Mole’s Cunning Plan

Equities have been holding their ground overnight and it’s completely plausible that we may see an attempt to squeeze momentum higher early in today’s session. However, thus far the reversal has been anemic and the recent lack of buying mojo calls into question whether or not the bulls will be able to overcome the first major hurdles waiting ahead.

For one there’s the 25-day SMA (weak) near 1950 followed by a volume hole a few handles further near 1960. If you remember my ‘zoning low’ chart then you recall that this is where the bearish scenario rapidly loses its luster.

Since yesterday’s drive higher our SPX P&F chart has switched into bullish mode, as would be expected due to the double top break out I pointed at last week. Now this is the price potential given we hold here and perhaps even drive higher. But if we run into a wall then this would trap a hell of a lot of longs, wouldn’t it?

And that potential scenario has been in the minds of market makers as the VIX:VXO isn’t yet buying this rally. So short term near term option premiums seem to going at a slight premium.

On a quarterly basis however the market believes that it’s clear sailing ahead – kind of. A bit tepid that signal but let’s not try to read too much into it. One step at a time.

So what happens right here and now is rather important, wouldn’t you say? The GBP/JPY correlation meanwhile is pointing down and I intend to keep a close eye on that one during the open. Yesterday it’s been useless to us as Forex markets were digesting the BOE’s quarterly inflation report.

Now if you’re a sub then you may have taken our NQ long and thus far it’s banked 1R as of this writing. So we have to make a decision now – do we hold it in expectation of a run higher or do we take our R here and run for cover? I have decided on a hybrid approach – which means I will advance my stop to break/even and keep the NQ long. Meanwhile, as I’m expecting downside, I will balance myself delta neutral where I expect the most weakness. This way I can wait until I get a proper entry on the short side which will only happen if we see spoos run into a wall. So effectively I just bought myself a cheap pass to sit out some of the whipsaw we can expect up here – I agree with Scott that we are approaching an important inflection point.

And here’s what I suggest on the short side – please step into my lair:


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So that is it – Mole’s cunning plan – and no invasive surgery is required.  Now let’s see if we get away with it ;-)

Cheers,

Bear Pörn

I’m not feeling so great today and I hope the few of you who are not on vacation can forgive me if I make this one snappy. On the equities side not much has changed since the overnight ramp and from a trading perspective the current tape is rather uninteresting. I’m sure you’ve got better things to do and so do I. The futures and forex side look similarly lackluster – so instead I decided to indulge in a bit of bear pörn today. Which however comes with a disclaimer: Price continues to point upward and the LT bullish trend remains unchallenged – so take the following charts with a x-large helping of salt.

On a short term basis I’m seeing a healthy divergence on our GBP/JPY equities correlation chart. Thus far gravity remains suspended and the E-Mini has happily bubbled higher. If I was ST long I would probably take profits here in anticipation of a little shake out.

Long term I have been watching this divergence on the VIX:VXO ratio – as you can see front month ATM premiums have dropped quite a bit in comparison with the remainder of the front month option chain (thus pushing the ratio higher) and we are now seeing a little correction which started early this month. So far price has not responded and per prior examples it may be delayed. If this divergence continues I would get very cautious on a 1-week forward looking basis.

However a similar divergence is seen on the VXV:VIX which compares quarterly implied volatility with front month IV. That one should make anyone exposed to the long side a lot more nervous – and again if it keeps dropping then price will most likely respond eventually. However here I would expect a multi-week correction, once it happens.

A bit more subtle but supportive is the formation we find on the SPXA50 vs. the SPXA200. It seems breadth is diminishing after having reached a reversal zone near the 1.0 mark. Again price has ignored it this far and that’s not unusual given prior context. I wouldn’t worry too much here yet but keep an eye on this one. On its own it only has limited meaning but if the two prior charts remain in correlation over the next few weeks then we do have enough evidence to warrant caution on the long side. After all it has been while since we have seen a thorough medium term correction.

Bottom Line: If you are long then there’s nothing to worry about just yet – stick with price and trail your stops as your system dictates. We need to see more extreme measures until we would switch the bullish case into Defcon 3. But early signals are flashing and we ought to keep an eye on them. I leave you with this:

That’s right – no more Mr. Nice Bear!

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Cheers,

Eyes On The Hourly

The suspicions I shared this morning were confirmed by price later in the session. And as suggested the 100-hour SMA has been holding the fall as of right now. And that is pretty much all you need to know on the equities side as we currently have little context to work with:

Judging by the daily panel that 100-hour better hold as there’s nothing but air lurking beneath. Which is the downside of low volume short squeezes – you better not overstay your welcome. As you know I started to be pretty skeptical over a week ago but thus far magic buying interest continues to show up.

Same picture on the YM – 100-hour holding as of right now.

And here is the NQ – not looking bearish really. This one may have decent odds to hold the line.

Short side momentum is looking tepid as usual – the grizzlies apparently gave up sometime late 2011 – hehe :-)

I don’t see a pressing reason to sell here. However, there are a few bearish signals buzzing in my trading lair – please grab your decoder ring and have a look:


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Cheers,





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