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.
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?
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…
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.‘
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
Scanning through my momentum charts this weekend I see a pretty mixed salad – suggesting a continued low calorie diet for the bears. Some of my indicators claim it’s business as usual while others continue to show divergences pointing toward a possible correction looming in the not so distant future. But in summary I remain quite skeptical when it comes to the bearish case. The bulls are clearly leading the charge here.
I think the most stubbornly bullish chart is the VIX which suggest that complacency and faith in Bernanke’s put is at record highs:
For over six months now we have seen the bollinger band weave down and now our range has compressed to between 17 and 23 – that’s a whopping five handles. Back in the days we crossed five handles in a day. What’s really interesting however is the nature of the moves, which have largely contributed to a slow drop in the BB: Every time we hit anything resembling a buy signal the bears are literally being taken to the cleaners as volatility drops quickly in a matter of two or three days.
On top of price it is important to realize that volatility risk is quite considerable, especially for option buyers. Bear in mind that this affects both put and call holders. So if you think you can buy the dips with options and then reap the benefits on quick move up – think again.
There is an important chart however that stands in stark contrast with the VIX:
Obviously the 5-day MA looks a bit more bullish right now but still – there is a distinct divergence developing here which I believe needs to resolve itself eventually. Unless of course we are going to gyrate around for the next six to eight weeks, thus producing a ‘sideways consolidation’ and giving the bulls the momentum to take 2011 by the horns in January.
For an example of just that look no further than May 2009 – we had a similar pattern emerging and in the end we never saw much of a correction and bears got slaughtered. Granted – this is not 2009 and we are in a much narrower and controlled market now. But when I look at this divergence and compare it with recent patterns then I’m a bit surprised to not see at least a drop to SPX 1100. So given that perspective it’s quite disturbing that the bears cannot muster up more of a reversal here.
The NYMO:BPNYA ratio chart tells a similar story. Without much downside in equities we quickly found ourselves at what seems to be a new buy line for this current leg higher. If the bears can turn it around here we may actually see a real drop but if you contrast this chart with the VIX for instance then the bears would literally have to come out of the woodwork to force a reversal – no pun intended.
And if there is any chance for a bearish scenario – short or medium term – then it’s probably right now and here. My BB on the SPX was quite clear about an impending drop – which is what we got. And now we are back at the center line and the magic 1200 mark. In my opinion – once we are above that it will be extremely hard for the bears to steer the ship back down – so if it is to be it must happen on Monday.
Bonds have been really interesting as of late – especially on the long term yield side. The 20-year (shown via TLT) got smacked big time and found itself embedded below the 20% mark on my stochastic. It seems to want to breach however and I expect a little reversal here momentarily. If it happens I think the 100 mark should be well in its sights.
Finally the daily Zero – which is getting interesting. Yes, thus far it has kept us out of becoming overly bearish – or bullish for that matter. However, things are slowly shifting and I expect ‘something significant’ to happen by early January. Look – the channel I painted on the smoothed panel needs to be breached – either up or down. Because if equities keep riding higher with the smoothed signal remaining below the upper channel line then we are talking about a bearish divergence, which can be ignored for a while but not ad infinitum.
Of course – if the DZ pushes higher and above the zero mark then it would strongly suggest that any dreams of a meaningful downside correction should be abandoned until 2011.
I’m mostly in cash these days as I the upside risk (see VIX) is growing but downside risk also remains considerable. It’s the type of tape where I keep telling myself that there is nothing wrong with watching and only taking small positions. Of course we could see a blow off move to the upside – considering the potential for a seasonal Santa Rally I could be missing out on a big move up. But is it worth the risk?
Perhaps Monday we’ll get that answer. Looking at the charts above I think that now would be the time for the shorts to come out and drive the tape lower. Chances are that after Thanksgiving the train pretty much has left the station. And momentum usually remains with whatever transpired ahead of the holiday season.
There is however another thought that occurred to me – grant me a little thought experiment (i.e. mental masturbation). Let’s say we actually drop on Monday or Tuesday – how far will it really get us? There is a cluster of support starting at 1130 and the thin tape during the Christmas season would most likely not lead to a breach through all those support lines. But let’s just assume we drop though that as well and find ourselves again near 1040 in January. What do you think would happen? A complete take down in January? Or an instant snap back as institutional dip buyers get positioned in the near year?
As strange as it may sound – I don’t think this is the time for the bears to make a move. It’s probably best to let the bulls have their Santa Rally and push equities to new record highs. From there an attack must be forged – one that produces long red candles slicing through entire clusters of support in a matter of days. I don’t think this type of ‘condoned downside’ we have seen as of late has the type of mojo capable of posing a real threat to the longs. More likely these are continued retail pig shake outs and thus buying opportunities for the big boyz.
It wasn’t a pretty day for the bears. Our impending VIX buy signal not only confirmed today – it immediately resolved!
Ouch – that oughta hurt – a 14% drop in volatility in one day! Option buyers surely felt that one in the groin area. So, what’s next? Are we rallying all the way to Christmas?
Alright, theoretically speaking there is still a chance this was a b-wave and we’ll descend further down into c tomorrow – if you buy into EWT rules, that is.
Right, exactly – and pigs can fly. Because this means we would have to breach Tuesday’s lows and I’m not really seeing that play out right now.
The daily Zero wasn’t impressed by this correction in the first place – and the fact that we stopped in mid-air without the slightest proximity of a support zone/line does not spell well for the mojo of the grizzlies right now. I think they’re simply spent and took the opportunity to jump out of short positions at the first chance that presented itself. Basically, the bulls granted the bears a little mercy fuck – that’s how I see it.
What I really like however is that little channel that’s been painting on the DZ for the past two month. With three touches each we got ourselves a bonafide channel going – not bad. And which ever side breaches it will dominate equities for the remainder of the year and perhaps the first months of 2011. Now, it’s possible we stay inside – and even if we do we have probably at least another month or so until a serious divergence would present itself. Of course if we paint down while we stay inside the channel there would be no divergence – but such a weak signal accompanied by red candles would be bad news for the bears as it would represent a slow consolidation out of medium/long term overbought conditions.
And there you have it – the DZ road map for the next few weeks. If you’re not a Zero sub – well, I hope you didn’t get your ass handed to you today. If you did I hope you can still afford the 49 bucks per month – IMHO it’s cheaper than taking it on the chin on a constant basis
One of the most interesting charts today was actually the DXY, which did not drop as much as equities ramped higher. So, this is a situation which still may give the bears some hope. IF we stay above the 78 mark there is limited hope for the bears. But just like last year it may take months for a rally in the Dollar to make itself felt over in equities – so don’t bet too much coin on that correlation.
Before I run – here’s a must-see clip for all stainless steel rats:
You know what to do. I already closed out all my accounts with major banks, but I’ll be wearing my Man U shirt on the 7th. Hey, with some luck this could start a second ‘French Revolution’, which citizens in other countries may just start emulating.
A day that may strike some fears into the decrepit hears of banksters worldwide – wouldn’t that be something for starters?
By gyrating sideways the odds for a bullish reversal in equities increased today.
Hey, don’t blame me – I don’t make the rules – I just work here…
That’s right – by closing below and inside its 2.0 Bollinger band the VIX satisfied phase two of an equities buy signal. If the SPX either moves sideways or pushes higher tomorrow we most likely will paint a lower close on the VIX – which would be final confirmation. A close above today’s would invalidate the buy signal and give the shorts another shot for glory.
A reader pointed out copper today as it gapped down nicely, steam rolling some of the pigs who got greedy and chased the highs. This happens all the time in commodities – sometimes it’s because of a rule change (e.g. an increase in margin amidst record speculation) – and sometimes it’s a natural reversal after an extended fifth wave. Whatever it was this time – it turned out to be painful for the longs who got trapped after a gap down.
There may be hope however – yes, we do have a downward sloping stochastic but we touched a support line which was observed after a fake breach. Holding this line will be key otherwise we may see copper at the 3.5 mark.
After a continuous two month ramp, scoring nearly 200 handles on the SPX it seems that the current reversal ran into a wall today resulting in a doji. All day we chugged sideways near the 23.6% fib line – that’s fine and I even grant it a weak up day tomorrow. But ideally it should be accompanied by a higher VIX close which would be a telltale sign that more downside is to be expected. Yeah – I know – what are the odds? See teaser image above. If we see strong buying interest with a snap down on the VIX chances are we’re done here and equities will dispense with bearish formalities and directly proceed toward the seasonal Santa Rally.
The remainder of this week will be key in determining whether or not the bears are granted more than an obligatory correction from highly overbought conditions. I consider today’s failure to push equities lower as a sign of weakness on the parts of the bears. Unless they are able to drive things further down either tomorrow or Friday at the latest expect the dip buyers to give the shorts a run for their money.
You guys all know the old saying: What’s good for the goose is good for the gander.
Sorry bears – a red lamp just started flashing deep down in my evil lair:
Well, there you have your gander. We closed outside the 2.0 BB on Mr. VIX today – which as you all know is a first step toward an equities buy signal. We now need another close back inside, followed by a close lower the following day. Sorry guys – I don’t make these rules – they are established over time via empirical observation. And breaches like these often lead to a reversal within about a one week time frame. We all love those sell signals – thus we need to respect the buy signals as well.
See that is the problem with a compressed Bollinger band – you start getting signals all over the place until the new trend finally establishes itself via a big move outside. These gentle little pushes however most likely only serve as fodder for the dip buyers. What would have been best for the shorts would have been what the bulls have enjoyed for months now – a gentle steering into the opposite direction without causing extreme signals outside the band.
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