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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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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Earning My Keep

I’d say the Mole earned his keep this morning when he kept you rats from getting emotional and chase this sucker to the downside. If you even managed to grab a few longs during the squeeze higher than you must be feeling rather giddy right now. Another bear trap averted, right? Well curb your enthusiasm – for the bulls are far from being out of the woods here. Let’s take it from the top:

As you can see the drive down pushed us against a small volume hole, which has however been filling in a little now. But it may establish a new bounce zone here which gives the bulls a chance to gather some strength. Now, I’m saying they will – what I’m saying is that any bullish scenario most likely involves some teasing around up here between ES 1938 and 1960.

On my Bollingers we’re seeing the E-Mini attempting to overcome hourly resistance – that’s a good start. As you recall there is a NLSL at 1944.25 and we need to stay above that one as well. A close below that one this week would trigger a daily sell signal.

For anything bullish to materialize now that 25-hour SMA on the SPX needs to be retaken. We are still below it and that opens up for a ‘last kiss goodbye’ scenario.

Now here’s the ba-aad news – check out that participation on our Zero indicator, in particular on the Zero Lite. Complete flatline since the session started and that was ‘after’ all the bad GDP news was being announced this morning. This kind of smells bad to me but as of right now we have no signal telling us to go short either.

Now this is interesting. Look at that divergence prior to the drop starting on the 20th. I didn’t see it but in my defense I did warn you guys near the top so I guess I’m forgiven ;-)

The signal is currently in sync but it it remains far below the SPX. And that means MMs are being a bit cautious here on the medium term. Let’s watch this tomorrow and Monday for early clues as to whether we’re heading into a real correction or not.

It’s been a bit dry on the setup front here in the past two sessions but as you all know I am not one to force the issue. I only feel comfortable posting setups if the tape throws them my way.  But I have an inkling things are going to start aligning rather quickly – just like with volatility cycles (see my post earlier this week) trading flips between periods of relative inactivity (actually we are monitoring and watching) followed by short bursts of action (i.e. getting positioned). But both are necessary for successful trading – it is not a linear activity and neither should it be.

It’s not too late – learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don’t waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.


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