Back in September, I outlined how the S&P is gunned higher by buying the Euro Yen (EURJPY) spread against the US dollar.

The chart below shows the spread on the daily timeframe. This spread, along with many other inter-market relationships, are shaping my outlook into year end: The S&P and precious metals will be extremely strong and the weakness in the US dollar will continue.

EURJPY

My posture on the dollar was bullish. I thought we were due for a spike that would catch traders off guard, causing the risk off trade–S&P weakness. However, as chronicled here, a phone call from Japan changed my market outlook. I was alerted that sovereign default swaps had widened, signaling dollar weakness to come.

With the S&P and the metals gunned into year end with dollar weakness, we can take advantage of the upside to build energy for the sell-off of 2010. The crash of 2009 has officially been postponed. The downside in equities will be fierce when the dollar does catch a bid. At some point it will. Just when it is least expected. Like life, trading comes down to the most important x factor of all: timing.

And the beat goes on.

Spooz, dollars a bore.
Amazon, gold, Priceline will soar.
Parlaying gains more.

Priceline - Daily

Today’s trading was a flight away from risk–risk off. US equities were weak with the S&P 500 (SPX) off 2.82%, the Dow Jones (INDU) Industrial Average down 2.51% and the tech heavy Nasdaq Composite (COMPQ) down 2.5%. The Volatility Index traded higher by 24% at 30.71. On the Nasdaq, there were 4.2 decliners for every advancer. On the NYSE, 6.5 decliners for every advancer. Volume was heavy all around.

S&P 500 - Daily

Volatility Index (VIX) - Daily

The US Dollar index closed higher by .62% at 76.39, Ten year Treasury futures traded higher by to close at 118 19/32 or up .76%, IEF closed at $91.99.

IEF - iShares 7-10 Year Treasury

Below are a few of the intraday charts.

US Dollar Index - 15 Minute

Crude Oil - 15 Minute

ES S&P Electronic Mini

Citigroup: He Said, She Said

I couldn’t help but reach for puts in Citigroup (C) today. Analyst Mike Mayo was quoted as saying that Citigroup will write down $10 billion of deferred tax assets, representing 10% of Citigroup’s tangible equity. Citigroup quickly responded they had no idea how the analyst was making those calculations. No matter if Citigroup learns how to calculate or not, their common stock is likely heading south of $1 within the next 6 months to year. I am short the big C–the former largest bank in the world.

Citigroup - Daily

The Shimmer of Gold and Silver

Yesterday, I noted that my stance had changed on the precious metals. I am positioned to take advantage of a move higher in gold and silver.

Gold was weak at the equity open this morning, but strengthened throughout the day to close near unchanged. This is evidence of the strength in gold to come. I am long select gold miners and maintain my stop below yesterday’s low. Credit default swaps on Japanese sovereign debt are rising, and the Yen is outperforming against the US Dollar versus other major currencies including the Euro (FXY), the British Pound (FXB) and the Aussie Dollar (AUD).

The charts below show this outperformance graphically. It is my view that this relationship will eventually lead to US Dollar weakness, and therefore strength in gold.

Gold - Daily

FXY - Japanese Yen

FXE - Euro

FXB - British Pound

FXA - Australian Dollar

Next week, same time, same place. And the beat goes on.

It was written on the walls that success is a process
No matter how hard I fall I know it is some progress
Notches of the ladder I climb, holdin a bottle of wine
So many paths to take, I’m followin mine
-Common

Yesterday, I wrote about Goldman Sachs lowering their expectations for Q3 GDP to 2.7%. This morning, the Advance GDP number was announced at 3.5%–higher than expectations and far higher than Goldman’s lowered target of 2.7%. This is the first of three GDP announcements. We’ll see preliminary GDP on November 22 and final GDP on December 22. I find it tough to think that an advance number of 3.5% can be lowered all the way down to 2.7%. Then again, don’t count Goldman out. Goldman is Goldman.

No matter where the final Q3 GDP number comes in, the announcement today is significant in that the economy grew in the 3rd quarter for the first time in just over a year. It was widely expected that there would be growth, and now the actual growth numbers will be analyzed and argued about on television.

There will be a myriad of economic releases in the next few weeks that will provide insight into what Q4 GDP will come in at. If Q4 GDP expectations need to be revised downward, there will be large gains by being short the right sectors.

Gross Domestic Product

Risk On, Risk Off

The higher than expected GDP announcement this morning spiked S&P futures and induced a selloff in the US Dollar. I have been referring to the “risk aversion trade.” The risk aversion trade is a risk off trade–when traders and investors run for cover. In the current market, I’d describe the risk off trade as being short the S&P, long the US dollar and long treasuries. Today’s market was the opposite of the risk aversion (risk off) trade. Traders scrambled to the risk on trade–long the S&P, oil, short treasuries, short US Dollar. When the risk on trade is on, the Volatility Index (VIX) trades lower. When the risk off trade is on, the VIX trades higher. From the intraday charts below, you can see that what the S&P lost yesterday, it gained back today. Conversely, what the Volatility Index (VIX) gained yesterday, it gave back today. Yesterday was risk off, today was risk on. You follow?

Volatility Index - 15 Minute

S&P 500 Index - 15 Minute

Phone Calls

Can a phone call change your view of the market? This one quite possibly could. I have long opined in these pages that there is more risk to this market than what it is priced for. Of late, I have written of a sudden spike in the dollar that no one is prepared for. After a phone call with a broker in Japan last night, I think it is best to be short select names in the weakest sectors rather than be short broader indices or sectors. Here is why. My broker in Japan alerted me to something very important: Japanese default swap spreads are at their widest in 6 months. Other sovereign default swaps have seen a significant widening as well. This is a sign of potential dollar weakness to come. If the dollar weakens, it will be tougher for the S&P index to sell off dramatically. It is for this reason that I am once again long some silver options (calls). If this widening of swap spreads is a sign–a tell in poker parlance–of dollar weakness to come, the best way to take advantage is to be long precious metals.

The Wall Street Beat

And there you have it, straight from the gut of Vinnie Vega of the Wall Street Beat, a subsidiary of Volatility News.

And the beat goes on.

Meanwhile, back at the office, my online presence continues to be in it’s infancy. That said, the plans that are in the works have some of my collaborators collaborators–and everyone in between–smiling real big. We are all on the same page. This whole thing is one huge party. Most importantly, as my voice grows louder, the parties will become grander on a logarithmic scale. I hope you’ll be there.

It has been a while since I rapped out a market rap. Let’s start with the big picture weekly and zoom in to the shorter term daily chart of the S&P 500.

The weekly chart indicates that the downtrend in stocks is still in effect–the S&P is still within the normal range of a pullback within an overall downtrend.

S&P 500 - Weekly

Switching to the daily chart, we see a nice looking uptrend. This means that the big money is still to the downside, but on a shorter timeframe–daily as opposed to weekly–you cannot be short. Don’t short into buying; short into selling. (It works both ways: don’t buy into selling; buy into buying). How? Wait for signs of distribution and then go short.

S&P 500 - Daily

A great example was when I positioned short in July. The market showed distribution–an increase in the selling that overwhelmed the orderly buying. I shorted stocks and I lost money. What happened? I was dead wrong. In my younger days, I’d have taken a 20 mile run and said things to myself like, “How dumb can a man get and still go on living?” That was before I knew the game as well as I do now. Though I was wrong, I limited my losses.

This is not archery, it is more like baseball. Frequency of being right is not as important as the magnitude of the gains when you are right. I don’t always get it right, but when I do, I have magnitude on my side. That’s what works for me, but remember, as Mark Twain said “there is more than one way to skin a cat.” The best thing a trader can do for him or herself is not attempt to do what works for someone else, but to do what works for him/her. As part of my vision, I hope my writing helps you develop what works for you.

Zooming into the intraday charts, we started to see some sign of distribution in the last 45 minutes of the equity session. While the jury is still out as to the exact catalyst for the late day sell-off, the general consensus is that it was the downgrade of Wells Fargo (WFC) that came over the wire. One day does not make a market, but when the selling starts, it will first appear on the intraday charts. Today could have been it. Stay tuned.

S&P E-mini - 15 Minute

Last night X and I had a call about global oil demand and game theory. I have known X since we were very very young. He usually knows what I am thinking. “You’re waiting for signs of distribution to get short again, aren’t you?”

“You bet I am.” I responded.

“The big money is in the big swing. The path of least resistance in the big swing is still down. What the catalyst for the inevitable sell-off is, I don’t know. However, I have done this long enough to know that the rubber band can only be stretched so far. Eventually, it breaks–which really hurts–or it snaps back inward and finds a new equilibrium.”

And the beat goes on.