MLR Updates

If the seams in the market are cracking they are doing so in their own sweet time as Mr. Pietsch so eloquently pointed out in yesterday's comments. Today was a strong day, with only a few reluctant lagers like SMH, which finally joined the party in the last 2 hours.
With oversees debt worries easing EEM rose almost 2%, rising an additional .03 after hours.
XOM was a curious party pooper today. Actually, XOM's been a party pooper pretty much all year. Considering that XOM is a major component of XLE and XLE has risen from $ 47 to 61 in the last year, XOM has risen from $67 to 68.50 during the same period . . otherwise known as flat, so essentially it's been holding the XLE back.
On the currency front BZF staged a nice channel breakout today and now leads the way in our little basket by a substantial margin. Whether it can maintain positive momentum should be demonstrated by Friday's action.
Despite it's drop in the ranks FXC still remains an attractive chart, whereas the yen and the Euro are bearishly downslope. We're finally seeing some weakness in the dollar, a few days after the PDQ Dashboard called for such a move.

Some Cracks in the Seams

Above, the 4 square chart of weekly bars with the VIX/SPY and VXN/Qs, and it's hard to tell these 2 sets apart. Short term mid-panel technical implications are bullish for the VIX/VXN and bearish for the SPY/Qs although the SPY/Qs continue to ride the LR30 mean upslope.
Below is a pattern that is becoming evident with an increasing number of the majors. In this case it's shown on the EEM, which was surprisingly weak today, spending a good portion of the day in negative territory but closing in the green. The white circle captures the erosion of new highs also seen in the Qs, SPY, SMH and IWM (to a lesser degree).

We got the widely expected knee-jerk pop in the majors today after yesterday's 30% rise in the VIX, and although volume was enthusiastic, buying was sporadic and failed to make any significant intraday pivot swings.

The VXN Matrix opened at 28:8 positive = Qs bearish, but the Qs downdraft only lasted 2.5 hours and closed the day at 18:18, a distinctly neutral position.

The Worm Turns

Bit of a turnaround today as global debt worries appear to have sparked a selling spree. Things looked like they were going to perk up around 12:45 as the VIX started to fade, but those who have been trained to keep a close eye on the NYAD noted only a modest revival in that index, thereby warning risk adverse old guys like myself to stand back for some bullish confirmations.

Those confirmations never materialized, and the NYAD only managed a meager rise to .30 before collapsing back down to .19 at the close. Market swoon reversals are often characterized with selling pressure that reaches a maximum negative momentum at NYAD values of .10-.12 . . a level not even approached today, suggesting more of the same to come.

Below a quick snapshot of the day's carnage with the VIX's over the top 30% pop highlighted. Typically, reversals off these sharp VIX spikes are seen the day of the spike and are reflected in the bar's top tail. In today's case the VIX closed virtually at the high of the day . . a further hint of more selling to come.

SMH and the Dollar

You probably thought I was going to make some astounding correlation between SMH and the dollar. Not his time around amigos. I simply wanted to point out that despite the weakness on the majors today, SMH managed to close in the green. Hey! . . maybe there's something to this rotation thing. Of course, over the short term things don't look quite so optimistic for the semis . . with an apparent consolidation pattern well underway. The SH, although in last slot, did make a nice little pop today and we'll be keeping a close eye on that for possible further evidence that a pullback may be imminent.

The currency front has some interesting developments going on and the metrics are actually a little bit deceptive until you step back and look at the broader picture. To help in that regard I've posted the PDQ Dashboard for the UUP. While I haven't posted on the PDQ for a while, it's still alive and well, kicking out those signals every day and I've actually found that using the VXX and the dollar (UUP) as PDQ targets provides a good probability edge. In reality, all you had to do was be Long over the past year and your total return on the majors would be very impressive, but I'm one of those traders who keep thinking mean reversion will kick in one of these days and actually reverse the upslope markets. Meanwhile, I'm net Long with one foot out the door and I continue my digging for nuggets.

Thanks for the Nuggets

I would be shamefully remiss if I didn't acknowledge Dr. Brett's decision to shut down his blog, which has been both a showcase and a benchmark for other bloggers. Over the years Brett has been more than generous, sharing his trading knowledge on a daily basis and introducing new bloggers with varied perspectives to his readers. Many of us owe our original reader base to a tip of the hat from Brett and I'd be lying if I said it wasn't sincerely appreciated. His recognition and avoidance of much of blogdom's blather and false claims is further testimony to his quest for truth and reality in the otherwise convoluted world of trading hype. I often liken my quest for trading wisdom to the efforts of a gold miner . . looking for nuggets while trying to avoid the fool's gold. In that respect Dr. Brett was this miner's good friend and I owe more than a few $ in my poke to his nuggets of trading insight. He will be missed.

Divergence Expands

The usual suspects led the pump on Friday after the expected fade at the open. SMH and the Qs were front and center and by the end of the day all the lagers had joined in the surge.
The XLE broke out of the upper LR30 channel closing on the high of the daily bar. With summer driving season only weeks away this move was not unexpected and additional upside momentum is likely.
I mentioned the need for caution on Thursday when the 4V (volatility indices) all closed in the same direction as the majors (SPY, QS, IWM). I suggested that when all symbols are green the market typically favors the 4Vs signal =market bearish. What we got was a fade at the open that lasted 30 minutes (20 0n the NYAD) before buyers stepped in and pushed the markets to new highs on moderate volume.
Once again Friday's VXN Strategy Matrix closed 18/18 = neutral, while the SPY and Qs each closed +25,-11 = bullish 2:1.
Just in case you though GS was hurting as a result of the SEC charges, they aren't. The WSJ noted that GS's new 43 story 2.1 million square foot headquarters in downtown Manhattan cost $ 2.1 billion to construct. Among other features, it contains 6 trading floors, each larger than a football field and a 54,000 square foot gym to help those frenzied traders take the edge off.
Below is a 4 square chart of the VIX/SPY and the VXN/Qs. The interesting thing here is that while the SPY and Qs continue to rise, VIX and VXN are also upslope . . not a lot, but not downslope as you would expect.

Thursday Divergence

The SMH was an impressive leader today, although after hours it has given up all the day's gains plus some. The same story holds for the financials in the form of XLF which trended up all day and then gave back all the gains at the close.
The NYAD was solidly upslope 30 % after the first 30 minutes of today's session, rising all the way from a bearish .22 to a decidedly bullish value of 1.83 at the close with no fade evident in the last 60 minutes . . typically a sign of impending reversal.
Of some concern is the divergence of the 4Vs and the majors. As we have experienced in the past, bullish closings of the 4Vs and the majors are typically resolved in favor of the Vs = bearish for the majors. I would have thought the bulls path was clear at this point after the positive skew of earnings reports, but exigent factors can swing the markets quickly and that be happening now.

Of note: Turns out at least 2 dozen senior officials (attorneys, accountants, etc. earning $ 100-220K annually) at the SEC that were supposed to be keeping democracy (and our brokerage accounts) safe have been logging huge hours on their SEC computers watching porn instead. The real pornography is the crap guys like Madoff and Drier pulled off while these numbnuts were comatose with visions of sugarplums in their heads (some were females).

Tracking the Day

Here are 3 sequential views of the market using the Indices watchlist and the Strategy Matrix focused on the VXN (Qs volatility index). The first view is one hour into the market, the second is 4 hours into the day and the 3rd is posted at the close.
At the end of the first hour the VXN is skewed almost 3:1 down = Qs postive. The Qs at this time are up .34%, while the SPX is flat and the IWM is down .01% . . essentially flat.
Note that the VXN is down 2% and the QQV is down 4.7% . . both bullish for the Qs.


At midday the metrics are only modestly changed. The Qs are still at +.36% and the VXN and QQV are still tracking the first hour values. The Matrix has eased a tiny bit but we're still seeing a 23:13 neagtive skew = positive for the Qs. This has the feel of a consolidation day and I'm not expecting much excitement for the afternoon session.
The IWM has picked up some positive momentum, while the RVX has also gained .3%, so we've got a divergence on the IWM that may be worth keeping an eye on. Typically we see this kind of "testing" before a reconcilation of the divergence.

OK, I've changed the look of the Watchlist for the EOD panel just to see of you're paying attention. I've deleted the volume column as it's effectively meaningless for the majors and yields no values for the $ type indices except the DJ.
At the close our midday forecast for a dull afternoon with possible action at IWM is proved correct. The VXN Matrix is now dead neutral at 18/18 while the Qs themselves are just a few pennies off the 1st hour and midday values. Ditto with the VXN and QQV = a sleepy day for the Qs.
Of note is the late afternoon IWM bump accompanied by a 1.3% drop in RVX . . just the type of inverse correlation we expect from the IWM/RVX. If you look at the 2 minute VIXEN setup of the IWM/RVX (not shown) it should be crystal clear that the last hour of the day was a great IWM Long opportunity that would have yielded a quick $.40 for 45 minutes of exposure . . a classic VIXEN trade.

Volatility Drop

A 9% drop in the VIX, RVX and VXN reflected today's bullish trend. VIX closed on the low of the day and is now tracking down to the low 15s. However, and despite those impressive numbers, the Strategy Matrix of the VXN at the close was dead neutral at 18/18.
Positive earnings appear to be urging the markets back up to previous highs, supported by mostly bullish guidance by the analysts.
GS is chattering around a bit at short term support while talk of lawsuits from California state pension funds (among others) with 330 million worth of GS stock loom on the horizon.
SMH and some of the semi components made a late day rally, which typically bodes well for the Qs so it's not surprising to see the Qs in slot number 3 after today's action.

A Volatility Watchlist

We're seeing a bullish bias going into Tuesday as the financials surged and the GS fallout abated.

On the Indices watchlist I've added the $RVX which now makes 5 volatility markers for the majors including the SPX, NAZ, Qs and IWM as well as the forever dismal VXX ETN.

I decided to add the RVX after several weeks of study which showed the RVX to be a great tell for forecasting IWM strength or weakness relative to the other majors.

The only volatility metric I really care about is the % change and on today's watchlist results you can see that the high percent change value for the RVX corresponded with the poor performance of the IWM.

I've spoken about the VXX before and as it continues it's slow drift to oblivion my only advice is to short the rallies, a tactic that has worked flawlessly for the past year.

Godot Arrives

First . . please note a change to the blog publishing schedule. Future postings will be released early in the evening rather than pre opening. This change will (hopefully) enable readers to take advantage of EOD conditions and prepare for the following day trading opportunities.
While I had initially considered making these advance posts available only to my Plutonium subscribers, in the spirit of equality I'm extending it to my Platinum and Gold subscribers also.
That's what we call an instant response as the VIX surged over 15% and Qs volatility rose 7.5% on Friday. And, despite the widely expected market reversal off VIX 15 levels, even the most non-conspiracy minded trader has to ponder the perfect timing of the SEC's announcement of GS fraud charges that prompted the explosive move on Friday (also see the last chart at the bottom of this post). Wouldn't it be funny if it turned out GS was massively long VIX options going into Friday?
Hey... ZeroHedge...let's check it out.
Interestingly, the VXN Strategy Matrix, as discussed on Friday, is now basically neutral on the VXN, with the longer term fractals skewed to the long side. And, there is some support for a moderately optimistic view based on the Friday's NYAD performance.

While the NYAD did manage to hit the low teens for a few mid-day hours, the slope into the close was modestly up, closing at a not too scary .24. The underlying 3 SMA and MACD technicals actually paint an optimistic picture of Friday's close, but I'm still playing this hand close to the chest.

And now a note on the Qs VIXEN:

Above and below are 2 minute bar charts of the Fridays Q's action with the VIX overlay. The upper chart displays the real time cross of the VIX at 10:50, setting up a short trade just ahead of the big drop through S2 and down to S5. Of course at 10:50 you've really no idea how far this thing might drop which is a big reason to keep one eye focused on the NYAD VIXEN chart (shown above the Qs chart). These 2 amigos move together like clockwork.

The chart below shows what happens when you view the same setup in the hindsight of the end of day. Now the trigger has migrated to 11:15. I've posted extensively on this "floating" character of the VIXEN but this is a crystal clear example of the phenomenon.

On 5 minute bars (not shown) the VIXEN cross was at 11:15 and there was still pretty of downside action following that entry point with a lower risk exposure. The more comfortable you get with the VIXEN setup, the easier it is to execute on the 2 minute bar triggers . . always using a cut-loss stop.

Goldman lost 12% on Friday although I am surpised the volume was not higher. Based on GS's often suspected and now documented history of saying one thing while doing another I wouldn't be surprised if it's revealed later that GS itself made more money on Friday than any other day this year. You heard it here first.

Waiting for Godot

For bears watching the markets over the past year it's been like Waiting for Godot. There is a small possibility that Godot may actually be arriving soon if today's uniformity of market majors and the 4 volatility indices I monitor are any indication. (VIX, VXN, VXX, and QQV)(OK, VXX isn't an index, but an ETN).
Over a month ago our close analysis of the VIX LR30 channel suggested the low 15s as a long term reversal level for the VIX and, although at the time the likelihood of reaching that low level seemed almost an absurdity . . here we are.
Normally the 4Vs and the markets are divergent, as pointed out in yesterday's posting, and in the past when the markets and the 4Vs have aligned at the end of day it's been a good indicator of a coming market reversal, if only for a short time.
Another signal that the markets may be setting up for a dip can be seen in the Strategy Matrix signals of the VXN. I've found that using the VIX or VXN as the Matrix study target produces more reliable forecasts than using the SPY or Qs or DIA, etc.
The Matrix is kind of color blind . . it doesn't care what its analyzing. it just kicks out the long or short signals. And, by almost a 3:1 margin the VXN signals are bullish = market bearish.
A word of caution, however . . We saw a slew of these preliminary reversal patterns during the last 2 weeks of March, only to have the markets embark on a new bull surge in April so it's safest for bears to just hang tough for the present until we do get a solid and confirmed reversal.

VIXEN Scale Views

Top chart is the Qs on 130 minute bars (3 bars per trading session), while the lower chart is 5 minute bars of the NYAD. Both have the VIXEN overlay in place . . and the technical implications of both charts are bullish.
I often use the 130 minute charts to get an arms length look at the market dynamics. At this level you can see whether relative strength was at the open or close while at the same time getting a marco view of trend momentum. The lower panel technicals, especially the 3 SMAs are also useful for trend confirmation. While we've used the VIXEN setup almost exclusively for daytrading purposes in previous posts, keep in mind that the VIX cross tactic was originally developed based on an analysis of daily bars. And, while the VIX is currently trading at sub-16 levels, the 130 minute chart provides no hint that we're anywhere near favorable short trades. Keep in mind that the VIXEN setups virtually never catch the absolute tops and bottoms of the cycle . . what they do is signal truly "sweet spot" trades with extremely low risk exposure . . and at this juncture we just have to bide our time on new shorts.
The NYAD chart below is just a microcosm of the Qs chart above. Those who follow and trade the VIXEN setup know that the VIX/prices crosses "float", . . that is, they move along the chart as time proceeds. In this regard, the actual VIXEN trigger on Wednesday's NYAD chart was 10:30, which coincides exactly with the NYADs early reversal off of the early swoon.
It doesn't get much clearer than this.

The EEM Situation

After looking at the Qs Situation yesterday, it seemd like a good time to review the performance and status of the rest of the Lazy Man's rotation model. In this case the focus of our study is the EEM.

The Project Z results for the EEM are shown below while the current technical status of EEM is shown on the chart above utilizing the same suite of indicators as applied to the the Qs.

As with the previous Qs study, an item of interest is the lagging performance of the Short trades relative to the Longs. While the Long-Short disparity is not as great as in the case of the Qs, the distinction still warrants a closer look, which we'll examine in the cases of DBC and SPY in the coming days.

As of Tuesday's close we are flat both EEM and the Qs, having executed a Short stop on the Qs yesterday am for an $.18 loss.

The Qs Situation

Here's an update to my ongoing Project Z research. I've added the BZV and the PP+ pivot related indicators along with the Project Z indicator in an effort to see what kind of signal alignment shows up. Project Z fired a Sell signal 4 days ago when the Z value plunged down to the .8 level before starting a slow reversal ascent. Both the BZV2 and the PP+ are currently bullish with the trade only pennies away from a 1/3 ATR cover.
The performance report for the Qs and Project Z are shown below for my typical 16 month floating analysis lookback window. The Long side trades have clearly done very well, but I'd be lying if I didn't admit disappointment with the lagging performance of the Short side trades. Of course the markets have been in a steady up swing for the past year and trading the short side has been more than a little problematic for most traders, but a lesson to be learned here is the old adage, "don't trade against the trend", or if you must, then have a tight stop in place and follow the trading plan.

MLR Steady, FXA Advances

The MLR updates are getting kind of boring, but it's a just a reflection of the ongoing uniform market advance. After a little consolidation pause we're seeing glimmers of strength as the leaders vie for position. The IWM and XLF charts actually look eerily similar, with both showing potential breakout patterns.
All eyes are on Monday's earnings reports, which will likely provide the initial catalyst for either a breakout or a breakdown. This earnings season has been unique in the lack of pre-earnings warnings so it will be really interesting to see if that's an indication of good things to come or an unwillingness to fess up.
Plenty of unknowns at this point that could move the markets either way in a hurry.

Over in the currency corner the Aussie dollar is making a nice run of higher highs as it reaches for the channel mean and the first point of technical resistance. FXA has been in an ascending LR30 channel since February and the midpoint technicals suggest it's comfortable on this momentum track for the near term.

Easy Peasey Thursday

As suspected in yesterday's post, the pullback proved to be just a temporary speed bump. To prove the point Thursday's market produced a nice little nugget . . a picture perfect low risk VIXEN setup at 11:50 on the Qs. Virtually all the technical signals were screaming BUY . . the hairy bottom at the open, the 8 hi/lo channel cross, the parabolics BUY signal, the mid pivot breakout, the 3SMAs slope and the 45 degree VIX cross. This is as good as it gets amigos and if you aren't working these setups you're leaving some easy money on the table.
This trade produced a $.22 gain in 75 minutes . . almost half of the Qs current ATR8 of .55.
And, if you had any doubts about the possibilities for the trade at 11:50, a quick look at the NYAD should have convinced you that the trend was clearly up.

Turn or No Turn?

As expected on a red day the TLT made a nice little pop. Also not unexpected was the almost identical % gain in GLD. What was of interest (to me) was the strength in SMH, which often leads the Qs in these divergences. The implication of that strength is that Wednesday fade may not have much momentum and any carry through is therefore suspect.
Of the majors (Qs, IWM, SPY) the Qs were down the least at .25%, reinforcing the previous argument. Also note that Monday's top Rotator pick . . BAC . . continued as a standout gainer, while AA gave up a sizable portion of Tuesday's surge.

On the currency MLR it looks like the yen is a real goer . . until you take a look at the chart and realize that it's essentially gone from truly morose to simply dismal . . technically an improvement but still a questionable long. The UUP is showing its good side, and while its not riding in rank #1, it clearly has positive momentum.
Our FXC superstar lost a little ground today. FXCs ATR8 is $.64 so the 1/3 ATR (trailing) stop is $ .21 which executed a LongExit at $ 99.38 . . and we are now flat FXC.

Mid-Week MLR

We're seeing a modest shift in leadership momentum here with the financials, as represented by BAC, and EEM are picking up the pace. Still not much divergence among the top 5 as the markets continue to inch upward. The new PP+ is bearish on the Qs and this will be the indicator's first trial under fire so I'm interested to see how the next few days resolve.
We continue to witness some flattening in most of the system equity curves, the product of both conflicted signals and a VIX bumping along at 16. The VXX hit another all time low close today at 19.59, with no let up in sight and in my opinion swing traders should ignore this ETN, leaving it to die a slow death. Daytraders, on the other hand, should take note of the daily ATR of .81 (4%)as an attractive trading vehicle . . keeping close attention to the ongoing downslope bias ( sell the rallies).

FXC is still leading the currency pack although a closer look at the Rotator results shows BZF continuing its run and actually leading on the 5 day performance metric. The dollar is picking up momentum once again and the yen, probably just to spite my Monday post, staged a little burst of enthusiasm.

Next week kicks off earnings season with AA leading off. Maybe coincidence, but Citi yesterday maintained its "BUY" rating on AA with a target of $17 (currently at 15). Whether this is gaming on Citi's part should become apparent next Tuesday and will provide an important benchmark for things to come.

The BZB PP+

As promised last Thursday, here's a peek at what I call the PP+ indicator. It tracks the baseline pivot PP against the R1-S1 daily range and therefore provides a daily update of how volatility is fluctuating in the face of either rising or falling PP momentum. And, as expected from those who've followed me for a while, I've added a few nuances to the algorithms to smooth the indicators and enhance signal reliability.
The utility of this indicator is very straightforward. Think of the PPP (yellow line) as a signal line for PP momentum. When the PPR (white line) signal line crosses the PPP the odds of a successful trade in the direction of the signal line slope increase substantially. I've annotated a few bullish and bearish signals on the chart above. The crossovers are clear in most cases although there are incidents of congestion as seen around Dec 1st.
I've considered that problem a bit and the result is a confirming indicator that is also shown on the chart (the cyan line), which I've termed the BZV (I'm trying to get as much mileage out of this BZB thing as possible), which is really a derivative of the QQV (in the case of the Qs) and is still a work in progress.

Meanwhile, I consider the PP+ to be a tradeable daily indicator in much the same manner as my ole reliable VIXEN daytrading setup, although the signal confirmation indicators are a little different. That's a topic for additional research but I'll touch on a few of my favorites later in the week.
The TS2000i code for the PP+ is shown below. Astute readers will notice some realignment of the code language as well as a smoothing factor for the range differential that has not been applied to the PP calculations. The zero line function has also been deleted since the focus of our attention is only the signal line crosses.

The MLR Situation

A tip of the hat to Dr. Brett for his kind link this weekend to Thursday's pivot indicator post. Apparently there's a lot of interest in the functional utility of the pivots for daytrading purposes and that's good because I've been preaching about their unique forecasting behavior for years. Brett disclosed some interesting pivot metrics on Friday and it's worth a closer read. His point of reference is the SPY, but I suspect that if his point of reference were the Qs the target correlation numbers would be a bit higher. Later in the week I'll show why, which may, in turn, help to explain my continued focus on the Qs in lieu of the SPY, DIA of IWM. Also later in the week I'll post the integrated pivot and volatility indicator and, without giving anything away, it's got some intriguing possibilities.

The SPY took over #1 rank on Thursday, but it's still a pretty even horse race among the top five. EWC continues to demonstrate impressive resilience both as a country and a currency (see below). This market shows little inclination to fade and Thursday's low volume pop was probably a result of a lack of sellers rather than a flock of buyers. April has a historical tendency to be bullish which, as game theory students know, means absolutely nothing in terms of a trading edge.
On the currencies front the Canadian dollar is easily leading the pack. BZF is showing a similar momentum pattern, but FXC is acting like it's on steroids. The last couple weeks have seen a slap happy pattern in UUP and FXE, each constantly jockeying for the lead and then quickly retracing. Currency traders expect this type of behavior between the dollar and the Euro, it's the volatility that's unusual. Meanwhile, the dollar remains uptrend on weekly bars while the Euro remains downtrend. The yen is not performing well.

BZB Pivot Indicator

Here's a little egg for your Easter basket . . the product of a project I've been fiddling with for over year which utilizes the PP pivot to forecast momentum. Basically we're looking at an oscillator similar to a 2 moving average cross system, but in this case our focus is not price per se, but the PP baseline pivot.
I have an expanded version of the indicator with R1 and S1 bands integrated into a single line range volatility indicator superimposed on the PP line, and this delivers an immediate view of floating volatility over time relative to the position of the PP, effectively complementing the momentum signal and producing a VIXEN setup situation. We'll look at that next week.

The Pivot Indicator should not be confused with the TS default zigzag indicator which is superimposed on the candlestick chart above. Although the zigzag tracking results look very impressive, the ZZ is in fact a lookback indicator that is always 2 days behind the curve and I use it more as a visual aid than a trade forecaster.

Below is the TS2000i code for the Pivot Indicator. I call it the Pivot Pivot because that's exactly what it is . . a signal of when the pivot pivots. As with most oscillators it's best to "tune" it to your focus stock or ETF . . . in this case it's set to 3 and7, although if you were to optimize it as a trading system the inputs would be 2 and 8.

With these relatively short data series the exponential function in lieu of a simple MA doesn't make much of a difference, but I'm always trying to squeeze as much out of the orange as possible.

As an aside I've once again tweaked the right blog panel to speed up loading time. The Prognosticators have been migrated over to the Pair Solution site after I updated the indicators on the real time Qs chart to reflect the Prognoticator signal in the lower technical panel (yellow).