*** update added VIX sell signal stats way below***
So the first quant math is how many times has the market not made a new low? Or how many times has the market closed higher than the previous day’s low consecutively. So how many times has the market not closed below the previous day’s low 19 times?
The stats do not have much of an edge (bullish or bearish)- I just though it was interesting that we got to 19 times. That being said, one way to interpret this data is that the market (since 1990) has only gotten to 22 consecutive non-lower closes 3 times. Or in English we are dealing with very very low odds of not having a lower close.
I will try to do stuff like this periodically as it literally takes me 8 seconds to run these stats. So for clartiy here are some explanations of the stats.
First off, all of the math excluding the “Ratio” presumes a long trade.
% positive= number of occurrences that the position made money on the long side out of the total- using the specified criteria.
—– Careful using this stat as if you win 7 out of 10- things look good, but does not mean a that it is a good idea. That is the reason most quants look a at skews and sharpe ratios. I prefer average max gain to average max loss. In any case “expected value” is much better than % positive. Many get caught in that scam/trap.
More definitions:
Mean= Average return for going long for the specified criteria. Mean simply means “expected return.” If it is negative- that is good for someone looking to go short.
Average Max Gain= The average of the max gain for a long trade for all occurrences that meet the specified criteria in the past- many would call this expected “run up.”
Average Max Loss= The average of the max loss fora long trade for all occurrences that meet the specified criteria- many would call this expected “run down.”
Now my favorite is the Avg. Max Gain/ Max Loss ratio. It simply means is my typical expected max run up better than run down. My calculator calculates the higher of the two and gives a risk to reward ratio. So here the max loss is greater than the gain- this spits out the risk to reward ratio of going short. Here it is about 2:1 over the next week, yet it is +2:1 going long over the next 2 week period. I presume that means a dip then a bounce is expected…. Again, there is not much of an edge here – well at least using this variable on a stand alone basis.
Skew simply means is there a tendency down or up- a negative number means downside skewness. As a trader I love to see a negative mean (negative expected value) and a negative skew. That implies the market has huge downside tails (great for lottery OTM nearby puts). Generally a -1 or +1 is significant- anything between -1 and 1 is “normal.”
Kurt means kurtosis or fat tailed. Kurt really means that the market has lots of little moves and infrequent, but huge large moves (up or down). Kurtosis only matters if it is greater than 2. If it is near 4 then it is “fat tailed.”
I hope this helps clear things up and if you have questions I will try to resolve them tonight or tomorrow.
*** ok here is another stat for you all. Here is the VIX sell signal with some extra sauce***
Ok notice that this is 31% positive in 1 week with a 12:1 Short sell ratio. Or average short selling max gain is 2.6% with a whopping 0.2% margin call. So I guess you know my position. So do not go bashing the VIX sell signal. I admit I have a small position- though I am long FEB VIX futures and short APR VIX futures (aka a bull spread or short VXV/VIX ratio ish) as well.
Here is the raw data for further inspection. 1-2 weeks is impressively good odds of more downside than upside in OHLC (open high low close) drawdown.
Today’s a fine opportunity to bring back an old Evil Speculator tradition – of the heavy metal kind, that is:
Rammstein at its finest, baby! In case you care, ‘wohin gehst Du’ translates as ‘where are you going’ in English – a question we stainless steel rats have in our mind on an ongoing basis when it comes to assessing the tape. Now before we get to the ‘real’ heavy metals we must first visit the core catalyst of their continuous advance, which of course is the U.S. Dollar:
Remember when I told you guys to get out of ole’ bucky a few weeks back? It’s been a sea of red since – so feel free to send the Mole your (hot looking) virgins or other offerings of worship. Anyway, if you are short then I suggest you take profits near 79 – it’s been a good run.
But the chart that depresses me the most right now is the long term P&F on ole’ bucky. We are looking at quite a bit of technical damage here and the current bearish PO is near 77.4. That’s very bad news for the Mole’s European vacation plans and it seems I may have to hitch a ride with Chevy Chase.
On to the metals – a relatively light one first so to speak – copper. It’s now near my T1 target range near 4.0. I think it can push a bit higher but I would probably start taking profits here. And once again – do you remember when I drew that diagonal support line and told you guys that any touches remained great buying opportunities? How many of you rats dipped into that one? I want to hear battle stories – bring it on!
And here’s the P&F for good measure. Seems on a long term basis the bullish PO is near 5.1 – wow, that’s something. I think we may get a little shake out in between but keep that in mind and even if we drop hard keep in mind that 3.5 will act as support.
On to the real heavy metals – members only please – you know how to get on the list:
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Congratulations, we are all Japanese now. Welcome to eternal ZIRP and an economy trapped in the doldrums for about a decade, if not longer. Thanks a bunch Banana Ben! Not surprisingly equities have been on a rampage since today’s FOMC announcement.
Things are getting complicated again as that VIX sell signal is pretty much shot to hell now. My own personal rule (it’s not official) for disqualification is either a push beyond the recent high on the SPX or a drop below the lower BB on the VIX. We got the former just now and although it’s still possible we see a little correction the odds of the signal resolving have now diminished significantly.
The weekly SPX chart is showing us an inflection point right here and right now. If we push above 1320 then we are in the clear and there will be little resistance into 1386 or possibly 1400. Now, how does that square with the volume chart above? Well, Rome wasn’t built in a day, grasshopper – expect some twists and turns on the way while we shake out some retail retards. The volume profile should adjust in the process, but for now/today there’s little fuel looming above.
And in the twilight zone world where bonds move with equities that of course means that our ZB trade never got out of the gate. Well, we had an ideal entry and a stop only a few ticks away. However this thing moved way too fast and unless you have super sonic fingers you probably were unable to flip this trade into a long. If you happened to be long this morning then it’s time to take short term profits and wait for a reload.
Seems the AUD/JPY had it right the entire time but it’s now time to take profits and wait for instructions. Maybe we’ll get a little correction here but the way things are bubbling up we could just gyrate around sideways for a little.
As a matter of fact all of our currency trades are way way ITM – which is why I keep pimping this stuff on an ongoing basis. Look at that EUR/JPY go – I would hold it all the way into 102.5.
Sorry for the typo on the chart – things were moving fast and I had to produce a post. Anyway, my recommendation on the EUR/USD is to lighten up around 1.31 and to keep a few lottery tickets into 1.33. Fat chance of me getting a decent exchange rate this spring – damn it! Spain – how about going back to the peso?
Cable – same story – after eviscerating that 25-day SMA and its NLBL we are now near T1. You can hold a few lottery tickets into 1.573 if you like.
Even the AUD is killing ole’ bucky today – are you seeing the unfolding theme here? I actually think this beast could run a bit higher but if you have been riding this one then I’d start to lighten up today.
And last but not least cocoa is finally at T1 – also time to take some partial profits. I am keeping a few positions with a stop roughly below today’s low. This trade took us four entry attempts and finally paid off in spates. If nothing else this is a textbook example demonstrating that sticking with your system and not yielding to human emotions will pay off handsomely in the long term.
Before I leave you here’s a bit of long term bear pørn. This is a chart of the Baltic Dry Index, which tracks worldwide international shipping prices of various dry bulk cargos. The index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved in various markets (supply and demand).
Although the SPX continues to point toward 1400 on a medium term basis the BDI now joins a growing list of long term indicators/measures which suggest that 2012 may turn really really ugly. If you trade the long term then you may keep an eye on this.
It never fails – on the few occasions I leave town for a few days something really interesting happens – this time was no different. Boy, where do I begin? It all unfolded Friday evening when the VIX closed outside its 2.0 Bollinger:
And that of course put a potential VIX sell signal (relative to equities) onto our watch list. In case you are a noob – here are the rules again:
For a VIX confirmed signal you need 3 events:
A close outside of the 2.0 Bollinger Band (20-day SMA)
A close back inside the 2.0 BB – this issues the signal
A higher close (sell) or lower close (buy) than the close of the day back inside the 2.0 BB – this confirms the signal.
Once you get those three events a major reversal usually occurs within the next week. The sell signals used to be far more accurate than the buy signals, but in the past two years that relationship has reversed, thus I think it is dependent on the ongoing trend, which kind of would make sense. By the way, I’m adding this to our cheat sheet – for obvious reasons
Yesterday we actually closed higher and inside the Bollinger – which satisfies step 2. And unless the VIX drops rather strongly in the next two hours I think we just may have ourselves a bonafide confirmed VIX sell signal here! And you know what that means – at the very least do not be long here.
It’s a bit late in the game but just FYI – the MMMR also painted an exhaustion signal to the long side on Friday. Great timing for me to head for Vegas – as I said, it never fails and the rats refer to it as the ‘Mole Factor’ – the ultimate contrarian entry signal.
Now, thus far we have been just fucking around sideways – as usual the tape is playing dangling carrot with the bears. If you we really get a meaningful correction here then there is a cluster of support that first needs to be breached. And unless we do so in the next week then whatever correction we may get may just be to the downside.
Another reason why I still remain a bit skeptical about any real fireworks on the bearish side is the AUD/JPY which has been happily pushing higher toward its target zone near 82.35. Volar did a great job applying his quant skills to the contradicting furball that we are dealing with right now. And I agree that we may just get a little shake out in equities before turning EUR momentum on the currency side continues to float all boats in stocks. I for sure would not want to be short the Euro or long the Yen right now.
Talking of which – our EUR/JPY trade is starting to look pay off in spates. When we took our entry near 98.5 we were a bit skeptical about the signal and expected to be stopped out during a more complex bottom fishing expedition. Well – for once we were proven wrong in a good way and the beast just kept on pushing up, making quick business out of that 25-day SMA near 99.6. At this point there’s only air above and I plan to hold this sucker all the way into 102.6.
Which brings me a few more FX setups we’ve got on our plate today. I also have one special chart you simply cannot miss and may just turn into the trade of the year. We have been waiting for a while and it seems all those chickens we sacrificed at full moon seem to have appeased the evil forces running this tape:
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Some days are boring- and some make seasoned traders say WTF? Friday was a WTF day for me—the market is calm as can be, and I am starring at option data that raises the hair on the back of my neck. Sure the tape had absolutely ZERO OPEX volume- and CNBC touts are saying, “Sideline money is coming in…” but my radar screen is screaming retardation.
Seasoned option traders are not idiots – they gauge risk better than anybody else. Option trading is not for the faint of heart – if one does not understand the game- one is as good as dead. As of this week option makers are not selling puts or selling deferred IV, while call volume is surging. Sure this stuff happens in December and these indicators can be early – but Santa is gone…
In any case, for every retail call buyer there is a seasoned call seller. There were nearly 100mm net OCC equity calls less puts over the last 30 days — drink the kool-aid if you want. Skews and IV time spreads are utterly absurd, VIX and VXV are both trading outside bollinger bands, and call buying has gone from beartard to bulltard. Yes the trend is higher, and yes we had volume capitulation on the low, and yes there are Euro shorts, but gamma has been falling like natty gas in many markets.
Last week, the equity option market went full retard IMO- here is a well analyzed look.
First here is look at IV time spreads. IV time spreads help put the VIX in perspective and seasonality helps to show the strong seasonal tendencies.
C’mon- this is retarded- and frankly bearish as crap in the short-term. Notice that even in 2008 December expired in a predictable value- even with a VIX that traded north of 50.
This next chart is a spin off of the first chart that shows the seasonal tendency is lower- not higher here. Or contango/time spreads should be narrowing not widening…
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So I’m off to Vegas for a few days of fun & games plus to visit an old friend. Frankly, I’m not much of a gambler – never was. Although I learned a lot about game theory and developing edge from professional gamblers I prefer my charts and being able to wait for that perfect setup. I’m sure some of you disagree but to each his/her own.
Expect me back Tuesday morning, maybe a bit hungover but ready for action as usual. In the interim I have asked my three musketeers (i.e. Scott, Volar, and Fearless) to fill the void, assuming of course there’s something to talk about.
Before I run to the airport here’s a quick snapshot of my ES volume profile chart. We are now sitting smack in the middle of a deep volume hole – if we get above 1315 or so then I think we’ll accelerate toward 1345. However there is no volume at all above that mark – nada, niente, rien, gar nichts. So if you are holding longs or maybe are risking a few OTM calls then be out and about at 1345.
Here’s a quick reminder for my intrepid subs:
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When all fails I always remind myself of Jesse Livermore’s core tenet, which was to follow the tape into the most easiest direction – the one with the least amount of resistance. Or in simpler terms – just follow the money!
And that, my intrepid stainless steel rats, remains to the upside. If you have been coming here for more than a week than you probably already grasp the fact that this rally has been fueled by invisible forces immune to resistance on the momentum, sentiment, seasonality, and price side. Thing is this – just like last January the tape should have reversed a long time ago.(remember my A/D ratio post?) The fact that it is not just tells us that the current up trend is strong and that any reversal eventually transpiring will most likely be on the more procedural (i.e. weak) side. Sorry guys – I don’t make the rules – I just report them.
Everything is pointing up on the short term spoos chart – that hourly 1309 NLBL is worth watching but since I took this snapshot we are already trading at 1311. May be good for a retest. The daily looks extremely bullish with both BBs pointing up and supporting what my P&F chart has been saying for a long time – which is that after some gyrations we’ll most likely arrive at SPX 1400.
As you recall – on a medium term basis the only resistance on the horizon is that weekly upper BB line near 1320 – so we still have a few handles room here. I yesterday said that it should be good for a red candle but be warned – that red candle may come after a strong rip up, so don’t fight the trend here.
Retail schmucks sentiment has turned a bit more bearish but that ratio is still on the stupid side. Well, thus far retail remains on the money side and it’s the main reason I am expecting a little shake out here on the medium term. Being a market cynic I simply have a hard time imagining to see so many retail rats bank coin all the way into 1400. That is not how the market usually works – enough said.
I had my doubts yesterday about that NLBL working out right out the gate but here we are at T1 – congrats if you traded the breach and enjoyed over a handle of profits. Now, you know the game – I would scale back a little and expect some turbulence ahead. However, my long term target is the 103 mark.
More FX goodness below for the subs – please step into my dusty lair:
More charts and cynical commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero or Geronimo subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
Seems like the seasonal winds continue to favor the bulls as we keep testing the coveted 1300 mark despite lackluster NYSE sessions. On a short term basis we now have a decent chance of pulling back before a push higher. The daily is not showing us that much but the weekly is a lot more forthcoming:
That upper 25-week BB line should be good for a red candle before probably proceed toward SPX 1400 – T2 on my monthly panel. My volume profile chart is not showing me much mojo above 1310 or so – not impossible they gap into that but I think it’ll take a bit more time. In any case – watching the AUD/JPY and the spoos remain key for avoiding any NYSE open surprises.
You may recall that late January usually favors the bulls for a week or two. The only problem with timing here is that everything appears to be seasonally late this time around. We got our ‘Santa Rally’ in late December into mid January and thus it seems to me we’re running a tad behind common seasonality. Not that trading would be that easy to begin with – granted
Alright – once more a few FX goodies for my intrepid subs below – I keep telling you that the real fun is happening outside of equities right now:
More charts and cynical commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero or Geronimo subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
I hope everyone has an enjoyable MLK weekend – I personally spent most of it icing my lower back. Fortunately I’m in much better shape today and hope to be back to normal later this week. If you read my weekend update then you know that the story on the equity side is a bit contradicting right now and that’s why I’m getting my short term bearings from the AUD/JPY:
I’m sure you recall that diagonal support line I painted on this one two weeks back. Well, it’s now acting as resistance and we bounced off it earlier in the session. I told you guys on Thursday that it’s heading into an inflection point and it seems we have arrived. The upper 25-day BB line is now coinciding with that diagonal acting as double resistance. A push higher here would most likely propel us confidently above the SPX 1300 mark and beyond.
A few FX and commodities setups below for my subs – please step into my evil lair:
More charts and cynical commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero or Geronimo subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
You may remember that one as the title of Andy’s Groove’s book – a great read and I recommend it. Over time it has also become one of my prime directives on the trading side which quite often kept me out of big trouble. Obviously ‘paranoid’ is a strong word – but ‘only the vigilant survive’ sounds a bit meek to me. Anyway, as I still have a hard time sitting for long periods of time let’s right dive into today’s subject matter – here’s exhibit A:
Ignoring all ill advice from my sadistic Chinese chiropractor I spent much of the afternoon sitting at my desk and fiddling with the Prophet chart version of my Market Maker Mind Reader (MMMR). I finally found out a way to plot it in conjunction with the SPX, which you see in blue candles above. This is the inverse version, which appears to be better at correlating major bottoms with signal spikes. Got it? Good.
The point I am trying to make here is that strong spikes outside the upper BB range often match up with major market lows. Very valuable – when you can get them. The 25-day and 100-day SMAs also seem to impose a certain amount of influence on medium term swings. So far so good.
The issue at hand here is the tape of the past two months. In essence – it does no fit the usual recipe. And market megalomaniacs like yours truly hate it when that happens. So, I was happy to see Volar’s attempt at using his quant skills to shed some light into the situation but IMNSHO the data merely supports what I am showing here and further below.
Let’s dig a bit deeper and look at major tops now:
More charts and cynical commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero or Geronimo subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
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