While many of you have been frolicking at some alpine ski paradise or testing the resolve of your battered digestive system the Mole has been busily scheming in his evil lair, carefully planning his next frontal assault leading to market domination. Think Pinky and the Brain but without the cheese and the cages. As I have been hinting in recent weeks – devious new creations are in the works and I’m getting close to unleashing them into beta. More on that in early January – but suffice to say we’re about to kick things to the next level. You have been warned!
So what are we to think of all the brinksmanship and political circus coming out of Washington? To quote the late Douglas Adams: It’s It’s all devastatingly true – except the bits that are lies. To be more specific – none of it matters to us traders, so you can safely ignore it. Quite frankly anything can happen on Monday – it’s the last trading session of the year and after a rather disappointing Santa season it’s anyone’s guess where we’ll wind up tomorrow. I think it’s safe to say it’ll be volatile, but I maintain none of it matters and you shouldn’t care. Whether we rally tomorrow on some last moment announcement of a deal or if we finish the year with a wipe-out does not matter. What happens after is what matters.
Let’s begin our sordid tale with a chart I circulated over the weekend. What you are looking at is the VXV:VIX ratio – for the noobs: we are comparing front month implied volatility to quarterly IV. The purpose of this exercise is usually to gather some hints as to what market makers are thinking. When we see divergences when compared with medium or long term price movements then we usually can assume something nasty is waiting in the woodshed.
In this case however we’re taking a slightly different perspective. I have zoomed out a little and want you to compare this year’s signal range to what we saw between August 2010 and August 2011. If you ask me – it’s looking eerily familiar and if the pattern continues then we ought to see more downside looming ahead – no matter what happens on Monday. Perhaps a spike higher on a last minute deal may put is in a fortuitous position once all the hype wears off and reality starts setting in as we are heading into January. Got vaseline?
The VIX on its own painted a rather nasty candle on Friday and usually a spike of these proportions is going to be followed by at least a quick correction. Should it NOT happen and we see a wipe out (and of course a jump toward the 30 mark) on Monday then I would be looking for the same on ‘the day after’. I know that’s a pretty tough cookie to swallow. I would love to just being able to tell you that we’re looking at a great long opportunity on Monday. But the current conditions qualify as extenuating circumstances, and it is almost impossible to make a pertinent prediction for tomorrow.
Our SPX P&F chart triggered a bullish signal reversal on the 27th and that now opens the gate to our new preliminary bearish price objective of 1360. Truth be told this price objective is rather academic and if we keep dropping from here in the new year things may start accelerating. Also, if there’s a large spike tomorrow then the current PO will remain in price until we breach SPX 1445.
Quite a bit more where that came from – please step into my lair:
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A quick reminder that the FXY has now satisfied our bearish price objective of 114 and change. That was a rather outlandish PO just a few weeks ago and it’s almost eery how quick we descended lower. This is the reason why I use point and figure charts and we have nailed several price objective in the past year. Let’s hope we can keep that tradition alive all through 2013.
In case you don’t drop by tomorrow – let me wish you all a safe slide into a prosperous, healthy and happy new year. Don’t party too harty now and most of all – don’t call me if you need someone to post bail.
This entry was posted on Sunday, December 30th, 2012 at 3:43 pm. Both comments and pings are currently closed.