Major Technical Damage

Wednesday near the close of the U.S. session I really thought the ole’ Yeller had us all by the balls. If there has ever been an opportunity to squeeze the bears into oblivion then this had to be it. In yesterday’s musings Scott confirmed my notion that the series of lower lows and lower highs was still intact (barely) and that the bearish case was on the edge of extinction but still had a small chance of resuming. The odds were pretty minuscule IMO and early yesterday I kept checking the tape waiting for the invariable second shoe to drop.

But then suddenly something very curious happened:

In the last 20 minutes, someone has placed/canceled a 666 contract order in eMini 26 times $ES_F

— Eric Scott Hunsader (@nanexllc) October 9, 2014

Someone at Nanex reported a surge of selling orders (yes, I did find it on ZeroEdge – bite me) and the tape suddenly caved in as all of the other bots followed suit. And the world for the bulls will not be the same again – at least for a while, most likely not for the remainder of this quarter.

2014-10-10_spoos_volume_profile

Unless – yes unless we see an immediate surge right here TODAY the bulls will be toast for a while. I’m not saying we drop like a rock from here – there will be bounces. But in order to wipe a major stain off the bullish case immediate action is needed.

2014-10-10_spoos_overview

For we are about to paint an official double sell signal on the weekly E-Mini (and the SPX cash as well). We have a breach of the 25-week SMA as well as a breach of a weekly Net-Line Sell Level. That is bad medicine for the bears and today is the day to somehow make it all go away. In order to accomplish that feat a push above 1950 will be needed – 1960 would be better as that’s where we find the 100-day SMA right now. Bear in mind that both the 25-day and 100-day SMA held up for the fourth time now – that in itself is enough to cast some serious doubt as to whether the bulls are still in charge here.

2014-10-10_VXV_VIX

Not to count out any last minute Fed-sponsored Hail Mary’s but market makers seem to be agreeing with me that trouble looms ahead. Here’s the VXV:VIX ratio and it’s pointing straight down. I would keep an eye on this one today for early signs of divergences – also mind the VIX:VXO chart on the short term side.

2014-10-10_spoos_correlation

Our GBP/JPY equities correlation (based on carry trade activity) is also pointing in the same direction.

2011-06-05_AVG_seasonality

Now someone in the comment section pointed toward the final quarter as being a traditionally bullish period. And yes, he was absolutely spot on about that – that’s usually where the bulls rule the day.

S&P_percent_positive_monthly

And we may still see that happen but let’s look at October specifically. Contrary to common believe it’s actually a very bullish month – the numbers do not lie. But that’s not the whole picture – because it just so happens to have a little SKEW problem…


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You have been briefed – now have fun but keep it frosty. See you guys later this afternoon.

Cheers,

Volatility Cycles

Some of you eager beavers have to start wrapping your mind around the concept of markets moving in volatility cycles. Just like it is a common observation in natural systems (i.e. water, sound, electromagnetic) imagine a sinusoid wave that oscillates in repeating cycles. A few days ago I wrote an indicator that visualizes the idea very nicely – I call it ATRIP as it’s a hacked version of average true range:

What is important to understand is that these cycles are a natural aspect of all basic market types – bull, bear, and even sideways. In sideways markets they allow us to scalp or swing trade – an apt definition of the activity obviously. In trending markets low volatility cycles allow us to assess the tape/configuration and get positioned when high probability odds arise. Obviously the cycles don’t come and go like clockwork but there are ways to leverage them. For instance we are currently in a high cycle on the spoos and we are dropping. Once we start slowing down again it may be time to look for support zones but not before that.

The repeating cycles are prevalent across all market verticals, you will find them on the futures, on stock symbols, on Forex, bonds, everywhere. For some reason however I have rarely seen anyone address them in a constructive fashion (not saying nobody has but I have not found much) which is why I am spending some time on this. Once you grasp this concept you will never look at the market with the same eyes again. And it will probably affect your trading decisions as well – for the better!

Talking about possible support zones – on the E-Mini we’re looking at 1944 as the next possible bounce zone – assuming we actually drop much further that is. I’m not seeing a lot of mojo on the Zero today – at least not right now.

And if you add fair value then you get near the 1956 mark on the cash index – that’s where we find the 25-day SMA, which has been carrying prices higher before the recent correction.

EUR/USD – very interesting configuration here. This looks like a floor attempt and if we breach today’s highs I want to be long with a stop below today’s lows.

More goodies below the fold – please meet me in the lair:


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Cheers,

Good And Bad News For The Bears

Unless you trade out of a cave then you already know that the S&P’s 1600 ceiling was effectively smashed today. It’s doing the gap & camp near 1611 right now but the day ain’t over yet. Now if want to spend a lot of time regurgitating what already happened then I suggest you go look elsewhere. We stainless steel rats for one prefer to look forward as that’s where our edge is. So in that spirit let’s zoom out a little and take stock as to where we are:

Looking at our monthly panel what sticks out is that we may be in the process of painting a seventh month higher. Obviously May is still young but what we do know is that six consecutive months are already in the bag. Many intrepid bears have attempted to pick a top here and once more received a thrashing with the bad end of the stick:

Ouch – that’s what I call a perfect formula for a short squeeze. A lot of folks felt it in the groin area this morning and it’ll leave a mark for sure. So let’s talk about what all this means from a purely statistical perspective. I ran into some interesting numbers produced by Ryan Detrick who’s a CMT (cheeky monkey technician) over at Schaeffer’s. Basically in a nutshell:

  • Since 1972 six higher closes only have occurred 12 times.
  • Near term there’s a slight positive edge but obviously a medium term correction is probably on the horizon.
  • Long term there is a definite positive edge in being long, in particular six to 12 months later.
  • Incredibly after a six month rally the SPX is higher 11 out of 12 times a year later.

Read that last one again: That’s right – after the 12 occurrences since 1972 the SPX closed higher 11 times one year later. Now let’s look at another goodie I dug up just now:

That’s my long term P&F chart of the SPX. And today it triggered an ascending triple top breakout, which now bestows us with a new price objective of 1800. Yup, you read that right. Obviously we’re probably not going to make a b-line up to that and I expect quite a few gyrations in between. However, given the statistics there’s a decent change we may scrape it a year from now.

So if that’s the bad news for the bears – what’s the good news? Well, I don’t know how May will close but if it does close higher as well then the odds for a correction should be pretty decent:

Statistically speaking (again) a correction in June has pretty high odds, especially IF May closes in the green. So there you have it, of course we’ll monitor our charts all months and if I see signs of a reversal (e.g. distribution, divergences, stalling momentum, etc.) I’ll be sure to post it here.

Before I close shop for the week let’s catch up with a few more charts. Here’s the USD/JPY which is pushing into a daily NLBL, and that ought to put up a bit of resistance. However, the monthly is what I have been pointing at (also see my last weekend update) – it’s in the process of breaching its 100-month SMA and there’s nothing but air above. And if it drops it’ll enjoy weekly support near 96.125. This is one of those LT setups you don’t want to miss out on.

GBP/CHF – I was harping about that one earlier in the week and suggested that a drop into its 100-week SMA and that NLBL was a good buy. Well, it paid off as it’s recovering and if it clears that 25-week SMA then we should be good to go.

Let’s wrap things up with setup on the commodities side – sugar. Nice inside day candle plus it’s happening right below the 25-day SMA. Great inflection point and given all the commotion preceding it I think we may have a big move coming.

And that would be it for me today. We’ve had another fun week and it’s time to crack open a bottle of your most coveted brew. May I suggest a nice glass of Paulaner – in the U.S. you may be able to grab a few of those bad boys at Whole Foods for a bit over two bucks. Best money you’ll ever spend. I raise my glass to all you cheeky monkey technicians. Prost!! :-)

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Cheers,




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