I Robot

Make no mistake – very few humans are actively involved here. The comment section looks pretty deserted today (short of tumble weeds passing through) and it’s one of many signs that anyone with a pulse feels pretty exhausted at the end of this week. Of course the market Mole knows no mercy and here are a few more charts for you stragglers before I send you off into a well deserved weekend:


Seems to me that the bots are driving this – they have on the way down and although there was a bit confusion regarding the script yesterday they’re back today in full force. I don’t know if they are scaling in our out there but thus far the mojo I’m seeing on the Zero leaves much to be desired:


I don’t think you need to be an expert chartist to see what I mean. Pretty solid divergence there almost since the open and we keep meandering downward. Could be a trap of course but silly games will not save this quarter, so if the bull wants turkey for Christmas he’s got to get a move on. If this divergence holds we may just slip away late in the session, but let’s see – it’s Friday evening, everyone’s gone and the bots are having a field day with it.


The gaps I’m seeing on the VIX are not exactly confidence instilling either. As you can see we have dropped back to 22 and change but volatility of volatility continues to expand. Not a sign of a healthy market. Perhaps everyone was waiting for some scraps of hope from the ole’ Yeller today. By the way if you’re up for a good laugh then check out this little jewel - and I quote:

Federal Reserve Chair Janet Yellen on Friday expressed deep concern over widening economic inequality in the country and called for tackling issues such as early childhood education and encouraging entrepreneurship to help narrow the gap.

I almost blew over my old Apple Cinema display when I saw that, hilarious. Maybe that should have been a concern before we threw over a trillion dollars into the arms of our esteemed banksters. Don’t get me wrong – I appreciate cynicism at its finest but please – don’t insult the remains of my intelligence.

But I digress – if you want to know what makes equities tick I suggest you look at the short term panels which contain our best clues. Please join me in the lair:

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!

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And now it’s time for me to attend to my [second] favorite Friday evening past time:


Have a relaxing weekend – I’ll see you guys on Monday.



Fear now permeates markets across all verticals – I’m seeing massive swings and intra-day gyrations that are almost guaranteed to touch anything but the most generously placed stop loss measures. Nothing expresses what’s going as well as the VIX and its sub components – I’ll walk you though the basics:


I wanted to know when actually was the last time the VIX touched the big 30 mark (which separates meaningful corrections from anything else). Took me quite a bit of zooming out as the last occasion was on December 8th, 2011. We all looked a bit younger then and it’s been one big party for the bulls since since then. So there’s that – a touch of the magic 30 mark but that’s not all, we dig deeper. On the last panel you see a ratio most of you guys usually ignore – the VIN vs. the VIF. So let’s talk about those two.

The VIX is not just calculated from strikes belonging to one single month. It’s more of a sliding window of sorts with its left shoulder nearby and the other some 30 days ahead which may be in a different expiration month. The near term IV is measured by the VIN and the far term IV by the VIF. If you ratio them against each other you know if options which expire soon are priced unfavorably (or favorably) against the ones somewhere in the back. And what does that tell us?

Well, as usual it’s all relative – look at the arrows I drew. What stands out is that in the past few years we see big spikes in the ratio which actually exceed the current reading. But wait – how can that be if the VIX hasn’t been touching 30 since the end of 2011? Good question! And I’m glad you asked!

Think about it – if you see a sudden spike very near term which quickly falls apart then one can presume that it’s most likely an abnormality which took folks by surprise and pushed the ratio outside its normal standard deviation. What we’re seeing right now however is a pretty orderly increase across the board accompanied by a 30 reading. And that tells us that something is different this time – and I believe it’s a genuine sense of fear.


I mean just look at the bonds – that was a massive spike (some of which Thor actually enjoyed quite a bit – snicker). Massive reversal since then but something tells me that we’re not going to simply go back to ‘business as usual’ after this. The cat is out of the bag and the bulls will have to work overtime now to avoid what may follow:


And this is what I am talking about – the LT panel on the E-Mini says it all. Nice safe of the lower 25-week BB – that’s quite positive as of right now. However as of today we still have a monthly sell signal on the books and nothing short of a recovery above ES 1923.5 before the EOM is going to hand the reigns back to the bulls.


What I’m seeing right now on the Zero does not look encouraging. Look at the signal strength on the way down and right now during this bounce. This doesn’t look like enthusiasm to me – those are strong hands accumulating near the current lows. Good stuff and their boldness has been rewarded but what matters the most now is what comes next.

Perhaps this has only been a temporary weakness which forces the Fed to relinquish another round of quantitive easing, and thus resulting in a squeeze higher and back to the ‘good ole’ days’ for the bulls. And in that context this spike higher right now may actually be needed. We all know what an outright panic in the markets will trigger in Washington – more of the same that has worked so well over the past few years. Which continues to be the Achille’s Heel of the bears – that eternal Fed put which restores market order at the slightest hint of a drop.

Unfortunately these are considerations beyond our pay grade – they are untradeable. I do think about these things but I don’t mix them with my trading, for obvious reasons: you must not worry about things outside your control. So given that all that’s left to do for us right now is to monitor the tape and look for clues that point either higher or lower. Given what’s going on right now I don’t see good buying opportunities, it is too easy to have your stops run and we would not be buying (or selling) from a position of strength. Which is the problem during deep corrections – volatility will make getting positioned very difficult UNLESS major inflection points are being touched. And that has not been happening – we simply reversed somewhere in mid air. Even intra-day trading has been difficult – over the past few days some of you may have been reminded of the type of tape we saw during 2010 and 2008. Massive drops followed by sharp pull backs. On the daily panel it all looks like one big slip off the banana peel but if you were there you remember differently.

Bottom Line: All that matters now is the follow up. Nothing but a concerted buying binge toward ES 1923.5 puts the bulls back in the game. Until that happens we are in bear territory – so watch your ass and be polite ;-)

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Time For A Breather

I see a lot of guesswork in the comment section and it’s time to take you guys out of your misery. Many of you are feeling bullish right now and after last week’s drop the odds for a bounce here are good but not guaranteed – we are literally sitting on the edge of a sell off. Which is often where some of the best setups happen – but we have to remain nimble and not jump to conclusions. So let’s try to shed a bit more light on what’s going on:


Exhibit number one – the BB configuration on the daily chart supports at least an obligatory bounce here. Because if we drop further from here we are not stopping until 1800 or lower – so the bulls have a vested interest in holding this level. Not saying it can’t happen but we’re talking odds here – a bounce would relive some of the oversold conditions and perhaps prepare us for a stab lower.


The Zero shows us almost non-existing participation down here. You can interpret that as a lack of buying pressure – yes – but what’s more important on the way down is whether or not there is selling pressure and I see none here.


See what I mean? Complete flat line – the bears aren’t interested down here and this gives the bulls a chance to catch a breath and wait for further instructions.


On the VIX we’re also pretty extended – I don’t think we proceed directly to 25 or 30 from here. We haven’t seen volatility like that all year and there will be pushback.
More crucial evidence looming below the fold – please step into my lair:

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.


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