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.


The Reckoning

For months now we have been watching equities flail around sideways, plotting increasingly spasmodic gyrations which have tested the patience of even the most battle hardened veterans. The recent series of gaps and overnight price jumps have only added to our growing list of evidence suggesting that we are witnessing an increasingly unhinged market. Adjusting to and surviving unscathed in such market conditions has been no easy task but I can truly say that we have negotiated some of the most challenging tape in years like bosses.


But now the time of reckoning approaches and I want you all to take a deep breath, lean back, and detach yourself from daily chaos that has thrown your feeble minds into recurring tailspins. We are going to look at some weekly charts because it is there where some real magic is going to happen in the coming days. Let’s start with the S&P E-Mini futures.

First thing that stands out is that we haven’t really gone anywhere since late last year. I’ve covered that topic to exhaustion and will not waste our time on regurgitating this again. Volatility has been out of control and the current VIX reading of 13.37 is a big joke. One I plan to exploit to the max however. Look at that stack of weekly Net-Line Buy Levels which starts at ES 2113 and ends at ES 2122 – we also have one at ES 2118.

This is where the boys are going to separate from the men. Meaning – if we get anywhere near that I plan to accumulate a nice collection of front month lottery tickets (a.k.a. OTM puts). They are not going to cost me much and I will expect to lose all the premium. However at the off chance that the bulls drop the ball there – which I estimate at around 20% – 30% – they are going to print ‘una burrada de dinero’ as they say over here in Spain.


So yes, we are talking lottery tickets. Here’s the same view on the YM – the range between the Net-Lines on that one is actually a bit more narrow starting at 18089 into 18180 – barely 100 YM handles.


Finally the NQ – here we are almost there which is why it probably should be our canary in the coal-mine.

I promise you it will take days for you to get that song out of your head again 😉

But seriously – watch the NQ and note what it does as it’s starting to bump into those Net-Lines starting at NQ 4536. If it happily pushes higher then we should hold off and perhaps wait for new instructions. If it stumbles and encounters resistance then we may have a shot at exploiting what I would consider the fattest chance for the bears in a long long time.


ZN Update – it’s looking good so far and I’ve moved my stop to break/even. And so should you! I’m holding this for a potential run higher on the daily – which makes this a daily campaign now.


Same idea on the AUD/NZD – another good entry yesterday and thus far it’s playing ball. First hurdle ahead will be 1.2 – if it pushes above it we may be able to enjoy another short squeeze.

A few more goodies for my intrepid subs below the fold:

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.


A bit of event risk today – try to be out of CAD related pairs after the NYSE open. We also nave some Kiwi tremors after the close.

Now have fun but keep it frosty.


Zero Divergence

Quite a fascinating sell off today – that bump against the daily NLBL was all the bulls were able to muster. Perhaps it would have been smarter to take profits there yesterday (on the NQ) but I personally prefer to ride the long cons – meaning I get in early if I can and ride those suckers out. Of course what happens quite often is that you give up previously coined paper profits. Part of the game really – I got out a bit above break/even so if nothing else it’s been educational 😉


Here’s the E-mini in all its ignominy – straight down near those hourly Net-Lines. The daily has us back at the 25-day SMA but don’t be so sure that a bounce is procedural now.


The Zero is rather fascinating which is why I didn’t want to miss this opportunity to post it. The hourly panel shows us a strong spike to the downside. That was quite a failure near the top and we have two possibilities now:

  1. This is the mother of all bear traps and we’ll be seeing a counter move here post haste.
  2. The jig is up for the bulls – we’re testing the 100-day SMA and most likely drop right through it.

See this is the problem with those sideways formations – you really never know when you are in a break out until you’re well in it (and it’s too late to get positioned). I think we can all agree that this is one ugly chart formation – whatever you want to call it. Fear ranks high right now and very few people are going to try to be long here.

Which brings me to the Zero Lite on the right. Pretty distinct divergence here, which not always means that we’ll see a bounce back. We may just have run out of selling pressure and if we drop through key support near the well tested 25-day SMA we may get more of the same. But yes, there is a small statistical chance that we reverse here which is why I just grabbed a few E-Mini contracts. Just a small position as I don’t see anything clearly bullish on this chart.

Let’s be clear about this. We are in the late stages of a LT bull market and market conditions have evolved significantly over the past year. What we are seeing are fast surges followed by drawn out sideways corrections. The bulls are living on borrowed time and I think sometime this year there will be a price to pay for six years of bullish exuberance.

So why am I long here? Because it’s a short term opportunity and I’m not in the business of predicting LT tops or bottoms. Not my game – at least not anymore – when I did I was actually doing quite well but it’s not something you can base a trading career on. And taking it one day at a time with eye on the ongoing trend has been the proper recipe over the past few years.

Some very juicy goodies below the fold for my intrepid subs – please step into my 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.

Things are about to get a lot more exciting – let’s put on our game faces.


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