The Mad Momo Ratio

Over the years I slowly shifted away from using TOS/Prophet charts toward NinjaTrader as I am able to enjoy coding my tools in an object oriented fashion. Scripting languages have always been the bane of my existence and although they can be great for prototyping you will run into limitations pretty quickly if you’re trying to do anything a bit more sophisticated. In addition consumer oriented trading platforms also suffer from an inherent problem which is that you simply cannot rely on a data feed that is either filtered or buffered.


One of the few things I however appreciate about Prophet charts is the ability to quickly create ratio charts via a mathematical formula. Basically it’s the poor man’s Mathematica for data series. What is shown above is a special volatility brew of mine which has served me pretty well over the past year. I call it the Mad Momo Ratio and one of its components is the VIX – I have also thrown in a few other symbols for good measure (pun intended).

The lower pane shows us the SPX (I don’t know how to add a 2nd series to my shame) and I have pointed out all daily highs and their correlations with my mad momo ratio. As you can see a push toward the upper line on the BB(100) either meets or precedes the highs on the SPX in all but one case (5/22). The subs should expect seeing this chart more often in the future, so here’s another reason to join the club 😉


Volume profile – last chance for the bears (how often have I said that in the past few years?). We are now pushing back into the high participation range between ES 2050 and 2100 – 50 handles of pain for the grizzlies.


The short term panel shows the spoos in the process of establishing a base near the 100-hour SMA. We should never discard the possibility of a counter response but as of right now I’m not seeing any pertinent evidence. So I’m moving my stop below that stack of Net-Lines and let the chips fall where they may.

A few more setups for my intrepid subs:

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MOMO Update

I may as well move my butt to Australia now as most of the productive discourse in the comment section seems to be happening during nighttime in the U.S. Much of this clearly is due to Scott’s untiring willingness to lend a helping hand. And as grateful as I am for his contributions I am however horrified by the level of inexperience reflected in many of the questions. Clearly over the years we’ve seen a quite a bit of reshuffling here in our audience. Just go back a few years and look at the comment stream – many of those people have long disappeared. Some of the old timers retired (hopefully happily and flush), others chose to move on after having reached self sufficiency, but unfortunately a much larger number never managed to do what it takes. In the end they either got wiped out or decided to call it quits after hopping from one flawed approach to another (or perhaps got led into ruin by shysters). The financial markets have always been an attractive destination for gambling types bent on ‘trying their luck’ at brain surgery whilst being incapable of properly peeling a lemon.

My point here is that 90% of the material that Scott shared as of late has been covered here over the years and in much detail. Perhaps it is all my fault for not featuring some of our favorite posts of the past more prominently. Until I get around to placing them in a more accessible place I strongly recommend that you all point your browser to our favorite posts page and work your way through a veritable laundry list of hands-on trading knowledge. There are also quite a lot of handy tools under our – you guessed it – tools menu. There is simply no excuse for not understanding key concepts like position sizing (as in R), SQN, expectancy, etc.  And how can you even think about trading futures/forex without our handy risk calculators?

Again perhaps I only have myself to blame for not featuring our educational stuff more prominently. Please understand however that after eight years plus of running this blog I am oftentimes tired of regurgitating material I deem to be essential for survival in the financial markets. But clearly my audience is hungry for this stuff as every time it’s being covered here the comment section explodes and subscription rates increase. Hint taken and I’ll do my best to selectively cover these things again – perhaps one educational post per week? I’m open to suggestions.

Alright – with that covered let’s talk market momentum today – we are at an interesting stage here as the annual ritual of a pre-XMas-Rally-Shake-Out seems to be gaining credibility.


So let’s start with the easy stuff. You may recall that about a week ago I proposed that we would shift into a sideways depleting volatility cycle. However I was wrong about the sideways part as we actually transitioned into a trending depleting volatility period. One which now has us back in our ‘normal’ volatility range pre-sell-off. I put the word normal in quotes as volatility is a very relative concept and there simply is no ‘normal range’. You can define certain ranges as historically low or historically high but your normal range is always the current range – if that makes any sense.

That said, given the current readings it is reasonable to suggest that in the near future we are most likely not going to see the large daily ranges of the past two months. However given recent ranges and the fact that we are heading toward the base range does permit another increase in the near future.


Before we talk about the implications let’s take a peek at the long term picture which has us solidly above a weekly NLBL with a monthly NLSL in close grasp. Both of those are very bullish long term signals, in particular in the context of an impending X-Mas season. Very rarely do we see large sell offs during November or December – it’s not impossible of course but as traders we deal in probabilities. So let’s look at the current momentum.


We start with our trusted VXV:VIX cross – if you are unfamiliar with VXV then Google is your friend. In short the VXV measures quarterly volatility expectations whilst the VIX uses a mixture of the near term month VIN and the VIF which represents the far term month. Not to be confused with the VXO show below, which is the old VIX – again Google is your friend.

The ratio shown is a 3-day SMA which has been forming a pretty pronounced falling diagonal and we’re right at the upper range. That suggests to me that we may be seeing a little shake out here in the coming weeks, most likely concluding in early to mid December. As this is a long term chart I wouldn’t be surprised to see another stab higher (as volatility is depleting, leaving room for more trending tape).


VIX:VXO is basically the short term brother and here I am comparing *front month to front month* – the main difference is that the VXO measures options near ‘at the money’ (ATM) whilst the VIX is more weighted via VIN and VIF. The difference is that the VIN covers the entire front range of the near term month while the VXO covers near ATM premiums of both the near term and far term months. I know – a bit confusing and it makes my brain hurt as well.

Now this ratio seems to be building its own falling diagonal but if price doesn’t respond soon then we most likely will see another push higher before a shake out. This has happened back in April/May of this year. Since this is more short term I would use those diagonal touches for quick sell off opportunities or profit taking. I’ll be sure to post it here in the coming months.

Okay, but now let’s get to the good stuff 😉

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Words to the wise: I am not trying to predict the future here, all I am highlighting are probabilities at the current state of affairs. Things are constantly in flux and thus can be leveraged quickly by surprise moves. But until those happen I would propose that the bulls run the tape into early next year with a little shake out on the way in the interim before Christmas.


Count On Volatility

I would like to expand a little on the topic of my Thursday post which submitted that 2015 will most likely be remembered as one nasty sideways high volatility wood chipper, inflicting massive losses on both bulls and bears alike. As we are gradually transitioning out of a QE fueled artificially engineered bull market fear and confusion are slowly replacing an abundance of greed and complacency (just look at the daily VIX before August). And that really should not be any surprise to anyone – it’s been a lot of fun and laughs over the past seven years but the end of the line is in sight and it’s now time to pay the piper. Please understand that I make this point without any ulterior motives or allusions of possessing any predictive powers.


All we have to do is to listen what the tape is telling us on a daily basis. There really isn’t much to it – assuming you somehow manage to quiet down the incessant cacophony of your own ego emitting a never ending stream of opinions and distractions. After all in this, the greatest game of our time, we are often our own worst enemy. But even the thickest mind should should have a hard time refuting that we are not in any trending phase right now and that in fact intra-day volatility has become the name of the game. It remains to be the one constant we can depend on these days. Whereas the direction of the (mostly bullish) trend and BTFD was the modus operandi over the past few years, catching the next sharp turn remains the only way to extract yourself a modicum of ill gotten gains. Thus as successful traders your primary concern should not be direction – it should be volatility.

Which appears to be expanding – and has been slowly all year. Not that the VIX would have offered you any indication whatsoever as to clear and present downside risk I was highlighting right here at Evil Speculator on a regular basis starting as early as late last year. Everyone out there was simply in a holding pattern, waiting for one last push higher – just like drug addicts begging for just one more hit before committing themselves to face cold turkey.


It’s been a while since we’ve experienced conditions such as these and the only other analogy in recent history is the big shake out in 2011. If you compare what happened then you’ll find the same pattern:

  1. Sideways topping pattern after a massive squeeze that lasted months.
  2. Fast drop to the downside.
  3. High volatility shake out period.
  4. Resolution.


Now if you look at the current year you see an almost identical pattern, however there are some crucial differences I would like to point out as well.

  1. Starting late last year we experienced a sideways topping pattern with increasing volatility. Again the VIX was ignoring it all, except during quick drops which served as buying opportunities. However things were already starting to slow down in 2014 – the buying frenzy that preceded 2015 was the result of a big correction which spiked the VIX all the way to 25.
  2. The fast drop played out just like it did in 2011 – even the magnitude of the correction is roughly the same.
  3. The current high volatility directional guessing game is per the same script and what will follow late this year or early next year is the final resolution.

Of course the direction that the fourth phase is going to take us is the topic in everyone’s mind, and as always (un)educated predictions are as ubiquitous as lofty theories as to what the Fed or the ECB may do or say next. But before you go and throw your own 2 cents into the big smoldering stew of opinions ask yourself this: How accurate have your own predictions and assumptions been in the past few months or in the past few years? Were you the one who traded the SPX all the way from 667 to 2100? If so then please go ahead and bet the house. I for one will continue doing what I have been doing pretty effectively since I started to see the light sometime in early 2010 – simply follow the tape and leave academic theories to the professionals. After all – I just work here and the day you start taking things personal or seriously is the day when you should call it quits.

Never take advice from anyone in a tie. They’ll bankrupt you. Don’t ask a general for advice on war, and don’t ask a broker for advice on money. — Nassim Nicholas Taleb

The future is now – so don’t bring a knife to a raygun fight. If you are interested in becoming a Zero subscriber then don’t waste time and sign up here. A Zero subscription comes with full access to all Gold posts, so you actually get double the bang for your buck.


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