Held Together By Duct Tape

We’re approaching the close of our January candle and by any definition it’s been a turbulent month for equities traders. We are all guilty of attempting to paint the future by looking at the past (with mixed results), but this morning’s exercise is to abandon or at least postpone such temptations and to simply look at what IS and then to conclude possible implications:

2015-01-26_spoos_volatility

The chart above features some of the volatility measures I employ, some of you may recognize Ken Long’s VolStat indicator. It provides us with a percentage based measure of average true range which then is put into context by standard deviation bands – you know, just like Bollingers. This tells me what volatility phase we are in and which type of trading strategies may currently be employed most effectively. What it does NOT tell me is the future of state of volatilty – like most indicators it has zero predictive value. Sometimes you get lucky in recognizing a particular formation and perhaps it ends up repeating (sort of).

More recently however I have come back to the basics by employing a simple LogReturn in combination with either a Bollinger or a Keltner channel for additional context. LogReturn is used heavily in machine learning as it relativizes price in the context of yesterday’s position. In other words – we want to know the delta between today’s and yesterday’s close. This offers us a pretty bare bones measure of price changes independent of the underlying’s nominal value. The formula is pretty trivial actually – first you calculate rate of return:

R = Close[0] / Close[1]

Alternatively you can deduct today’s close from yesterday’s and divide the result by yesterday’s close:

R = Close[0] - Close[1] / Close[1]

You can actually just use that but I prefer to slap a natural log on it, thus it’s a LogReturn:

LR = ln(R)

And that’s it. What we have here now is a pretty basic expression of price movement/momentum. And with that in mind you can start interpreting the lower panel on the chart above quite effectively. What I see is expansion and compression of price volatility. In previous corrections we started seeing long spikes to the downside which at some point where followed by selling exhaustion in turn followed by buying pressure which gradually started to build higher day by day. This is how I would expect a reversal to play out and it looks rather natural.

plane_duct_tape

However in recent weeks the pattern has changed. We are now seeing large sudden spikes to the downside stemming increasing selling pressure. Look at the three spikes I have highlighted – they are pretty forceful and one may interpret them as stick saves to discourage the bears from taking the tape lower. What however the most interesting to me is what we are NOT seeing here: Follow through – the big spikes are not accompanied by lower level buying spikes which would support the notion of increasing buying pressure. They were definitely present in prior corrective moves but at least thus far they seem to be lacking. Rather it looks like the tape is being forcefully pushed higher and then everyone just walks away. This reeks of distribution and even if I’m mistaken on that – tape like this it does not reflect a healthy market.

So the take away message here is that the current rally is still standing on very very wobbly legs and it may fall apart at any moment. This whole market seems like it’s held together by duct tape and the wheels may come off at any moment. That won’t keep me from taking long positions near inflection points and while the odds seem to be in the bull’s favor, but let it be said that we should all be aware what we are dealing with.

2015-01-26_spoos_briefing

That said – short term the E-Mini is looking like a long with a stop below 2030 – however if breached things may become unglued rather quickly. ES 2014 is where this rally most likely meets is maker. As I said last week – how many more stick saves do the bulls have in them before equities fall off the plate?

2015-01-26_dollar_briefing

The Dollar is getting more volatile as well – I’d be long above the 95.445 NLBL but only 1/2R. My stop would be below 95.16 – pretty nearby. Either it rides higher now or we’re going to see a visit of 94.8.

A few more short term setups below the fold – please join me in the lair:


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

Cheers,

 

Inflicting Maximum Pain

So I found myself staring at the E-Mini charts for quite a while this morning. Usually I am pretty snappy when it comes to sorting through the dos and duds of the day – on average I spent in between 2 to 5 seconds on a particular chart. If it doesn’t speak to me right away – meaning if my brain doesn’t pick up sufficient context within that time frame I simply discard it and move on. It’s a daily procedure that has served me pretty well over the years.

mma

My approach is not accidental, in fact I consciously do not want to spend too much time looking at a particular chart, for I am keenly aware of the fact that the human brain has a tendency to see what it wants to see. But sometimes there are those days when I just get stuck staring – because I’m seeing something but simply can’t figure out what exactly I am seeing. I’m sure you’ve all been there – you run into this formation that just looks so juicy, ripe for the picking. But deep down inside you know that it’s just too good to be true.

2015-01-21_spoos_briefing

Back in my old wave wanking days I would have labeled the current formation a 1-2 pattern followed by a third wave lower but allowing for the possibility of a simple zig-zag correction. You know – Soylent Green and Red and such. However since then I’ve learned that any chart I post here is completely useless unless it is ACTIONABLE or at least suggests that action should NOT be taken at the current time. In other words - tell me something I can use to place a trade in the near future – or at least tell me that it’s time to wait. Otherwise tell me nothing.

2015-01-21_events

If you’re a sub and caught up with yesterday’s afternoon update then you’ve got a pretty good idea of where I think we are heading on the equities side. And today’s morning tape only serves to drive this point home: We are clearly in a limbo period which will most likely be resolved quickly and violently before the week is over, early next week at the latest. In the meantime the modus operandi is to draw in as many directional players as possible and to inflict the maximum amount of pain.

Given Draghi’s big day in the sun tomorrow my expectation is that the current sideways churn between 2000 and 2025 will continue. Some say the ECB’s QE plans are already priced in but people say a lot of things and a vast majority winds up to being useless for trading purposes. What I do know right now is that my NQ short campaign has magically survived the recent hike higher by a few ticks – it’s possible it’ll survive until tomorrow but frankly I think the odds of that are pretty low.

What I do believe will happen is another rip higher to stop out any remaining shorts. Why? Because there is little reason for resolution today and the conditions here are perfect for punishment. If by any chance the ES breaches 2060 then the bulls may get the chance to close January in positive territory. But given what I have presented yesterday there’s a pretty solid chance we fall hard before there, at minimum retesting the recent lows and probably continuing lower. This market is standing on very wobbly legs right now and the conditions are ripe for a major correction. This view would be revised if we breach 2060.

2015-01-21_zero

What that means for you right now is to do nothing. If you are a Thor sub and are still in the NQ campaign then don’t touch it – our stop is at break/even and given the current tape we are perfectly positioned. You can perhaps grab a ST long position near the 100-hour SMA on the E-Mini (i.e. near 2000) – this may be a good play today with a stop below the 2k mark. But I caution you from getting caught in the swings -just look at the Zero signal yesterday, there was barely any participation. Which means perfect conditions for tape banging and running of clusters of stops.

For what it’s worth: I’m keenly aware of this moment in time and the opportunity that may be at hand. Evil Speculator was founded in the midst of a financial crisis in August of 2008. Back then much of my initial reputation was earned by posting then rather unpopular bearish charts on the Slope and then here, which in the end turned out to come true. In retrospect much of that reputation was earned through pure luck and I spent the following six years earning it through hard work and questioning everything I thought I knew. So be assured that I don’t take making this call lightly. Suggesting major turning points is always tantamount to a rope walk, especially during limbo periods like these. You know that you’re sailing in dangerous waters but at the same time you also know big moves are coming and your motivation is to keep your readers from drowning at minimum and help them bank coin if somehow possible.

Bottom Line: 2060 is the bear’s line in the sand – above it the current attempt to correct will go up in smoke. Anything below 2060 and above 2000 should be considered limbo tape and I don’t recommend you pick sides. If you can get positioned short near (and below) the 2060 mark then you have decent odds opportunity for a rather substantial pay-off. However above 2060 the bulls again run the tape and we are most likely seeing new highs in the coming weeks. Below 2000 the bears run the tape again and below 1960 we are looking at least at a medium term correction. So that’s my Soylent Green/Red verdict with hopefully a bit more actionable context.

Let me be clear – grabbing longs or shorts in between 2020 and 2050 will most likely lead you to getting shaken out today/tomorrow unless you get very lucky.

2015-01-21_wheat_briefing

The only short term setup I like this morning is wheat. Looking like it wants to finally paint a floor and I would be long above the Net-Line Buy Level at 543.5. My stop would be below 539 – I’ll only deploy 1/2R here as it’s an early formation without re-tests or major context.

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.

Cheers,

Riding This Beast Into The Sunset

Forget about equities – everyone and their mother is trying to sort out this gyrating stop sweeping mess. And yes, they are about to get interesting (see below), but I expect our chart of the month to be gold and not the spoos or the NQ.

2015-01-20_gold_update

Fortunately some of us rats managed to secure a seat on the bus just before it took off. I have to run the numbers as I scaled into a bit over an R between 2012 and 2018. Which gets me to roughly 10R at this point and I’m just getting warmed up. The weekly shows us approaching the 100-week SMA – our first major hurdle. However I’m going to keep my stop below 1272 for now in expectation of an obligatory shake out attempt.

riding_into_the_sunset

The long term implications of this campaign are very promising and with a bit of finesse it’s possible that we’ll ride this sucker into the sunset. Which means somewhere around 1500 – you heard it here first.

2015-01-20_spoos_update

Okay on to equities – which as I said are about to get extremely interesting. We currently are what I believe are the late stages of a limbo period (see my 2012 excerpt on market weather). However we are most likely facing long term implications here – this is not just another leg lower or higher. I repeatedly have pointed out the increase in intra-day volatility expressed here by long wicks and overlapping candles. Very very tough tape to get a read and even tougher to get a good entry. Which is exactly why most traders miss the early stages of a downside correction.

2015-01-20_spoos_GBPJPY

But let’s not count our chicken before they are hatched. Most likely it’s going to get worse before it gets better. The GBP/JPY correlation is pointing upward right now and I think short term it’s quite possible we’re going to stop out the current NQ short campaign (courtesy of Thor).

2015-01-20_UVOL_DVOL

However there is conflicting evidence and in order to interpret the big picture we need to put it all into context. Now our UVOL/DVOL ratio today remains pretty negative despite the current push higher – could be indicative of slow accumulation especially as the Zero is donning a very flat signal (meaning little participation and quite a lot of monkey business).

A LOT more below the fold – not a post to miss – please meet me in the lair:


More charts and commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don't waste time and sign up here. And if you are a Zero subscriber you get free access to all Gold posts, which gives you double the bang for your buck!

Please login or subscribe here to see the remainder of this post.

Bonus chart:

2015-01-20_CrazyIvan

CrazyIvan now at 77R – new all time highs since 1/1/2014. Who would have thunk? And it started to really get cracking when volatility was on the increase starting November/December. Seems like CrazyIvan is loving the IV and I hope to see more of this. Message to everyone who left during the summer: Watch the Nick Rage video again. This is a long term game, folks and instead of going with the program I watch you picking up pennies in front of bulldozers. Enough said.

Cheers,




    Zero Indicator


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  3. recent misdeeds

    1. There Be No Butter In Hell
    2. Setup Tuesday!
    3. Late Monday Quickie
    4. Held Together By Duct Tape
    5. No Juice
    6. My New Best Friend
    7. Inflicting Maximum Pain
    8. Riding This Beast Into The Sunset
    9. Let’s Dive Right In
    10. Friday Morning Briefing