Thanks for your interest in our work.  While we began this site with the intention of providing short-term market timing advice, we have attracted a wide swath of readers because of our longer term research.  Most of our posts are related to short term market analysis and are posted under the category “Intraday Analysis”.  Our daily morning report is always filed under “Pre-open Analysis” and contains our short and medium term views of the markets, along with interpretation of recent news, reports, and Federal Reserve actions. 

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We have recently been pouring over data provided by the Federal Reserve and will be posting (hopefully this weekend) our observations about what appears to have been driving the markets over the past year, and what the current data are potentially telling us about the future.

Thanks again for your support.

10:16 am EDT:  The bearish trend off the (moderately) bearish CPI data pre-market has continued as expected, but accelerated on a much worse than expected Consumer Sentiment reading, which tends to mirror market action more than lead it.  Hence, the remarkable rally since July has effectively not impressed the average consumer (assuming the data is valid), and this in itself is bearish.

Longs in the ES need to push back above 1006.50 to have a chance at a strong close and will likely defend the 994.00 market profile point of control heavily and aggressive longs could fade long this area on a short time frame double bottom.  New shorts will be difficult to enter as this is shaping up to be a strong directional down day with few retracements.  If the ES rallies off 994, then we would hold out for the 1000 level or 1004, not hanging around short above 1006.50. 

Should the ES close below 994 today, we expect the rally is at least temporarily over and for declines to continue into next week.  Also recall that today is a POMO Agency day, and there is a good possibility of a rally from 3:30 pm to 4:15 pm, so day trader/swing shorts may want to cover prior to this time.

The Precise Take – CPI comes out deflationary – can equities shrug off to head higher?

Treasury Analysis:  Yesterday’s 30 Year auction had solid support, allowing the 30 Year T-Bond future to reverse its prior day loss.  The next test will be Monday’s Treasury Int’l Capital report at 9:00 am, which will reveal the holdings of the big name purchasers of US long term debt, then next Thursday’s announcement for the following week’s auctions of Treasuries, which is expected to continue its uptrend and be for a record amount.  The 30 Year looks to be in good shape short term, but we would like to see it take out the 119’08.5 swing high sometime next week. 

The Federal Reserve Bank of New York (FRNY) had already scheduled POMO for the coming Monday and Wednesday prior to the FOMC announcement.  Based on the tentative maturity range, it looks like they will not be buying this week’s supply (3, 10 or 30 Year).  As has occurred each Friday for the last five weeks, the FRNY will be conducting a POMO for Agency securities today.

Time Profile:  The Time Profile for all Agency POMO days that have occurred on Friday since the beginning of the March rally (n=14) has a slightly bullish edge into mid-day and a very strong paint the tape close.  However, for July going forward, the edge becomes bearish in the afternoon, with a tendency for a weak close.  This could be because each of these recent POMO Agency Friday’s has been preceded by a regular POMO day, which tends to have a bearish close on the following day.  Accordingly, because yesterday was not a POMO day, we believe the possibility of a strong close is greater today than the previous five Fridays, even if the day is net down up to that point. 

Trading Today–Putting it all together:  We weigh the markets’ reaction to news as much, if not more so, than the news itself, and have expected CPI to be…

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We use a 1 min chart of NYSE $TICK, which indicates how many issues on the NYSE are upticking at the same time, in much the same way other traders do (topic for another post).  However, we also plot a standard 14 period Volatility indicator (out of the can in TradeStation) and tend not to trade when it’s under 250.  What this measures is how much resistance there is to a move.  If it’s low, that means there is little participation and a trend is unlikely to develop.  Usually, $TICK Volatility begins high, trails off in mid-day and then becomes very strong toward the end of the day.

Adding an alert for the 250 level, then, can be a good way to stay out of chop.  We’ve also added a new alert for the 125 level, which indicates that there is something potentially wrong with order flow in the NYSE.  This level was breached today and June 12, the last time there was a major order flow problem.

We won’t be trading again until after 1:00 pm and until the $TICK Volatility gets above 250 again.

10:29 am EDT:  The ES headed lower initially and broke (but not matierally) the combined day/night session daily pivot at 999.75, which was our holdout point for being bullish the first hour.  If we get a strong 30 Year auction at 1:00 pm as we expect, the market should close lower between 994.00 to 1,000.  Otherwise, the reaction depends on where the ES is at that point–above 1008.50 and it could break to new highs.  We would fade a move up from 1005.00 to 1007.00 (retesting  as we write), not hanging around short above 1008.50.  Above there, longs will be difficult unless and until there is a breakout to new highs, so we’ll probably stay out in that case.

The Precise Take – Overnight strength reversed slightly – eyes on 30 Yr Auction today

FOMC Meeting:  Overall, a neutral announcement.  Equities were able to rally after an initial hit, capitalizing on previous momentum.  The extension of quantitative easing (QE or POMO) through the end of October is interesting and unexpected to us.  While this won’t support the Treasury market (and it did indeed take a hit yesterday—though not critically), it will also have the effect of making less frequent the equally damaging tape painting closes and POMO-induced buying frenzies in equities.  Our view that equities need to correct is largely based on the fact that allowing Treasuries to go too low is the worse of two evils.  If equitie go higher, but at a less frenzied pace, Treasuries may be able to be kept under control.  This will become increasingly difficult as the funding requirements become higher and higher—the last week of August will be the next test.  But, for now, it appears the Fed is willing to take its chances and not spoil the equities run.  Perhaps it believes it will correct on its own.

News Today and Tomorrow:  The 30 Year T-Bond auction at 1:00 pm will be closely watched.  If it goes poorly and equities continue their run, Treasuries will lose much ground into the next funding week at the end of August.  Therefore, we believe that it will likely go well.  If it does not, then we will be suspicious of any equity gains short term.  As to CPI, while it is important from the perspective that it is closely watched, we believe it will merely confirm the existing move.  If it comes out moderately above expectations, equities should head higher on expectations of an improving economy.  If it is materially higher than expectations, it’s potentially bearish as it could set up expectations of FOMC tightening and increased production costs.  Anything below expectations should be bearish.  The reaction to the data will be key, and we will report on it tomorrow.  As we write, the 8:30 am reports of Retail Sales, Jobless Claims and Import/Export Prices have disappointed and equities are lower.

Time Profile:  Yesterday’s FOMC Time Profile was nearly perfect and many advisory services had noted the bullish tendency, so we do not see the rally as overall strength and need for it to be confirmed today or tomorrow.  For today, as we wrote yesterday:

We have also run a Time Profile for the last two years (n=17) for the post FOMC day, and have found that it has a generally bearish bias [for the day], with a slight bullish bias for the first hour.  For the period covering the March rally (n=3), there has been a stronger bullish bias for the first hour, with a slightly bearish bias for most of the rest of the day.  This seems logical because most FOMC days are big range days, which tend to be consolidated the following day.

Trading Today:  In light of the Time Profile and because we are heading lower, if the ES opens between yesterday’s settlement of 1001 and 1005, there should be an early attempt to …

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Read our latest interview with Damien Hoffman of WallStCheatSheet.com regarding market manipulation (hosted at GreenFaucet.com).

Today’s final price action vs. the two year FOMC Time Profile:

They won’t all be this close, but we’re looking forward to Sep 23 09. 

Full commentary in tomorrow’s report.

1:29 pm EDT:  Most of the trading recommendations we’ve seen today note the bullish tendency of FOMC day.  That means day and swing traders will be covering after the announcement and into tomorrow.  If tomorrow’s close is above today’s high, we will consider this real buying strength.  Otherwise, it was just a high probability short term trade that everyone jumped in on.  Given the breadth of knowledge of this trade, should the FOMC news be bearish (unlikely, but possible), the day/swing longs will be covering en masse.  Longs could get out in the first couple of minutes, or hold out for the 2:45 to 3:00 pm potential reversal period.

Remember, the release has been late the entire year, by up to 5 minutes.  From 2:14 pm to the Announcement release will be a highly illiquid time and easy to hit close stops.

The FOMC Time Profile pattern from this morning’s report has held perfectly, so far.  Expected profit taking at the confluence of daily (Globex) R1, daily (day-session-only) R2, weekly R2 and weak point of control for yesterday in the area of 1005.75 to 1006.75.  Next potential reversal area is at yesterday’s overnight high of 1010.75, then 1016.00 to 1018.75.  Things should calm down a bit into the 1 pm 10 Yr auction, but that does not preculde higher highs.  Potential long areas are 1001.00 and 998.50.  We would not be top pickers here.

The Precise Take – 10 Yr Auction and FOMC Announcement – Statistically bullish bias today

Slightly abbreviated commentary as we have been focusing on chart analysis and statistical edges for today.

Yesterday:  Down, but not critically.

Today’s News:  See headline above.

Time Profile:  We posted an important update post close yesterday (free registration here).  Time Profile charts are posted on page 2.  An excerpt:

There is a very consistent pattern on FOMC days that sees a strong open with gains trailing off into noon, then a dip into the 30 minutes just before the 2:15 pm release, an expected volatile 15 minutes into 2:30 pm tending to be net up, and continued gains into 3:00 pm.  In the last 3 announcements that occurred in since the March rally began (including the QE one on Mar 18 09), the strongest gains have been made in the first 15 minutes into 2:30 pm, with gains trailing off into 3:00 pm.  The bullish edge tends to disappear into 3:30 pm (with the last 3 Announcements reversing much of the net gains).  Then, a moderately bullish to neutral close.  In the last 3 Announcements, the 3:45 to 4:00 pm period has been very strong, but on average over the last two years, this period has been a big net loser. Bottom line is that FOMC days usually create gains, with the bullish edge conservatively over at 3:00 pm. 

Some further thoughts are: we presented the Time Profile for the last two years, which has been an entirely accommodative period, meaning that the FOMC was releasing bullish news to the stock market.  Accordingly, we ran a Time Profile for the tightening (bearish for equities) period between June 04 and June 06 (not pictured).  We found there is still a bullish bias in the opening, which trails off after 11:00 am, resurfaces slightly into 2:15 pm, then becomes negative.  There tends to be a net up period from 2:45 pm to 3:00 pm that, if the FOMC were to release bearish news today, would probably be the ideal exit for longs or initial entry for shorts because the 3:00 pm to 3:15 pm period is very strong net down, with further net down periods trailing off into the close.

We have also run a Time Profile for the last two years (n=17) for the post FOMC day, and have found that it has a generally bearish bias, with a slight bullish bias for the first hour.  For the period covering the March rally (n=3), there has been a stronger bullish bias for the first hour, with a slightly bearish bias for most of the rest of the day.  This seems logical because most FOMC days are big range days, which tend to be consolidated the following day.

Big Picture:  We expect that by tomorrow we will be able to more clearly map the direction of the markets in the medium term.  Looking to the leaders, gold made a new immaterial low overnight, but the EuroYen made material new lows and reversed sharply, which is slightly bullish for equities.  The 30 and 10 Year Treasury futures are up marginally.  All in all, not a clear picture, which is not surprising.  As we wrote in another update yesterday, if we have perfect 10 Year and 30 Year auctions this week, it is risky, but possible for Bernanke to let QE expire and not materially change the wording of the FOMC statement, and still have the Treasury market be in decent shape.

Trading Today:  There is a bullish edge on FOMC days, as stated above, but there are no guarantees.  Accordingly, longs will need to break above…

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