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.


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:

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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Sons Of The Lair

So I’m officially a biker now. That’s right – the Mole has been issued a Californian M1 license and driving in SoCal will never be the same. Well until the 21st that is – that’s when I’m heading to sunny Mexico.  I can assure you that this was no easy feat given the time restrictions as I’m only spending a bit over nine days here in Los Angeles. As you know I’ve been riding a scooter back in Spain for the past few years and quite frankly it’s getting old. Unlike over here in the U.S. the Spaniards permit you to legally ride everything up to 125cc with a regular driver’s license.

But if you want to hop on the real stuff then you’re out of luck as passing a motorcycle license anywhere in Europe is a royal pain in the neck. We are talking red tape galore, weeks of driving lessons, and thousands of Euros in expense. I think in Germany they make you take 20 hours of driving instructions minimum, there’s a full day First Aid course, and that’s only to get you started. Which may make sense for the average 20 old hoodlum trying to impress his lady friends but a bit much to ask for someone who has been riding two wheels for years and has carried a driver’s license for over 25 years. Heck, I drive stick shift like a mini Schumacher – my accent is way better though.


Of course over here in California things are a lot easier and more fun, so I didn’t want to miss this opportunity to finally get my proper M1 license and start riding in style. Which I then could easily convert into an international permit courtesy of the AAA. So I studied up via some iPad app until I knew all 250 possible questions by heart. Off to the DMV waiting in line for four hours (couldn’t get an appointment early enough), fortunately there’s plenty of eye candy up here at the Hollywood branch. Finally get to take the test and it turns out that there’s a new test now which has nothing to do with any the 250 questions I memorized. Plus those bastards make me do the written test for the car as well – and I didn’t study for that one! Oooops!

Well, I passed them both anyway. So yesterday I’m heading down to San Diego to take a three hour course with Brian at SoCal Super Moto. Awesome instructor – he apparently even taught some of the guys from the show Sons Of Anarchy (I was a big fan). Turns out he broke two of his ribs the day before while skateboarding – yeah, he’s a bit of a speed nut. But he showed up anyway and just sucked it up – big props to this guy and if any of you are considering to pass the M1 then head down to SD and learn from the best.


Anyway, this morning I get up at the ungodly hour of 6:30am PDT and head over to the San Diego Clairemont DMV. Brian apparently has an arrangement with those guys and he’s able to pass a whole group one by one in the morning. I’m there with five other guys and all of them are already accomplished riders. The Mole’s the only one who just learned to shift a motorcycle a day ago. Well, to make a long story short – I nailed it like a boss and I’m as happy as punch. Mission accomplished. I already have my eyes on some of those sweet custom Bünderbikes they make in Switzerland.


So let’s talk markets. Seems I didn’t really miss much there – sideways session suggesting indecision. Note the complete lack of participation after the little ramp higher. Follow up matters but given that we just held a critical inflection point at ES 2040 chalk me up as being a bit suspicious.


But okay, I bite as we have a nice inside day offering a binary entry. The long side seems to be the easy one right now – once again the 100-day SMA has held and we have four touches which is going to bolster support down there. But no, it’s not impossible that this resolves to the downside – I’d give it a 20% chance. Which means I’ll take it if it breaches lower but only with 1/2R – adding the other 1/2 at 2040. On the long side we need a breach above today’s highs and our ISL will be the low or wherever you feel it’s clever.


By the way – I wouldn’t even consider the short side if it wasn’t for this. The subs will remember this chart – it’s the VXV:VIX ratio which shows us premium deltas between 1-month and quarterly CME options. That little divergence is holding up, leaving the door a crack wide open. But not by much – again, I give the downside little credence as of right now.


Otherwise it’s pretty slow on the setup side today – the only ones I like are GBP crosses. Here’s GBP/JPY which I like short with a stop above 179.75. A long above 180 (i.e. the 100-hour SMA) is an option but I think the downside has the momentum here right now.


You can also play cable instead – triggers on the chart. Or if you like ’em in pairs split your exposure between them and Bob’s your uncle.

That’s it – I’m going to relax a little now. Perhaps head out for some L.A. style shopping – the list is long and I only have a few more days to go until I head out to Mexico. See you guys tomorrow.

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