Major Technical Damage

Wednesday near the close of the U.S. session I really thought the ole’ Yeller had us all by the balls. If there has ever been an opportunity to squeeze the bears into oblivion then this had to be it. In yesterday’s musings Scott confirmed my notion that the series of lower lows and lower highs was still intact (barely) and that the bearish case was on the edge of extinction but still had a small chance of resuming. The odds were pretty minuscule IMO and early yesterday I kept checking the tape waiting for the invariable second shoe to drop.

But then suddenly something very curious happened:

In the last 20 minutes, someone has placed/canceled a 666 contract order in eMini 26 times $ES_F

— Eric Scott Hunsader (@nanexllc) October 9, 2014

Someone at Nanex reported a surge of selling orders (yes, I did find it on ZeroEdge – bite me) and the tape suddenly caved in as all of the other bots followed suit. And the world for the bulls will not be the same again – at least for a while, most likely not for the remainder of this quarter.

2014-10-10_spoos_volume_profile

Unless – yes unless we see an immediate surge right here TODAY the bulls will be toast for a while. I’m not saying we drop like a rock from here – there will be bounces. But in order to wipe a major stain off the bullish case immediate action is needed.

2014-10-10_spoos_overview

For we are about to paint an official double sell signal on the weekly E-Mini (and the SPX cash as well). We have a breach of the 25-week SMA as well as a breach of a weekly Net-Line Sell Level. That is bad medicine for the bears and today is the day to somehow make it all go away. In order to accomplish that feat a push above 1950 will be needed – 1960 would be better as that’s where we find the 100-day SMA right now. Bear in mind that both the 25-day and 100-day SMA held up for the fourth time now – that in itself is enough to cast some serious doubt as to whether the bulls are still in charge here.

2014-10-10_VXV_VIX

Not to count out any last minute Fed-sponsored Hail Mary’s but market makers seem to be agreeing with me that trouble looms ahead. Here’s the VXV:VIX ratio and it’s pointing straight down. I would keep an eye on this one today for early signs of divergences – also mind the VIX:VXO chart on the short term side.

2014-10-10_spoos_correlation

Our GBP/JPY equities correlation (based on carry trade activity) is also pointing in the same direction.

2011-06-05_AVG_seasonality

Now someone in the comment section pointed toward the final quarter as being a traditionally bullish period. And yes, he was absolutely spot on about that – that’s usually where the bulls rule the day.

S&P_percent_positive_monthly

And we may still see that happen but let’s look at October specifically. Contrary to common believe it’s actually a very bullish month – the numbers do not lie. But that’s not the whole picture – because it just so happens to have a little SKEW problem…


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You have been briefed – now have fun but keep it frosty. See you guys later this afternoon.

Cheers,

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 Time!

As all of you know I am probably the least bearish trader around. I am a trend following pattern trader. However, to all things a season, and it is the exact time for the bears to finally do some technical damage to the tape.

Why do I say this? Because as pullbacks have gotten shallower and shallower over the last few months volatility (real volatility in price right now, not the market take on implied future volatility in the VIX) has fallen to a historical extreme and then painted an uptick. I posted these two charts on Sunday and I think they are well worth a revisit.

Very strong price action late in a trend is a classic sign of capitulation of one side and typically marks the terminal stage of any move. Objectively price action could not have been stronger over the last few months.

Volatility, in this instance measured by a normalized (expressed as a percentage) ATR (14) with a 100 period 1 standard deviation bollinger on it is a good objective measure of volatility (though it must be said it is slightly lagging). Objectively, when ATR is below its 1 standard deviation bollinger it is historically low. When you get an uptick from extreme low volatility it is a time for extreme caution for trend following traders, and counter trend trades become a positive expectancy again.

We are somewhere near the terminal phase of a low volatility melt up. In low volatility moves on all timeframes from 15min to monthly counter trend setups have a very pronounced negative edge UNTIL you have extreme low volatility and then an uptick from that low base. This is a remarkable and repeatable concept I suggest you all take to heart.

Anyhow, I’m digressing. I told you to avoid long setups this week as best case for the bears we are in a trading range and there is not sufficient distance to the upper boundary to justify getting long on a risk/reward basis

Now let’s take a closer look at what happened today, and see how that affects the overall picture. As you can see today’s price action represents extreme failure by the bulls. Perhaps they were waiting for the Fed garbage to play out but still this is very bearish price action.


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Careful of the potential fed whipsaw :)

Scott Phillips





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