Some Stats

Lots of noise out there. Lets keep it simple. I dont mean to post over Scott, but need this to go out today due to the FDOM (first day of month) stats. Please read Scotts post.

I (volar) just got caught up with vacation, and I always re-read my favorite books on vacation. Many traders look for trading answers, I look for understanding. What do I mean by that? Well I dont read books that tell you “how to make money.”  I suggest New Market Wizards- the piece by William Eckhardt is the best written material I know of to this day (next to some of Taleb’s stuff).

I know some of you dont like stats, but if you dont understand true market distribution, well then how can you trade? If you are betting on mean reversion you need a platykurtotic market. Go google it, I am not your mother or hired teacher. If you are a trend trader, you need a leptokutotic market.  Now, dont get me wrong, trend traders need edges; they have to be crafty to keep drawdowns low to catch the trend. This is hard, but it is necessary to traders who want to win. For those betting on mean reversion, you may win often (in little bits/pieces), but you will be bankrupt if you dont know how to get out and STAY out. I am sure there is an edge shorting mutual funds that have very consistent returns for that exact reason.


Now lets look at the seasonal distribution of weekly returns (rolling 2 week average) for this time of year.

Go figure- not bullish, or bearish. Just utterly fat tailed.

This means that you should be careful fighting trends- IMO bollinger bands may need to be used inversely this time of year. Or if you are betting on convergence, you need to be very careful with a very tight stop.

Now on to a timely piece of data.

Notice the first day of SEP is highly positive, but has a terrible sharpe. Which means, I dont take my usual FDOM trade.

Bottom Line: the market is deceiving. You need to know why you win and why you do not. As for the FDOM, I dont see that edge in September (even tho there is a high chance we do close higher).

Best of luck trading,


Ready, FIRE, aim…

We are fast approaching what I believe is to be an *outstanding* intermediate term shorting opportunity.

But not yet. Lets be good rats and do some homework before the day of judgement arises, hey?

So yesterday I said that we should be getting out of longs very soonish because resistance was just ahead… lets see what actually happened.

Now thats not a prediction, just an observation. We have 2 scenarios here….

1) The Market has corrected and this rally will continue on to be a powerful new up-leg
2) The market is in a corrective phase before continuing down.

Obviously the evidence does not support the hypothesis that the uptrend is entering a powerful terminal phase. But that doesn’t mean we have enough reason to get short yet.

Take a look at the weekly:

So on the daily and weekly we have resistance both here and a little bit up from here. Its a no-brainer that shorts will try and have a crack, since the technical evidence supports the bearshitter hypothesis.

If the attempt to overcome resistance fails, then odds favor a resumption of the downtrend, and bullish capitulation, driving the market down. If the attempt fails, you can expect those shorts who are accumulating around here to be forced to cover, driving the market up for unknown duration.

Be alert. Odds favor at least one tasty short setup happening in the next 5 trading days


Volume Pothole

Although the tape looks pretty straightforward on a daily SPX chart the journey intra-day has been filled with traps and tribulations. What comes next may be determined by whether or not we’ll make it across this gaping pothole:

I posted this twice in the comment section yesterday but got very little response. Which surprised me a little as the implications of this chart are rather significant. As Scott already hinted at in his own update – we are in a low volume rut right now and I expect quite a bit of churning before we get resolution here. But let’s assume the current long squeeze does not extend and we are able to bridge the gap here – what would be our upper targets?
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Well, we’ve got a 100-day SMA looming ahead around 1280 which will probably coincide with the upper 25-day BB by the time we may get there (notice my weasel speak here – we really cannot be sure). In essence I think that the would be hitting rather stiff resistance around 1280 and that’s when I would be starting to analyze the tape for signs of a downside reversal. Perhaps that would also coincide with my mid-September mark on my POMO swamp drain calendar.

My trusted RSI_EMA chart on the SPX allows for a bit more upside – never guaranteed but definitely supportive thus far. Once we hit the 80% mark I am gone and goner on anything resembling positive delta.

I took another look at my volatility combos today and they look pretty supportive – no big medium term divergences just yet – except maybe on the VIX:VXO, so let’s take a closer look at that one:

I’m using a ratio here as opposed to a delta but the story is the same. Anyway, since the 1987 crash it’s rather common to see across the board IV to outrun front strikes IV. And again, let’s remind ourselves that on this ratio BB breaches are more interesting and that long term divergences are really what we are looking for. Well, we still have room on the BB and I don’t see anything standing in the way of more upside.

Before you even think about touching any short positions take a glance at my NYSE breadth chart, which after some creative recoding is usable again – I had to truncate the huge spike we got on the D/A panel two weeks back. Anyway, look at the recent cluster of 10.0+ spikes – a lot of energy has been expended to drive this turd higher and this is not the type of tape I would feel comfortable shorting right here and now. Best to wait for some clear divergences plus I really want to see an accumulation of closes within the usual < 5.0 range.

Bottom Line: The spoos are currently sitting above their daily 25-day SMA plus we are above both the 25-week and 100-week SMA on the SPX. Let’s not forget the 100-month SMA which we breached yesterday. In addition we are inside a big volume hole that yet needs to be overcome. If we manage to somehow claw our way higher then this will represent fine support for once things start to slide lower again – perhaps late September. But that’s all Isaac Asimov for now because nothing happens until we make it across the volume pothole we’re stuck in right now.



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