The Incredible Growing Market

Irrespective of today’s news induced volatility we are now looking at some pretty top heavy tape. As I have retained a distinct and horrifying memory of summer 2009 I would be foolish to suggest a major reversal being in the works – but I do think that the market is now over extended enough to justify at least a short term correction.

This RSI_EMA chart has treated me pretty well in the past year. Usually a reading above 85 means that we looking at a correction in which an overbought situation relieves itself so that new buyers are able to step in (yes, Mole actually just said that). If you look a bit deeper you also realize that the degree of optimism does not seem to matter much. Case in point – last summer we hit the 85 mark and after that it took a few more days for the tape to reverse lower – not by a huge amount but it was definitely a nice trading opportunity, especially if you sold low vega close to the top.

What’s also interesting is that channel to the downside which is highlighted on the RSI_EMA panel above. About three weeks ago we had reached the upper range of that channel and it first seemed that a downside correction was in the works (i.e. the drop lower). But equities recovered quickly and the RSI_EMA kept pushing higher – at which point I basically told you guys that Soylent Blue was pretty much in the toilet.

This chart and many others I am not showing currently is why I have become a bit quiet as of late. It’s not that I’m giving up – but I need to see more tape before I venture into any type of predictions. What I feel comfortable saying is that we’ll see a correction in the next week to ten days. Right – you rats don’t need me to figure that one out – granted. But where I’m a bit soft right now is the big picture. The tape right now needs to resolve itself so that the long term trend can be firmly established. We are at an inflection point right now and if we don’t see any strong downside and instead will be presented with tape not unsimilar to what we saw last summer then I fear that I will have to change my tune as to when P3 is expected to appear on our radar. But as of right now I don’t know anything – yet – and I seem to be among the few analysts who are comfortable admitting this.

Quite frankly – we are in such uncharted territory in such a narrowly traded market that making any predictions is tantamount to predicting today’s volatile swings. It’s simply impossible and I will have to reserve judgement until I see more evidence. Now the market has produced a lot of bullish evidence all last year – and that’s the trend right now and right here. After the looming correction we will be able to identify what’s next – until then I will simply focus on trading the short term (i.e. Geronimo, Rammstein, and the Zero).

Stick with what works right now – which is trading intra-day and perhaps some discretionary setups. Everything else is just talk and if someone shows you their chart from a few months ago which predicted where we were going he (and perhaps especially she) doesn’t show you all the charts that pointed in the opposite direction ;-)

Enough said.

Cheers,

Mole

Rammstein Update

I was looking at my entire chart collection to see if there was anything important to share with you guys today. Didn’t find anything inspiring, so I decided to post a quick Rammstein update. Since its introduction it’s done quite well – bummer I didn’t manage to implement the notification system earlier (sorry!!):

I started to forward test in late October and refined the settings for another week or so. However, since then I have not changed a single thing. As a matter of fact I just ran it through the optimizer and the current settings are still in the winning three which is pretty encouraging.

If you haven’t signed up to Rammstein – do it now – it’s free after all and will remain so until it has proven to us all that it can continue printing coin through a diversity of market conditions.

BTW, geronimo has been kicking ass lately but for some mysterious reason very few subscribers are left. Why – frankly I have no idea – it never had a large drawdown that should have scared off a serious trader familiar with the concept of a long term edge. It’s strange to watch geronimo bank coin day after day while subscribers are slowly dropping off – doesn’t make much sense to me.

However, it’s clear that retail traders are simply leaving the market (PRSGuitars’ comment made that very clear) – which actually poses the question of how much longer it makes sense to continue running this blog. And I’m not saying that to elicit any type of response from you guys – it’s a nagging question I have been wrestling with for a few months now. Thus far I have been kicking the can down the road so to say (in inimical Fed fashion) but at some point I will have to make a decision. I wanted to see what happens if we see a meaningful correction but at this point it seems the fun & games continue unabated.

VIX Reversal Signal – Day One

Yes, I’m back – but my time is extremely limited right now – so without further ado I will present my case. Something very rare occurred today – an event that has not occurred for several months now:

Today represents step 1 in a technical pattern called a VIX reversal signal. To illustrate the pattern I have marked the sell signals in orange and the buy signals in green on the chart above. Since last summer we mainly saw VIX buy reversal signals – all of them concluded successfully. A VIX buy reversal is of course the inverse of a VIX sell reversal signal. The last time we got the former was on October 30th, at which time a certain analyst I won’t name here recommended to more or less ignore it as the market was supposed to continue downwards. I think this is one ignominious call he’ll have to live with as the ensuing bear squeeze wiped out a lot of his bearish followers.

For the noobs – here are the rules:

For a $VIX confirmed signal you need 3 events:

  1. A close outside of the 2.0 Bollinger Band (20-day SMA)
  2. A close back inside the 2.0 BB – this issues the signal
  3. A higher close (sell) or lower close (buy) than the close of the day back inside the 2.0 BB – this confirms the signal.

Once you get those 3 events a major reversal usually occurs within the next week. The sell signals are far more accurate than the buy signals.

Yes, that last sentence should make any bear hopeful – but it’s been the other way around in the past few months and that’s the reason I only loaded up on a very moderate amount of index puts right before the closing bell. Of course technically speaking I should wait until the confirmation, which is at least two days away – assuming we get it that is. BTW – why index puts? Only because I didn’t have the time to parse through my overbought filter and pick specific symbols. Well, let’s see what happens tomorrow. A close back inside the 2.0 BB would lead me to increase my positions size.

Understandably many of you are nervous about shorting this market – and rightfully so I might add. You can only get your dick caught in the elevator doors that many times until you start remembering to zip up your pants after taking a leak. But I have a very fundamental rule when it comes to trading. If I encounter a time tested technical signal that indicates a market reversal is in the making then I have to take it, no matter what. The day my emotions or a directional bias prevents me from following a statistically proven technical trigger is when I must retire from trading.

For what it’s worth: It would be nice to see a down day for a change – this market is getting on my nerves. I suffer from a mental condition that prevents me from doing what everyone else is doing, especially when it comes to trading. In the past few months everyone seems to be doing the same thing over and over again – and it’s working for them. That’s not how it has worked during 99.9% of the stock market’s history.

I’ll leave you with that to chew on.

Mole (some of you might remember me)

P.S.: The Rammstein notification module has now been activated – have fun :-)




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