Volatility Pinball

I just can’t seem to be able to get over my VIX chart which is now in the process of racking up a record amount of bonus points:

The 2.0 Bollinger band is increasingly turning into a pinball bounce zone as we see 20% drops followed by 20% ramps. Rapid swings like that can be extremely painful for option holders on the short and long side alike. The good news is that we are seeing a slight expansion of the band now and I expect the lower border to start creeping up slowly during December. After all – equity buy signals at VIX 22 does not really help the shorts, does it?

Something’s afoot here – chalk if up to pre-holiday tape but wild swings like that usually precede something more significant on the horizon. My momo charts remain mixed but we are accumulating energy (i.e. winding a clock) that will have to resolve itself at some point. My best guess is that this will happen in early January – which direction – well, let’s look at some momo charts:

Most of you probably remember my ‘CPCE Deluxe’ chart – it’s basically a 10-day SMA on the CPCE (i.e. put/call ratio). And on that one we’ve been stuck in a pinball bounce zone since mid year as well. Only problem is that we now find ourselves in buy territory as the recent snap back on that SMA produced very little downside in equities. I’m keeping my eye on that diagonal resistance line  – only a decisive breach would convince me that more downside is in the works. Usually the dip buyes swarm in at that line – only problem is that they already did all last week…

This is what I’m talking about. That 23.6% fib line proved too much to handle for the bears – and we are slowly painting yet another support zone. A breach is needed here Monday, otherwise the bears will have to watch their December puts getting manhandled in the coming weeks.

That’s a slightly different view – this time I’m using a 20-day SMA, also on the CPCE. This chart marks important buy/sell signals and we have been in sell signal territory for three months now. When things slipped into extreme readings on the bullish side (e.g. ISEE Equities readings above 250) we got a little dip – yes – but thus far equities are clinging to that 23.6% fib line I showed previously.

Now, I don’t think that the CPCE has much lower readings in it – in particular ahead of the Santa Rally bonanza. And the worst thing for the shorts here would be a sideways correction which pushes that 20-day back towards 0.61 or 0.62. Which is what will probably happen however unless we see a fast drop here early next week.

My concerns are also supported by my trusted NYSE adv/decl volume chart. Folks – that is a major divergence and the fact that we are not seeing long down candles here will bite the bears in the ass, probably sooner than later.

I showed you this chart last week and as expected we are pushing higher toward the 0.1 mark. In case you wonder – the NYMO is a medium term momentum indicator and the BPNYA is a more long term P&F based measure of momentum. I simply mix both together and thus far this chart has treated me extremely well.

I have actually doubts that we’ll stop at the 0.1 mark. If the longs garner momentum during December we could see a little low volume POMO inspired buying frenzy that pushes this thing toward the old blue sell line all the way up around 1.4. Now that is where I would want to be short in January – if we get there without the Nokos starting WW3 that is.

The TNX is painting a textbook inverse H&S pattern – including the gratuitous neckline retest. The stochastic also is supported of a break out here – thus I expect yields on the 10-year to scape the 3.4% mark in the not so distant future.

Bottom Line:

Like I said last week – the bears should have grabbed the steering wheel last Monday – and of course they again failed to produce any measurable downside, despite a rallying Dollar, wild VIX swings, and bad news galore (supporting my insistence that the latter does not matter). It seems that equities remain impervious to meaningful corrections and based on what I’m seeing on the charts I don’t expect this to change anytime soon.

Again, this outlook is something I would love to be proven wrong on as I don’t see a clear edge here – neither on the long nor the short side. A fast move down would give us a nice buying opportunity but the odds for that remain low. So, the best I can hope for is a ramp into January at which point the bears may have a better shot at taking equities down. Right now and right here – well, it would have to happen on Monday. But hey – isn’t that what I said last week? 😉



Edward Bernays Day

In case you missed it – Friday was Edward Bernays Day, a.k.a. Black Friday.

If we understand the mechanism and motives of the group mind, it is now possible to control and regiment the masses according to our will without them knowing it. — Edward Bernays

The conscious and intelligent manipulation of the organized habits and opinions of the [public] is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country. — Edward Bernays

Case in point.

You may want to bookmark this page (or the youtube clip directly) – if in the future you find yourself wondering why the financial elite got away with robbing the public blind then simply remind yourself by watching this clip. You’ll sleep better – or not…

Here’s a fitting excerpt from The Father Of Public Relations:

The big question about Bernays is whether or not he was undemocratic. He actually believed in democracy, but he felt that the public’s democratic judgment was ‘not to be relied upon.’ The masses were inherently irrational and driven by desire. This made them dangerous, so he felt the masses had to be controlled. The good news was that, according to crowd psychology, the masses were relatively easy to control. In his famous book, Propaganda, Bernays wrote:

If we understand the mechanism and motives of the group mind, is it not possible to control and regiment the masses according to our will without their knowing about it? The recent practice of propaganda has proved that it is possible, at least up to a certain point and within certain limits.

I find it almost humorous that 99.9% of the public has never heard of Edward Bernays as I believe that he has influenced the 20th Century to a similar magnitude as perhaps Winston Churchill or even Adolf Hitler. Interestingly enough Bernays operated mostly behind the scenes but the impact of his theories and his work have left an unmistakable mark on our society. Whether or not it was for the better or for the worse – well, there’s something to ponder about for the remainder of the weekend.

Why am I posting this on a trading blog?

Simple: As traders mass psychology is a factor you should never ever underestimate, especially if it is being manufactured. For more insights on the topic may I suggest the documentary ‘The Century Of The Self.



Fractal Alert!

I don’t have terribly much to say tonight as this tape is bouncing around like a Mexican Jumping Beans and needs to finally pick a direction. Seems each day we gap down and then reverse at least some of the lost territory by the end of the day. Of course this type of monkey business can only go on so long.

I have been talking about the VIX a lot lately and there’s a reason to my insanity. One – we the pattern itself has been interesting in that we keep gyrating higher and then suddenly ‘reset’ to the downside. Clearly there’s a buyer at 22 and seller at 18 (relative to equities of course) – and at some point a winner will establish itself – whether or not the bears or bulls will take the price here remains to be seen. My take thus far is that we’ll cross that bridge early in January.

Now – what’s even more interesting is that ‘volatility of volatility’ seems to be on the increase – as that means that we may be approaching a turning point on a medium to long term basis.

For my beloved subs I have a beautiful fractal tonight – feast your eyes on this beauty:

That’s right – the NYSE A/D ratio panel (in the middle in green) bestowed us with another Gothic Church Tower fractal. Which increases the odds for a continuation of the current correction to the downside. Now the reason why I italicized the odds is that this is not a guarantee that we’ll continue downward. But in the context of other supporting measures it suggests that an interim high has either recently been painted or is in the process of playing out. As you can see the last one worked like a charm and the one before that was only good for a little slide.

If you want my take on it (and since you’re here I guess you do): I’m lukewarm on this one – the tape seems to be all over the place and IMNSHO may be feigning weakness. Those magic dip buyers just keep showing up when you least want them – I pointed some of that out on the hourly Zero today (if you’re not a sub – do something about it).  Plus it’s holiday season – yada-yada. I gave the bears Monday and maybe today to really yank the bull’s chains – thus far they have been producing some downside but nothing that couldn’t be sorted out by a juicy POMO auction. Thus, at best I see a slide to 1160 – maybe 1140 – unless I start seeing some really negative signals on the Zero.

The good news is that the DXY continues to rally. The bad news is that the DXY continues to rally (without equities properly following to the downside). Now, I did mention that equities may lag a rallying Dollar for weeks or even months – so let’s reserve final judgment until then. Relative to ole’ bucky specifically it’s however worthwhile considering that it closed right at its 50% fib mark today. Coincidence? I think not!

I expect it to make a run for the magic 80 mark – perhaps get as far as 80.5 (i.e. its 61.8% fib mark) and then get stomped on by our friends over at the Fed. And any downside or snap back here on the DXY may support a counter rally over in equities. Which is also why I don’t give the SPX much further than 1140 at best. Heck – I would love to be wrong on that one – believe me 😉

Happy Thanksgiving everyone!!



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