We were going to leave this for the morning report, but found it compelling enough to publish now for traders who may be planning tomorrow’s trades.  We’ve delved into the 15 minute level in honor of our namesake. 

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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 occured 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.  Does this alter our thesis that equities need to correct this week and Treasuries need to advance?  No, but it does serve as a counterweight, and what needs to be done needn’t always occur.  On the flip side, if we don’t see this pattern emerge tomorrow, and rather see selling into the noon hour, we would be very weary of longs at that point.

Hope this helps and, as always, feedback is encouraged.  In tomorrow morning’s report, we will look at the post FOMC day to see if there are any tradable edges there.

After the successful 3 Year auction today, the 30 Year (which we follow most closely as a proxy for the long dated Treasuries) sits in a fine position to weather even a tepid 10 Year auction tomorrow; however, with the FOMC Announcement 75 minutes after the 10 Year auction tomorrow, it could easily be overshadowed. 

Another scenario for consideration is that (1) QE is not renewed in the FOMC Announcement tomorrow, which would otherwise be bearish for Treasuries and (2) the 10 Year and 30 Year auctions this week have such strong foreign interest that they avoid a downturn.  With another ~$70-80 B in POMO money set to come into the markets over the next month and another (likely) record breaking set of auctions set for the end of the month, this is risky for Bernanke.  However, nonrenewal of QE and strong auctions this week would send a very confident signal to the Treasury market this week.  Raising the interest rate on excess reserves or hinting at tightening could also help to stem the dangerous advance in equities; however, as we have said before, Bernanke does not want to be seen as putting in the top in equities. 

We don’t envy his position and don’t front run big news.  However, for those with positions on, our continuing thesis is that, one way or another, equities will correct this week and Treasuries will advance (with yields turning down).  For the grand scheme to be a success, we’d like to see the 30 Year close over 119’08.5 resistance this week.  If there is a close under 114’30, the march up in yields will become a threat again.

The POMO auction was strage today, as Zero Hedge reports.  Any bullish trading edge left over from the prior POMO day was expected to disappear by mid-day anyway (and apparently disappeared long before the open today), so we will now guide ourselves by other factors. 

The only leader that did not confirm the equities downturn today was gold, which equity bears will want to see breach support tomorrow.

Overnight, 990.00 support will be the level to watch, with 983.75 to 999.50 unlikely to be breached either way.

10:52 am EDT:

Short term: Our critical point of control at 994.00 did not hold (low of 992.50), so we won’t look for anymore longs unless the 1:00 pm 3 Year auction is a disaster and gives equities bullish momentum.  Until then, we would short in the 998 to 1000 area, which includes Fibonacci, and volume-based VWAP resistance.  However, if this turns into a directional day, we likely won’t see that area and will have missed the move.  For any shorts out there, the next downside target is  983.75, with 983.75 to 987.00 containing several forms of support to slow the market.

Long term: Our ongoing theme is that the Fed needs a temporary stock market correction in order to let yields calm back down.  Whether this is the start of it, or merely position squaring ahead of tomorrow’s FOMC Announcement remains to be seen, but we will likely know one way or another by Thursday.

9:53 am EDT:  We’ve seen a pretty swift price drop on about average volume.  We’re still willing to fade long the 994-996 area, but will not stick around with more than a 1 point stop.  994.00 is the highest value point of control in this upper range and a move below suggests we could test the next one down at 983.75.

The Precise Take – Maintaining strength and looking ahead to Wed’s FOMC Announcement

Yesterday:  We wrote

[W]e would like to see a break of 998.50 early before entering shorts and indeed may fade long this area if buying comes into the ES.  We would also expect longs to come in at the 994.00 to 996.00 area.  If it turns out to be a range day (likely), the downside will be trickier to trade than the upside.  Above, and we don’t get outright bullish until above Globex highs at 1007.75 [corrected from 1007.50].  1010.50 to 1015.25 has very little resistance. 

The ES could not break the overnight high in early trading yesterday and ended up testing Friday’s day-session’s low of 999.50, with a final probe down to test our critical support of 998.50 (low of 998.25).  This area was quickly rejected and breakout shorts were forced to cover into the close.  When a high confluence support area is breached by a point or less and quickly reversed, it is often a clue that the reversal will continue from forced covering as it did yesterday.

Today’s News:  The 3 Year Auction at 1:00 pm will be the one to watch as an indication of long term Treasury interest ahead of the 10 Year (tomorrow) and the 30 Year (Thursday).  As we wrote yesterday,

[A]s we have seen recently, the smaller auctions can go poorly as long as the last longer dated auction of the week goes well.  Therefore, it has more bullish potential for Treasuries (bearish for equities) than vice versa because weakness will be downplayed.  This week is the last holdout for Treasury longs and we expect much volatility into Wednesday and Thursday, though today will likely be quiet.

POMO:  Yesterday and today are days on which the Federal Reserve Bank of New York conducts permanent open market operations (POMO), for which we have developed trading edges with the help of others*.  Yesterday’s price action fit Graph 3 from our Sunday post quite closely after the first hour (see page 2 for the comparison with actual price action).  The tape-painting into the close effect had been diminishing recently with gains concentrated in the preceding afternoon hour, but resurfaced yesterday.  Generally, we were bullish into the afternoon and early trading today, which is what has occurred.  Today’s time profile has a bullish edge into the morning, but turns bearish around mid-day. 

Big Picture:  We don’t have much to add from our Big Picture segment from yesterday’s report regarding the FOMC Announcement and Auctions.  Regarding the leading markets we follow, we wrote:

[The leaders] are not yet pricing in further equity gains this morning.  The EuroYen cross, an important barometer of risk taking is testing its June highs.  A break through resistance would signal expected further gains.  Gold is off its Thursday highs and curiously did not advance on Friday’s gains in equities.  Also, the 30 Year T-Bond is holding support at its July low, but just barely.

Gold and the EuroYen cross finished the day materially lower, with gold bouncing off a 61.8% Fibonacci retracement from its July 29 low, which has held overnight.  Overnight, the EuroYen has lost further ground.  The big winner yesterday, however, was the 30 Year T-Bond future, which formed a bullish engulfing candlestick pattern on the daily chart after testing critical support.  This puts Treasuries in a good position into tomorrow as even a weak 3 Year Auction today will likely not cause the 30 Year to break support.  All in all, the leaders are still not pointing toward new highs in the S&P 500.  Gold will be the likely leader if this pattern reverses, so we’ll watch for a strong move up as an early indication that equities could see another strong run up.

Trading Today:    Putting it all together, we are not expecting a…

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So far, an expected quiet morning with the overnight low of 1000.50 sucessfully defended.  The ES should be able to break a bit higher into the afternoon, especially if it can clear Friday’s market profile point of control at 1010.50, though it will likely back and fill up to that point.  If the low is taken out, we become bearish and will look for shorts, but only after support at 998.50 is taken out.  As we wrote in the morning report, there are a lot of support levels immediately to the downside, so gains will be difficult to hold on to.  To the upside, above 1010.50, and we should be able to reach the 1015.00 day session only R1 resistance point.  New highs are unlikely with gold and the EuroYen in retreat, but possible into tomorrow morning with the POMO effect.

The Precise Take – Quiet news day ahead of jam packed (potentially) watershed week

Friday:  After a strong bullish premarket push up to the 1007 area resistance, the ES retreated a bit , but was able to break through a few minutes after the first hour.  As we updated intraday:

The R1’s were exceeded premarket, but the double top of the last two day’s in the 1,007 to 1,008 area have proved to be the stumbling block.  If the ES cannot exceed by 10:30 am, we would move stops up on any longs and resist taking new longs unless and until the resistance is cleared.  We now become bearish below 1,000 and would look for shorts below that area.

The close was not as strong as the bulls would have liked, but overhead resistance was cleared and we have a clear break of the 1000 level on the long term charts.

Looking ahead this week:  With the 10 Year auction that needs to show strong foreign interest and the FOMC Announcement on Wednesday, and 30 Year auction on Thursday, the markets will be looking to tomorrow’s 3 year auction at 1:00 pm for clues.  However, as we have seen recently, the smaller auctions can go poorly as long as the last longer dated auction of the week goes well.  Therefore, it has more bullish potential for Treasuries (bearish for equities) than vice versa because weakness will be downplayed.  This week is the last holdout for Treasury longs and we expect much volatility into Wednesday and Thursday, though today will likely be quiet.

POMO:  Today and tomorrow are days on which the Federal Reserve Bank of New York conducts permanent open market operations (POMO), for which we have developed trading edges with the help of others.  See our overnight post that updates the time profiles for today and tomorrow.  In short, the paint the tape tendency is diminishing as we’re seeing many of the day’s gains finished by 3:30 pm on POMO days in this July rally.  Also, the first hour today could prove tricky as we have some conflicting information.  We would look for a break of 1007.75 to the upside or 999.50 to the downside in the first 15 minutes to see if there will be a directional edge for the morning.  If we go down initially, longs may want to hold out, looking for a low into the hour that closes at 1:30 pm.  For the July rally only (n=5), there is a very strong tendency on the second day of a back to back POMO set to see a strong open and continued gains until about mid-day, after which we have been getting very weak closes.

Big Picture:  In the ongoing saga of Treasuries vs. equities, we feel this week is the last holdout for the Treasury longs and that it’s do or die for the Fed.  As we’ve been writing, the potential disaster that awaits with long term yields breaking to new highs is much greater than a stock market correction.  However, institutional sentiment seems to be that the Fed will simply let QE expire when it runs out of money or time (six months from announcement on March 18 09) in September.  The FOMC could wait until the next meeting in about six weeks to renew, but yields will likely have gotten away from Bernanke by then, and a hinting of a rate increase (which could correct yields) is too politically dangerous for Bernanke, who would not want to be seen as having single handedly put in the last stock market top.  Accordingly, while we still find it likely that QE will be renewed on Wednesday, we must prepare for a Fed that stands idly by as the Treasury market disintegrates and for the monster rally in equities that could accompany.  Until Wednesday, we will tread carefully, but we expect to have an answer by Thursday on where we are headed over the next few months.

The leaders are not yet pricing in further equity gains this morning.  The EuroYen cross, an important barometer of risk taking is testing its June highs.  A break through resistance would signal expected further gains.  Gold is off its Thursday highs and curiously did not advance on Friday’s gains in equities.  Also, the 30 Year T-Bond is holding support at its July low, but just barely.

The Big Rally:  We hinted at a massive equities rally that could continue from this week’s news.  There was very little transacted volume in the markets from the area of 1000 to 1200 on the S&P 500, which takes one form of resistance off the table.  Also, as our friend Billy O’Nair has researched, the S&P is now 15% above its 200 day moving average, which has historically led to further gains in the following three months.  In this environment, overbought and oversold are largely irrelevant and mean reversion strategies are indeed getting hammered.  A note of caution, however.  The only time the S&P 500 has been 15% over its 200 day MA in the late summer or fall was the second week of August, 1987.  Go to your charts if you don’t recall what happened a few months later.  The time of year is critical, because, as we have studied, M2 volatility (at historic highs now) can exacerbate corrections in equities that become self-feeding.  If we get a reversal this week, we are very skeptical about the ability of equities to break to meaningful new highs in the subsequent weeks and will be on alert for crash signals into October.  We’ll also throw out that the NFP Friday was a spike high and NFP have been reversal days this year, while FOMC days tend to be trend continuation days.  Again, we need to wait until Thursday for confirmation of everything.

Trading Today:    As we write, the ES is entering our intraday bearish area at 1001.50.  However, we would like to see a break of 998.50 early before entering shorts and indeed may fade long this area if buying comes into the ES.  We would also expect longs to come in at the 994.00 to 996.00 area.  If it turns out to be a range day (likely), the downside will be trickier …

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Refer to other posts under the POMO tag cloud 5for more information on POMO. 

Not much time here, but we will have more in tomorrow’s morning report.  For those that are planning for tomorrow’s action, please consider the below.  Also, ignore any dates in the “x” axis of the graphs.

Graph1:   The tape-the-paint tendency has been fading since the July 09 min-rally, in favor of the 2:30 to 3:30 pm hour.  Also, note the strong opening hours.  Even though the auctions have not yet occurred (they start at 10:30 am), could this be frontrunning as people are catching on?  Perhaps, because this opening bullish edge completely disappears for non-POMO days in the same time period (not shown).  Measuring the edge from the July rally forward appears to be important, but it necessarily reduces the sample size.

 Graph 2:  This covers each of the days from July to present for which there has been an Agency POMO on the preceding day (all were Mondays–important–and have enjoyed great strength.  Note too, that Monday’s are usually quiet news days (as is tomorrow).  Unfortunately, sample size is necessarily small.

Graph 3:  This is the one negative factor for tomorrow morning because, going back to the beginning of POMO (Mar 25 09), a POMO day following a POMO (Agency) day has had a tough opening hour.  We’ll filter our bias based on the price relative to Friday’s close 1-2 hrs pre-open.

Graph 4: This is this Tuesday’s Time Profile because it is a POMO day following another POMO day.  Note the tendency for a strong first hour, but negative performance after 1:30 pm.

Always remember the following:  The “edge” is an evolving target.  You would need to take every trade on a given edge to produce the graphed results.  Because the edges are often discovered with 20/20 hindsight, this is not possible.  All we are alerting to here is that traders might want to be more receptive to certain trends and possible reversals in certain periods of time.

1010.50 to 999.50 is our projected overnight range, assuming no major developments, and the opening price of tomorrow’s day session relative to these numbers and also Fri’s settlement of 1006.50 will be important to our projection for the day.

We will have much more tomorrow, including an analysis of whether or not the amount of buyback on POMO’s  by the FRNY from primary dealers of the dealers’ inventory acquired at previous Treasury auctions has any trading edge (hint: it appears to).  Thanks to Zero Hedge for his painstaking work on this over the weekend.  Thanks to the members of the Value in Time Group for their invaluable contributions.

It may sound like Greek, but Paul Levine created his MIDAS Method after he made a major discovery in the mid-1990′s about the uncanny ability of these lines based on volume and price to act as support and resistance.  We’ve gone a step further and added standard deviations to the bands based on the work of an existing indicator from the TradeStation forum.  See how they have acted on US 30 Year T-Bonds since the Fed announced its quantitative easing program on March 18, 2009, and how the eMini S&P 500  rocketed off confluence today.

We’re using this opportunity to launch the Free Resources section of our website, where we’ll be posting indicators (including code) and helpful articles that we create or come across.

10:00 am EDT:  First, our correction to the pre-open report.  In our zeal to pack in as much information as possible regarding NFP, POMO, FOMC and other associated acronyms, we neglected to properly update the sidebar news schedule on the first page and reported the low of yesterday as 990.00 when it was 989.75.

The only other scheduled news for today is Consumer Credit at 3:00 pm.  Monday, we have only the 3 and 6 Month Bill auctions at 11:00 am.  As they have been going very well lately, we don’t expect them to be market movers unless there is a surprise.

We warned earlier that:

these premarket spike highs often presage strong reversals if they are not subsequently exceeded early after the open, and the daily R1’s have proved to be reversal areas for the past two days in premarket action.

The R1′s were exceeded premarket, but the double top of the last two day’s in the 1,007 to 1,008 area have proved to be the stumbling block.  If the ES cannot exceed by 10:30 am, we would move stops up on any longs and resist taking new longs unless and until the resistance is cleared.  We now become bearish below 1,000 and would look for shorts below that area.