Abnormal Tape

One of the strengths of human nature is its ability to quickly adapt to changing environmental conditions. At its core this is the primary reason why human beings, a physically rather underwhelming species, managed to achieve dominion of all reaches of the planet we inhabit. Whether or not that is a good thing I leave open to debate. At the same time this purported strength can also turn into a weakness in that we are often quick to lose sight of what once considered a normal baseline.


I have often made the point that the emotional aspects of our human psyche are are completely unprepared for achieving success in the financial markets. A big part of that is recognizing context outside of recency bias – a cognitive inclination we all seem to share. For instance, if your system starts losing after months or even years of working fine – do you discard the system altogether, do you take a break from it, or do you simply keep trading through the rough patch?

Novice traders would probably take a handful of losses and then walk away. The worst approach in my not so humble opinion. More advanced traders probably split into the two remaining camps. I for one would most likely consider reducing position sizing for a while until I see concrete evidence that market conditions once again favor the particular system employed. Others would simply trade through it and quite frankly there is justification in doing that as most of my statistical analysis reflects that it produces superior outcome in the end. Nevertheless I personally feel uncomfortable with losses above 20R with a time frame of less than three months. So therefore I chose the former path, knowing that it lowers standard deviation in my SQN.

One of the big learning experiences over the years, and one I am quite regularly reminded of in my ongoing system development efforts, is that market conditions change on a constant basis. On an hourly basis every single system goes through a ongoing cycle of volatility. Some of that is clearly attributable to market hours and participation and being privy of it offers advantages in when to take positions, when to take exits, and when to wait for sideways tape to subside. On the daily charts things also cycle but it’s a lot less regular – you may see years with rarely any increase in volatility, except for the occasional obligatory correction.

The chart of the E-Mini above shows what I would call a pretty normal transition from a minor correction into an advance, after which we see a more thorough but pretty textbook intermediate correction. What follows is a strong reversal which  after a few weeks starts petering out but continues higher. The blue outlines highlight all the candles I would consider beyond two standard deviations during their respective period. It’s quite normal to see volatility explode higher during corrections which is a major seductive element of why bears are so eager to find red candles.


And here is the current view of the spoos in comparison. I actually should have done the reverse – highlighted all the candles which do not exceed what would have be considered two standard deviations over the past few years. Mathematically speaking the smaller ones are now becoming the outliers. And that tells us a lot about the market conditions we are operating in right now. We see in increase in gaps and fast reversals followed by even faster drops. And that chart does not even tell the whole story – for that we would have to post a series of intra-session charts, as the big moves happen mostly overnight when most U.S. equities market participants are locked out of managing their positions.

Which is why I’m rather surprised anyone is actually still active in this tape. Unless you are extremely skilled in playing the swings and suffer from chronic sleeping disorders at the same time (or are a trading robot from the future like Skynard) then your odds of success in this tape are rather slim. If you have participated in a traditional fashion (i.e. taking intra-day positions and holding them) then odds have it you’ve made several trips to the woodshed in the past six months or so. There are only two ways to approach high volatility sideways tape. And that is to either participate on a very short term basis – meaning playing the swings and taking profits before the bell. Or slow down your activities to a weekly and monthly scope and avoid all the intra-day noise. Of course the implications of doing that is taking entries at price extremes or major inflection points. Which sounds a lot easier than it truly is.

What I do keep emphasizing here is that this is not the same market we’ve been trading over the past few years. Yes, quantitative easing is still a major driver of investor confidence but one quick glance at the chart above would suggest that it is increasingly losing its effectiveness. Clearly the goal of the Fed and the ECB is that of market stability and they have both proven on numerous occasions that they will go to any length imaginable to stave off a major market correction, which is seen as politically untenable. Or at least that’s the popular argument and you may suspect that the truth is a bit more intricate – albeit outside the scope of this post.

It is quite possible that in a year from now we will look at this chart and scratch our heads wondering how we could have not see that the market was about to fall off the plate. Or nothing could happen and we just kind of continue higher, one quick headline fueled push after the other. I really don’t know – because if I was certain then I would be either buying a bunch of puts here or grab a truck load of long positions and be done with it.


But what I do know is that the bull market of the past five years most likely will not return. Central banks may succeed in propping up equity markets for another year or so but volatility is increasing rapidly and it must resolve at some point – one way or the other. My approach going forward will be to take stock of the situation near major inflection points and then assess my available options. I won’t be betting the farm but I am willing to employ a small portion of my assets toward a resolution.

I have two setups this morning but need to keep them for my intrepid subs:

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Running Like A Hare

The tape across the board has been running like a hare and today’s session again did not offer us any reprieve from the relentless battering we’ve been through over the past few weeks. Up and down she goes although on the equities side it’s been more down than up and the fat lady hasn’t sung just yet.


Clearly I’m going to be limping behind here as things are unfolding quite rapidly. When I took that snapshot it was looking like equities may have found some ground but I simply didn’t trust it and posted in the comment section that it’s probably best to let things play out. That seems to have been good advice as the spoos are heading even lower as I’m typing this. To your collective benefit Mole’s instincts have been honed by decades of hairy tape ;-)


The Zero is still showing us very little participation, once again indicative of a stop run by institutional traders. A lot of greedy retail rats are being burned here folks – consider yourself lucky you’re not one of them (I hope!).


The NQ printing lower highs and lower lows – this is not looking good. The 25-day SMA only offering soft support and this thing could easily resolve toward the 100-day SMA near 4317 before it’s all over.


On days like these it always pays to check breadth and momo charts. The VIX:VXO is showing me no divergence which is concerning.


More long term the VXV:VIX is also pointing down. That’s bad medicine…

Alright, updated across the board in no particular order:


The EUR/USD is now in earshot of my target and I’m taking everything but 25% of my position off the table. This campaign has done a great job of softening the impact of the shitty exchange rate I’ll probably be facing in the months ahead. Notice the weekly NLBL that has been sliced today.


EUR/JPY – same idea here – I’m taking almost everything off the table, only keeping 25% of my original position. Again my target is near the 100-day SMA where I would normally expect some obligatory resistance. But given the velocity of this short squeeze things could easily overshoot.


Crude – I’m quite stunned by how well this one has kept up given all the drama in the remaining futures pits. As you may remember I snagged a rather early seat near the 50 mark and remain determined to ride this puppy higher. Over the past week or so there was a lot of talk about crude having hit a high and I’m glad I didn’t listen – as always! ;-)


ZF is not a setup yet but I like the daily and weekly panels here. As soon as it gives me an excuse to be long I’ll let you know.


Ditto on the 10-year futures but it’s a bit early to snag a position just yet. Let’s see how things play out Sunday night or on Monday.

Alright before I grab dinner a few juicy setups for my intrepid subs:

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Bounce It

The magic pendulum swung back the other way and Friday’s decision to take partial profits (according to system rules) managed to lock in at least 50% of the profits accumulated on the way down. Of course the question rattling around in your retail rodent brain right now is whether or not this is just a temporary bounce to shake out a few weak hands (i.e. you) or if this thing manages to squeeze higher.

If you want my advice – just bounce it all. You should always always know what your campaign will do at each step of the way – ahead of taking entries. Remember that the game always has and always will revolve around pressing your emotional buttons - and there’s a wide range of keys available – take a look:


You think of yourself as a rational person? Well, think again – 90% of what we do is steered by habits and emotions. Just look at how much of your brain is actually devoted to emotional interpretations and responses in comparison with rational analysis and the exercise of judgment. So if you are still exposed to the downside all these sections of your brain are most likely feeding you a party mix comprised of disappointment, fear of losing more of your prior paper profits, temptation to double down and sell the rip, doubts about your prior analysis, anger at not taking full profits last Friday, etc.

Mind you this is NOT the time to second guess your system (if you have one) or to react as opposed to simply act. I think this is an essential maxim every trader should be print, frame, and hang on the wall facing you during your trading activities:



The hourly and daily price panels are looking pretty bullish at this point. However we are at a short term threshold which will determine if this leads higher. Notice how the BBs and SMAs on the hourly are starting to slightly swing higher – if this continues into the close then the bulls take this one home and probably squeeze things higher. So watch the next two hours – the bears need to act now in order to prevent a massive squeeze to the upside. Accordingly I have put my final stop near the 25-day SMA which is probably more than generous.


Weekly – the bulls definitely won the first important battle. That NLSL and the 25-week SMA held up like bosses and unless challenged early this week it will henceforth act as additional support.


Let’s take a look at market internals – the SPX:VIX ratio is looking a bit suspicious as it’s trailing price. This may be nothing but I am sharing additional considerations below the fold.


The Zero super flat today – no participation. Which leads into two charts that grabbed my attention – please get your secret decoder ring and join 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!

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UPDATE on Ivan Krastins – I am happy to report that I just received notice from someone in contact with Ivan. Apparently the old buzzard managed to survive a category 5 cyclone wearing his Chinese wok as a helmet and by chaining himself to a boat anchor. He has no electricity or internet and his computers have been damaged. But he does have phone access and I wouldn’t be surprised if he’s calling in futures orders as we speak. Well done old chap – if you need anything please don’t hesitate to ask – we’re here for you. Unfortunately Scott is in Bali right now otherwise I’m sure he’d be on a boat by now. I have an old MBP I could ship him or perhaps someone closer to Ivan could help him out? Getting things over there will be difficult for the next few weeks and any Aussies or Kiwis please steps up – he needs our help.

PUBLIC COURTESY ANNOUNCEMENT: I am heading to San Diego for a day and am scheduled to return to Los Angeles tomorrow early afternoon. I won’t be bringing my lappy as I’ll be on my feet most of the time down there. This means that tomorrow’s post will most likely be after the market closes. Thank you for your understanding – I am doing my best to keep the blog flowing during my time on the beautiful West Coast. By the way the weather here has been fantastic – super sunny with dry heat – just like the Mole likes it :-)


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