Equities are heading lower as I’m typing this and I have decided to move my stop a bit further up to the 100-hour SMA. Quite frankly speaking there comes the time when a market simply doesn’t hold much of an edge and it’s best to simply focus on other verticals (i.e. forex, bonds, and various other futures).
Given what we’ve had to work with I think we’ve done brilliantly. But observing the developing mess it’s clear that this may not resolve until the FOMC makes a more decisive statement about the planned hike in interest rates. Until then things appear to circle in a general holding pattern.
Plenty of movement in other markets however – here’s the 30-year bond contract which looks like it just may want to climb higher. However the general trend is down and I’m only attributing 1/2R to this.
Crude has been testing our patience and I don’t think it’ll make any big moves anytime soon either. However a long position here could be good for a few ticks and I’m throwing 1/2R into this pit.
EUR/USD touches its 25-day SMA earlier and I’m grabbing a long with a stop below the spike low (and new NLSL). As you know this is the trade I love to hate – in general I’m pretty happy about the current sideways formation as I earn in $s and spend in €s.
Otherwise, not much going on this morning. Summer is nigh and many of you guys are busy planning your well deserved vacations. Next week I may actually put together some educational posts as the tape is surely putting us to sleep lately. If you have a particular topic you’d like to see covered then please chime in here.
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I often use the term ‘spoos’ here and some of you noobs may have wondered why the heck I’m calling the E-Mini S&P futures like that. As you know the ES is a futures contract with the S&P 500 index as its underlying that trades on the Chicago Mercantile Exchange (CME). All E-Mini contracts there expire quarterly in the months of March (H), June (M), September (U), and December (Z).
The word ‘spoo’ however originated back in the days in the XMI pit on the America Stock Exchange (AMEX) in New York. It comes from the symbol for the September contract: ‘SPU’. Even though the name is based on the September contract symbol, it is used to describe contracts of all expiries. When somebody speaks of the ‘spoo’ or the ‘spoos’, they are referring to the current, most active E-Mini contract.
Well we just rolled the active contract over to September and for the next three months when I’m talking about the spoos I am indeed talking about the September contract. For me the roll over into the September contracts really mark the beginning of summer trading. Usually that is a time for sideways churn but given what we’ve been through in the June (M) contract I have an inkling that things won’t be abiding by the usual script this year.
As a side note: The roll over also resets the fair value which is at its widest today, slowly degrading (actually increasing as it’s negative on the spoos) until we are near par with the actual cash index on the day of expiration (which was yesterday for the June contract). The why and how is a bit outside the scope of this post but I’m confident Google will help you educate yourself if you care.
Alright, so let’s see where we’re heading on those spoos. If you managed to snag long positions in the past two sessions then you are in pretty good shape and I suggest you hold at least a portion of your exposure for a ride lower. Every tick higher now establishes new support below and increases our chances that we’ll at least ride to ES 2108.75 – per the new U contract.
For now I’m holding my stop a bit above break/even but will be advancing it to the spike low near 2095 if we manage to scrape 2110 today or tomorrow.
That said – it seems the ‘easy part’ of the ride higher is nearing its end. Look here at the NQ which expresses quite nicely how much resistance we have accumulated on the way down. At minimum we’re going to stumble a bit starting at 4500 until 4550 – above it we’re in the clear and most likely destined to push higher. So if you’re looking for short opportunities then that’s your range
Remember when I was harping about my perfect gold entry yesterday? Well someone with deep pockets must have read this post because I was taken to the woodshed this morning and quickly relieved of my ill gotten gains (i.e. stopped out at break/even). In retrospect I should have taken partial profits when it reached the 3R mark. To be more nimble is supposed to be my modified modus operandi and I probably just have myself to blame. Quite a lot of intraday volatility across the board these days and we need to adjust our trading activities accordingly.
Quite annoyingly this actually bolsters the original entry but it’s way too late now to jump back in – revenge or chase-after campaigns usually result in losses.
Wheat may be a long if it manages to pop back above 510 – if it does then I’ll be long with a stop below 505 or whatever spike low is in place at that time.
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I know what you’re thinking – this is it, the Mole finally has lost his mind completely. Well, that may be so but let me assure you there is in fact method to my madness (mugabu – how the heck do you say that in Spanish?). Let me attempt to explain this in simple terms as to not overstrain your sleep and caffeine deprived rodent brains:
Just so happens that the spoos have managed to crawl higher overnight and are now back at the 100-hour SMA where a seller appears to be lurking. Admittedly we haven’t seen many touches in the past few days but that again also speaks to the fervor of the sell off that preceded the ongoing correction.
I actually think this has a fair chance to push higher – about 60%. So why am I trying a short here? Because this is the last best short opportunity with very limited risk. Looky here – I’m taking out a few shorts with a stop near 2090. Quite a lot of leverage given you use our futures risk calculator. And you’ll risk at most 1R but if it drops from here it’ll bank quite a bit more. On the flip side a stop out will most likely lead to a run higher – and that means I’d would flip for a long and put my stop below 2081 – a bit wider that stop but still tiny compared with the type of short squeezes we have seen in the past few years.
So in summary: the risk to reward ratio is pretty tiny here – and that means it is my patriotic duty as a card carrying market megalomaniac to get positioned. And so should you but I’m not your daddy (unless you’re cute and under 140 pounds).
And while we’re talking light math, let’s clarify this one once and for all: It’s called an exponential curve and not a parabolic one. Have a big sip of Java and try to follow along here:
Exponential vs. quadratic functions:
Quadratic functions are actually more related to linear functions and are of the form:
y = a x^2 + b x + c,
Let’s take that example:
2x^2 – 3x +1
See the graph below.
If you change the quadratic coefficient from 2 to 3 then see how the curve widens (looks the same but it reaches higher, Einstein).
Compare that with an exponential function which is simply periodic in x. E.g. 2 with period 2 = 2, 4, 8, 16, 32, 64, etc.
Quite a difference. Human crowd behavior is a lot more akin to exponential moves than to a quadratic function (i.e. forming parabolas). Yes smart ass, the fall always follows the rise but it doesn’t return to its origin
Bonds are in the process of diving through both weekly and monthly support. This is actually quite a big deal and there’s nothing but air below. I’m still looking to play a bounce here but it’s equally possible we’re going to see a big slide. If I see a possibility to play either side I’ll let you know.
Gold seems to be rather happy to see me. Picture perfect entry there yesterday and I’m moving my stop to break/even.
Alright, I’ll dig around for more charts and add them here if I find anything juicy.
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