There Be No Butter In Hell

The pendulum of market sentiment continues to swing from one side to the other, inflicting maximum pain on market participants. Not getting chopped to pieces in between is most likely beyond the capabilities of the average retail trader. So if you are participating here and are not getting killed then you are either very good or you are following Evil Speculator. Just kidding, but hey – I’ve had my moments in the sun lately.


So as usual let me break it down for you guys. In a nutshell we are still stuck in the woodshed which spans between ES 2000 and 2060. Any gyrations between only feed prop desks and HFTs bent on squeezing the every last penny out of all this juicy volatility, indiscriminately burning shorts and longs on both sides of the spectrum.


You remember this chart which I posted a day or two ago: Clearly volatility is swinging wildly on both ends but what’s missing are the in-between signals which would allow either bears or bulls to dig in and paint more than a few candles in one direction. You get a fierce spike up or down and then everyone walks away for a day or two. Judging by what we’ve seen on the Zero indicator most of the participation actually happens near the extremes of the current range and during sideways sessions, suggesting accumulation and distribution and thus boat loads of monkey business looming ahead.

Even when we get three or four successive candles in a row they show large ranges and high levels of intra-day volatility (i.e. long wicks) which also serve to run stops and again shake out weak hands. In essence it’s one big nasty woodshed and only the paranoid survive. So join the club!


I cut my short positions this morning a little after the lower BB was being touched and not retested. But I suspect we are probably going to climb a bit more before the session is over. I’m still long the NQ – miraculously this Thor campaign survived by just a few ticks. So the ES short this morning helped sooth the pain quite effectively.

But in the end always remember - there be no butter in hell!

Bottom Line: Expect volatility – that’s pretty much all you can rely on right now. I suggest you get positioned inversely near either the ES 2k mark or near 2060 (or play the NQ if you like which is almost identical). Nothing really bearish happens until the 2k mark gives way and nothing bullish happens until 2060 is breached. In between it’s anyone’s guess. Oh, and don’t follow your own bias or emotions – this is not the type of tape that favors human reasoning.


GBP/JPY update – it’s one of today’s morning setup that played out very well. I’m holding on to this one in anticipation of a push higher – perhaps we can turn it into a daily campaign. FYI – this is a very risky move as this formation could easily turn into a last kiss goodbye (LKGB) and fall off the plate. So it’s permissible here to take partial profits and walk away – the upside resistance is pretty considerable.


Natgas – very rarely do we catch such a smooth entry on this beast – Mrs. Market must be giving us a break today. Same game here – it’s really at a daily inflection point and if it can make it above the 3.0 mark then it’ll burn the shorts medieval style. Odds are pretty low this will happen – but the payoff would be oh so great ;-)

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Late Monday Quickie

I really don’t have much to add to this morning’s musings. We got a little fake out at the open but equities have been holding the line and our ST campaign is in good shape. However we are still trading below the 2062 inflection point I established early last week – it needs to be conquered and that post haste.


There’s a typo on the chart – I meant 2062 and we need to close above it – period. Until that happens the bears still have a sliver of a chance to take this dog lower. However, that said – I hate this tape and consider it high risk territory.


Once again participation (courtesy of the Zero indicator) is non-existent, suggesting this advance is driven by a few major players. I don’t wager to guess which way it’ll lead but what I do know is that intra-day volatility is here to stay with us for a while. Even if this resolves higher and paints new high there is no telling when we turn on a dime again and suddenly dive lower.

Just for the record – I am not talking my own book here. I’m actually long the ES from this morning and still long in my NQ Thor campaign, which I professed last week was emotionally difficult to enter but thus far seems to be paying off.


Otherwise I want you to keep an eye on soybean oil – not because it’s delicious but because it’s at a LT inflection point and thus we are looking for opportunities for a snap higher. The best approach IMO is to look for ST entries and build ourselves up from there. I don’t see any right now but let’s put it on our watch list. A drop off the plate is of course a possibility but unfortunately I don’t see a good entry for that right now, perhaps if we correct higher for a LKGB first.

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Held Together By Duct Tape

We’re approaching the close of our January candle and by any definition it’s been a turbulent month for equities traders. We are all guilty of attempting to paint the future by looking at the past (with mixed results), but this morning’s exercise is to abandon or at least postpone such temptations and to simply look at what IS and then to conclude possible implications:


The chart above features some of the volatility measures I employ, some of you may recognize Ken Long’s VolStat indicator. It provides us with a percentage based measure of average true range which then is put into context by standard deviation bands – you know, just like Bollingers. This tells me what volatility phase we are in and which type of trading strategies may currently be employed most effectively. What it does NOT tell me is the future of state of volatilty – like most indicators it has zero predictive value. Sometimes you get lucky in recognizing a particular formation and perhaps it ends up repeating (sort of).

More recently however I have come back to the basics by employing a simple LogReturn in combination with either a Bollinger or a Keltner channel for additional context. LogReturn is used heavily in machine learning as it relativizes price in the context of yesterday’s position. In other words – we want to know the delta between today’s and yesterday’s close. This offers us a pretty bare bones measure of price changes independent of the underlying’s nominal value. The formula is pretty trivial actually – first you calculate rate of return:

R = Close[0] / Close[1]

Alternatively you can deduct today’s close from yesterday’s and divide the result by yesterday’s close:

R = Close[0] - Close[1] / Close[1]

You can actually just use that but I prefer to slap a natural log on it, thus it’s a LogReturn:

LR = ln(R)

And that’s it. What we have here now is a pretty basic expression of price movement/momentum. And with that in mind you can start interpreting the lower panel on the chart above quite effectively. What I see is expansion and compression of price volatility. In previous corrections we started seeing long spikes to the downside which at some point where followed by selling exhaustion in turn followed by buying pressure which gradually started to build higher day by day. This is how I would expect a reversal to play out and it looks rather natural.


However in recent weeks the pattern has changed. We are now seeing large sudden spikes to the downside stemming increasing selling pressure. Look at the three spikes I have highlighted – they are pretty forceful and one may interpret them as stick saves to discourage the bears from taking the tape lower. What however the most interesting to me is what we are NOT seeing here: Follow through – the big spikes are not accompanied by lower level buying spikes which would support the notion of increasing buying pressure. They were definitely present in prior corrective moves but at least thus far they seem to be lacking. Rather it looks like the tape is being forcefully pushed higher and then everyone just walks away. This reeks of distribution and even if I’m mistaken on that – tape like this it does not reflect a healthy market.

So the take away message here is that the current rally is still standing on very very wobbly legs and it may fall apart at any moment. This whole market seems like it’s held together by duct tape and the wheels may come off at any moment. That won’t keep me from taking long positions near inflection points and while the odds seem to be in the bull’s favor, but let it be said that we should all be aware what we are dealing with.


That said – short term the E-Mini is looking like a long with a stop below 2030 – however if breached things may become unglued rather quickly. ES 2014 is where this rally most likely meets is maker. As I said last week – how many more stick saves do the bulls have in them before equities fall off the plate?


The Dollar is getting more volatile as well – I’d be long above the 95.445 NLBL but only 1/2R. My stop would be below 95.16 – pretty nearby. Either it rides higher now or we’re going to see a visit of 94.8.

A few more short term setups below the fold – please join me in the lair:

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



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    1. Alea Iacta Est
    2. Early Warning
    3. The Last Bear Standing Is A Bull
    4. Wednesday Morning Briefing
    5. There Be No Butter In Hell
    6. Setup Tuesday!
    7. Late Monday Quickie
    8. Held Together By Duct Tape
    9. No Juice
    10. My New Best Friend