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:

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!

Please login or subscribe here to see the remainder of this post.


Only The Paranoid Survive

Originally attributed to Any Grove, the founder of Intel Corporation, this has remained one of my favorite quotes and one that has kept me out of trouble over and over again in my time spent as a trader. It always pays to watch your six and if you think you live in turbulent times after following the ongoing Grexit saga over the weekend then think again. Here’s a quote by Andy which summarizes the first twenty years of his life:

By the time I was twenty, I had lived through a Hungarian Fascist dictatorship, German military occupation, the Nazis’ “Final Solution,” the siege of Budapest by the Soviet Red Army, a period of chaotic democracy in the years immediately after the war, a variety of repressive Communist regimes, and a popular uprising that was put down at gunpoint. . . [where] many young people were killed; countless others were interned. Some two hundred thousand Hungarians escaped to the West. I was one of them.

So however bad you think you have it – think again. Things could be a lot worse. Of course not to diminish the situation in Greece right now. I often image myself living there, unemployed, broke, and standing in line in the smoldering summer heat trying to pull my last few Euros out of my bank account. In comparison I live a rather a sheltered existence - which of course could change at a moment’s notice (I reside in Spain). Which is why I personally employ a mixture of living in the now bundled with basic preparation and diversification.


And that should be a standard policy given what I expect in the months ahead. After indecision and a six months + sideways churn we are now seeing successive gapping action across various market verticals. That is not a sign of a healthy market and the wheels could come off here at any moment. So just because the almost reflexive BTFD perhaps worked for you last week doesn’t mean it’s a good idea moving forward.


Be cautious and avoid charts which signal uncertainty – the EUR/USD certainly is one of them. Given the weekend headlines the drop back to 1.1 is actually rather mild, just like when we gapped here last week. But we could see a huge jump or drop here at a moment’s notice (without the notice), and it won’t have anything to do with technical inflection points but rather political brinksmanship played for months/years finally coming to a sudden resolution. Remember that six sigma events happen when we don’t expect them. People have expected one for months here – and perhaps it will happen when everyone thinks the situation has been resolved. I personally don’t have a crystal ball but I do know a dangerous chart when I see one.


You could get lucky and catch the right direction or you could find your trading account severely diminished one morning. To see the five year bonds paint such gaps is certainly disconcerting – especially if you understand how damn huge the bond market is (almost twice that of all equities combined). Gaps like that cost a lot of people a lot of money…


Of course there are still charts out there which seem to benefit from the overall increase in volatility but aren’t flagging alert signals. The AUD/USD did a bit of gapping down but makes for a decent short term long this morning. However I’ll be pretty nimble here in the coming days – meaning small position sizing and being quick to take profits.


Soybeans on a rampage – we did ride some of that beautiful advance recently. After an obligatory 3.0+ standard deviation reversion it may be ready to continue its way higher. I’m long 1/2R here with a stop below 1016. However I’m only playing half an R because…

am4show have=’p1;p13;p9;p12;p5;p10′ guest_error=’login’]

… I also like soybean meal. It’s facing an hourly NLBL plus its 100-hour SMA. No guarantee for a low but as good a chance as any we’ll get technically speaking. So I’m long another 1/2R with a stop below 342.


Natgas – it’s always been a volatile bitch but compared with equities it seems almost serene these days. At least we’re seeing clear trading ranges and it seems to be observing LT support levels. Which is why I’m trying 1/2R long here with a stop below 2.73.


AUD/NZD is my final victim for now – I like the combination of the daily and hourly charts. However I could be a bit early here so I’m only taking 1/2R. I would try again with a full position if it drops lower and kisses its 25-day SMA.


That ought to keep you guys entertained for a while. See you guys later this afternoon.


The Quiet Before The Storm

Personally I believe that very little is going to transpire here before Monday morning. I’m sure you are aware that the Greek are holding a referendum on Sunday the 5th [good write up here] which is I expect will throw markets into a turmoil – no matter which way the pendulum swings. Expect a ton of volatility and most definitely expect stop runs galore right after the Sunday open (which is night time here in Europe and preliminary projections will be coming in).


All of that means I’m pretty much shutting down the liar starting tomorrow morning – and I won’t be taking on any new setups in the interim as we’re now heading into low participation territory. I’ve got two charts of note though:


First up bonds - here’s the 30-year futures contract. As you can see it keeps failing at the 25-day SMA and is now heading down for a revisit of the recent lows. The weekly panel on the right however toggled my interest – the 147 mark near the 100-week SMA has survived a few times but the Grexit vote this Sunday could be the catalyst that finally breaks that camel’s back. Nothing but air below – this could get ugly quickly.

Honestly I completely hate what’s going on right now. I would love to be long here but the continuous Greek roller coaster is producing so much uncertainty that taking directional positions has been extremely difficult as of late. And being short here today ahead of Sunday is simply not an option as we may find ourselves facing the gap from hell Sunday night.


My long positions on the E-Mini survived that little dip lower yesterday by a mere tick. Sometimes you get lucky and sometimes they’ll get ya. Not that it’ll do my much good though as today was supposed to be the session which drives this puppy higher. I have already closed them out for a meager 1R profit. As I quipped a few weeks ago – I don’t remember working so hard for so little coin for quite some time now.

As you can see we’ve produced an inverse island down here and unless that NLBL at 2071 gives before the close we’ll most likely remain stuck down here until Sunday night. And that means very little buffer to the downside – extremely serious conditions. But frankly speaking it’s all academic as the odds for a huge move down or up are significant. Thus I caution all of you from holding any equity positions over the weekend.

Words To The Wise

With all the gapping action and general uncertainty I wouldn’t want to wager on where we’re heading next. Holiday weeks are tough sailing to begin – without EU members falling by the wayside. Plenty of opportunity for monkey business and you know someone will get the results early (hint – it won’t be you or I). FWIW – I hope the Greeks decide to rip off the band-aid and leave the EC. It’s been nothing but drama since they joined up and I’m convinced both sides will be better off over the long term. I believe some type of separation over the long term it’s inevitable. Under the current conditions Greece is simply unable to function as a member of the European Currency Union.

Alright, if I see anything interesting I’ll make sure to post a quick update tomorrow morning. In the interim keep it frosty and don’t take on any positions that would cost you any sleep over the long weekend. It’s summer – go out and roast a hotdog or something. Get a tan. Pet your dog. Talk to your wife if you have to. The markets still will be there on Monday – hopefully in one piece ;-)

It’s not too late – learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don’t waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.


    Zero Indicator

    Darth Mole Alerts

  1. poll

    • How many discretionary trades to you place per month?

      view results

      Loading ... Loading ...

  2. NinjaTrader

    search warrant

  3. recent misdeeds

    1. Volatility Wave Surfing
    2. Dangling By A Thread
    3. Paying Attention Pays Off
    4. Sell Off Thursday Wrap Up
    5. Pay Attention Now
    6. Setups Setups Setups!
    7. I’m Your Huckleberry
    8. Who’s The Sucker?
    9. Mind Hacking
    10. Coal Mine Canary Update