL2

Second, especially given where we closed, this COT net long position could be vulnerable to the producer’s relentless need to sell. This is kind of like longs trying to keep their heads above water, treading, while wearing no life vest and concrete galoshes. Producers have to keep selling, they’ve said over and over in the news propaganda they will, and the COT shows they definitely have been. IMO, all it would take is for the right speculative player with interests in even lower prices to dump a few thousand contracts at key times and it’s a fraking disaster (get it?). Speculative longs not stopped out right away could then be forced by risk managers to liquidate their positions.

At the same time, as I mentioned last week, we’re only a couple explosions away from some supply constraints, though this is the kind of thing that would likely affect the Brent and WTI contracts differently. The domestic US oil refining market dynamics and logistics are really messed up right now, and that’s what the renewed run at the Keystone XL pipeline is all about. Feedstock for US refiners who today have to blend light domestic crude with heavy imported crude in order to process it. But I digress….

It could be quite a show if this scenario plays out. The COT report says there are just not a fat pile of shorts to squeeze above. This, amigos, is how it should be. A market providing real price discovery. This also means an unclean, dirty or even filthy auction depending on your time frame. Basically, I’m expecting more sloppiness around key price levels until we get back into some kind of retracement mode.

All that said, the February WTI contract expiration is the middle of next week. Many will begin trading the March contract late this week, and this could be a time for shenanigans. Speculative longs who don’t want to take delivery of the February contract oil have to liquidate the position outright or roll their position to another contract.

So for continuation to the upside – save force majeure – bulls could just heave it above last week’s VWAP at 48.9x and late-week balance VPOC at 48.70 early and defend a couple of fierce downside tests. This would mean not only would they have to fight off selling aggressors hunting stops for a quick profit but also soak up the flow of contracts producers sell just trying to get their everyday business done. Success may encourage fresh longs to join the upside fight. What if the right (cough) motivated seller takes advantage of this position skew? Bulls could easily get a bear claw-festooned spear stuck right between their shoulder blades and go down with a bloody, grunting thud.

At this point I’m looking to a failed test of the $47 handle to open the gates of hell. 46.0x, 45.1x, 43.7x and 42.1x are targets lower. Should this late-week balance turn into near-term acceptance above last week’s POC of 48.75 and VWAP of 48.93, upside targets  are 50.2x, 50.7x, 52.0x and the week’s open around 52.70. I’m having a tough time imagining a universe, save exogenous events, where much higher prices would be seen given the fundamentals. At this stage, I’d expect the fundamentals to trump the technical aspects of the trade.

Remember the Alamo, SPOO Fighters

The ES is actually the simpler instrument to grok at this week. Friday’s trade called and sang the tune, which was Tommy James/Joan Jett’s Crimson and Clover (Over and Over). We rotated the full range (red and green boxes, crimson and clover, below) between the Alamo levels of 2060 to 2031. While these levels are providing great edge/reversion trades, annoyingly we’ve seen these levels and this range time and time again over the last few weeks. It’s created a thick range of small balance/HV areas which are getting harder (unless you just scalp for ticks I suppose) to trade because they are all so close together:

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ES2

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ES

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On Friday, the middle of the range was handily rejected just as many were expecting a late Friday upside face-melter. What the huge back-and-forth of the week is telling me is that we’re in substantial disagreement over the fair prices of the US large caps. Remember, the weekly POC’s still all the way down at 2015, Friday’s VPOC was 2041.

On the bullish side, we have rumors (expectations?) of even more central bank easy money in the EU on top of the flood of money spewing from the US, UK and Japan (among others). On the bearish side, many of the geopolitical shoes the market has been ignoring for many months seem to be more credibly threatening to drop. We also have real disagreement over the state of the US economy in the financial media. Depending on which market multiple you want to use, we’re either fairly valued, over valued or ready for multiple expansion soon. The heads are all feverishly talking their books now, and this is the time I generally just tune it out.

Anyway, the closing position of the week without a doubt has advantage going to the bears. The rejection of Friday’s mid range could be an interesting tell.  So much so that I created a new Alamo level at 2046.50. This is the price to watch early in the week and could provide a good short opportunity if bears come on showing teeth and claws. If you’re bullish, what you really don’t want to see is another test of the lower Alamo of 2031 area without a resounding rejection. This, by the way, is also the 50d EMA area. Lots and lots of traders are watching it.

So for early in the week I want to see this 2046 area hold for tests of 2056 and the high end of the range at 2060. Above this, and new ATHs are certainly within reach for the week. If resistance above holds and then the 2031-30 area breaks the 2023 area and the 2020-18 VPOC/gap area would be good spots for a long on a first test.  And then there’s the mid 1980s area where we bounced on January 6 to test again below that (on the weekly time frame, probably not Monday).

Not going out any farther than that at this point, and I have stopped considering any seasonality factors. Plus there is now so much confluence in the nearby range the levels are getting choppy and sloppy. We have Fibs, the 50 and 20d EMAs, etc., etc., etc. And because we’ve seen last week’s range so many times so lately, there probably are not a ton of stops on either side to fuel a really monster move outside it either way. Inside, Wednesday’s and Thursday’s longs are certainly vulnerable.

Oh, and uh, one more thing. I’ve noticed a change in the character of the coupling between the ES and CL. When oil plunges, the ES follows. Probably due to forced selling. But when it bounced hard this week the ES didn’t seem to care at all. Something to watch this week, methinks.

Trade ’em well…

Cognitive Dissonance – It’s What’s for Breakfast

I sense something; a presence I’ve not felt since…

–Darth Vader, Star Wars Episode IV

I don’t know who or what it is yet, but I think it’s there. I’m not even sure what or who it is matters so much as what it’s bringing with it. Or maybe what I’m feeling is the lack of something expected but missing.

Stay with me…

Let’s Talk Spoos

A couple weeks ago after the spectacular #santarally, the SPX looked poised to resume its sensible, inevitable upward march in the usual position, the upper channel. But guess what? It didn’t:

[one_half first]

 

SPX Daily

 

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ES RTH Mush

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Instead, it expressed enormous ambivalence, retreating to and retracing a large area of previously well-explored prices between 2090 and 2040 (left, above). The range between these zones was so well explored that the volume structure left behind is remarkably thick and indistinct. These are two attributes that the ES/SPX rarely ascribe to the same region.

So the 2100 dollar target question is why? Why did the market choose to calmly retreat to this region? We’ve been here several times before recently. This region, while lower, is only a couple points off the ATHs. And because we’ve been here so many times recently it’s pretty easy to rationalize this as “safe.” But to me there are now some subtle causes for concern if your primary thesis is “higher.”

Let’s start with the big doji candle left on Friday by the SPX, shown above. Next we have my momentum indicators either parked in the middle or edging down. This is an oddly and vaguely uncomfortable neutral position given the battle royale of buying (and selling) just a couple weeks past. If we look at that same chart but with the ES, things look a bit less ambivalent and weaker:

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ES Daily

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ES Island

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Then there’s that pesky gap on the RTH charts in the 2020 region (SPX and ES) that does not appear on the daily (Globex) charts. But as we know, the vast volume is cast in the equities RTH hours and anything which happens in the ES outside of that time can be easily disregarded, run over and crushed by RTH volume. In other words, there has been enough entrancement of this gap area above 2020 to seriously consider whether the area circled above is turning into an island top, which is a well-known reversal pattern.

Now before hitting the bid in a big way, I should bring up some mitigating (confounding, even) factors in the way this chart developed. First, very plausibly, the down move could have been sellers taking advantage of thin volume and the region of non-scary prices in order to shed some overweight positions and not grab too much attention. It was a very orderly, controlled slide lower over a couple days which indicates some long term players simply squaring the books around the new year. If this is indeed the case, it should already have the BTFD-ippers salivating and I’d expect:

  1. We see a measure of strength from MOOs right out of the gate
  2. A test lower and a more powerful afternoon bounce
  3. A trend down day taking us down to a point where we no longer have to wonder whether this is an island top

At this point, for early in the week, I am favoring scenario 2 followed by scenario 3. Why? Well I would be remiss not consider the seasonality precedent for the situation we see ourselves in now (via Quantifiable Edges), where there are biggish down days between Christmas and New Year-ish:

 

2015-01-02

 

At this point I think scenario 3 above is plausible given the charts, I just think it’s better set up just a little later in the week. As always with the SPX, you really have to think twice, maybe three times, before you get bearish. You have to have really good technical and fundamental reasons (and often a few 40 point red candles) for being bearish on US large caps for more than a day or two in this environment. Bears just get mercilessly pummeled with soap bars in sacks every time. The proof is right there in the charts.

That said, on the downside in the ES, the levels to watch for a test lower – below the 2050 area – would be 2043 Friday VAL, 2038, 2034 and the oh-so-critical 2028 Alamo area. This has been a biggie for weeks on end, and if it breaks there is almost no doubt in my mind we’ll close this candle gap and take out the open/naked gap at 2008. This 2000 region is the next prominent area of support and I imagine the market will pause and breathe a little should we run down that far.

If Team BTFD is ready for action, the 2050 area is an important psychological price as well as the lower bound of the December 31 range. This is the first key hurdle, and given where we are now we could easily jump over it overnight and test it early Monday (something like scenario 2 above). If it holds we have we have the 2055 area as a rotational target. But from a structural perspective the 2060 HVA area is more important. What happens there, should we get there, is critical to my decision making for next steps. There are a few minor levels in between I’ll no doubt tweet if they become relevant, but the 2076 area is next critical area for bulls to bust to get to 2100.

Now for a couple macro things I find kind of unsettling at the moment (force tremors). First, NYSE margin debt seems to have peaked and backed off. This means that bulls have buying power if they want it. But margin debt also tends to peak and roll off prior to market tops. Also, the jokers on CNBC have been saying for a couple weeks now they expect multiple expansion and another 8-10% positive year in the S&P. This sends off alarm bells in my head for a bunch of reasons. It can mean they are already overweight large caps and getting low on dry powder. They need the little guys to keep it marching up with fund inflows and raw speculation.

Of course I understand the exceptionally bullish monetary situation, but this week I am having an increasingly hard time squaring that view what could happen as the cheap oil chickens come home to roost, the message the massive moves of the USD are trying to send, and some others I won’t mention. I just think the talking heads are purposefully (some idiotically?) overly sanguine for show and tell time on camera, trying to keep the fear of missing out sharp in the minds of the retail cohort. Cognitive dissonance. It’s what’s for breakfast all week, methinks.

Personally, I’d love to see the return of volatility to the ES. Not Armageddon volatility. But I tend to do my best trading when volume’s high and the rotations abusively powerful. It just fits my style of intraday trading.

Oh, and speaking of cheap oil…

A Tale of Grease and Two Gasses

The energy complex is  still just weak, weak, weak on the weeklies:

Natural Gas

Natural Gas

RBOB-Gasoline

RBOB Gasoline

WTI Crude Oil

WTI Crude Oil

For the last 3 weeks, every one of them opened higher and closed lower. Friday trade, shown in blue on all the above charts, is at the bottom. I don’t trade Natty Gas or RBOB, but there was a bounce in NG in Friday that shouldn’t go unnoticed. Which could be an interesting implication, or only a dead cat bounce. It’s just been ugly, ugly, ugly. As we all know, NG is a big companion product of domestic oil producers and it’s been in an oversupply situation for some time. In fact, I remember reading not long ago that about 50% of all the gas produced is just burned at the top of stacks because they have to remove it to get the oil and there’s just no demand for the excess supply. RBOB is of course a cracked derivative of the raw crude, but I digress.

What I really do care about is WTI. What I think is the key pattern to watch in Sunday’s overnight/London session and Monday is this big ol’ descending wedge CL has jammed itself into over the last week. This is a bullish pattern. That’s not to say it will turn out this way, but the holiday week volume was actually pretty close to normal. And in fact, even as the week progressed and volume increased, the range decreased and the rotations sharpened. Many an oil trader were griping about algos and bots on Friday, but what it really means is that there is a buying presence here which is catching up (or trying to) and match up to the relentless selling of months past:

CL Desc Wedges

CL Desc Wedges and Tails

 

Note the buying tails on the candles at the bottom of the range in the last two sessions. This range compression is what’s starting to piss both sides of this trade off, IMO. Everything is tightening, and over a longer time frame that we’ve seen recently, and this may be a character change signal. At least in the short term. I think $50 is an important psychological price for a whole bunch of reasons, and I think it’s very reasonable for someone to try to floor it at or near there. Will it work? Given the supply/demand picture that has emerged over the weeks I have to say I doubt it.

But we’re really only a couple explosions or voluntary twists of a big pipe valve away from the mother of all supply-disrupting short squeezes. Not saying I am expecting anything this dramatic, just saying these kinds of threats always loom over the energy market. But what is even rarer than credible supply disruption threats is to have to oil market so lopsided. At some point low price will start to tip over the supply dominoes… but that will take time. Unless any supply disruption is caused by force majeure, we’ll know it as it manifests and can plan accordingly. No need to get ahead of ourselves on this one. So for now, I’m taking this trade one day at a time.

Speaking of, I mentioned my specific expectations for Sunday/Monday on Twitter.

It’s setting up to be a fun and (hopefully) profitable week if you can swallow the dissonance. Trade ’em well…