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Low Volatility Melt up Monday
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Low Volatility Melt up Monday

by ScottJanuary 30, 2017

This is Scott. Mole is ass deep in code for a new system we are launching soon, so I’m making myself useful by doing some guest blogging. Of course just after I agreed to do it, I realized the market couldn’t possibly be more boring, and its hard to think of things to say.[Mole: Welcome to my world.] I figure we should look at the bigger picture here.

Let’s look at a long term view, and then we can zoom in.

monthly1

From the monthly you can clearly see that the bears had the perfect opportunity to start carving out a series of lower highs and lower lows. They failed to capitalize, and the last chance for the bears was effectively the day Trump was elected.

Make no mistake those bears have now been stopped out or are being stopped out.

The lesson is that there is a heavy price for the bears to pay. And the price action we have now is something we have all seen before, many times. The move is nothing impressive, but just gravity defying and boring at the same time.

It is a classic low volatility melt up. When volatility spikes, and then decreases with a melt up, typically counter trend trades have a dramatically lower win percentage. Which is what we see here.

daily1

In the boxes on the chart are the potential topping patterns, none of which worked. This is a lesson for the future, in a low volatility melt up, the topping patterns look really perfect, but still don’t work. The bears who have to cover fuel the melt up, which is why we have weeks of going up with almost no participation. It makes for frustration on the part of both bulls and bears. I’ve been long, and I’m still long NQ futures and emotionally it has felt awful.

daily2

So the future. Typically these types of moves reach an unsustainable low and then reverse suddenly. However betting on a top in this situation is futile, and you should not do it.

When this type of thing happens there are always better pickings to be had in the other markets. Let’s look at the US Dollar, which is showing all the signs of being a sustained bull move, currently nearing the end of a counter trend move.

dollar1

You can see from the monthly chart we had a very strong move off the lows, then 20 months of trading range, then a recent breakout. Either that breakout is a false breakout (very low probability) or we should have a significant move. There are a number of supporting factors we can see when we zoom into the daily.

Arguably we have transitioned from a trend to a trading range. In a trading range the optimal place to buy is near the lows of the trading range, because you can get long with a tight stop.

dollar2

The only trade I see that I really like is this. You can get long with a stop below the trading range lows, for approximately 3:1 risk reward to the top of the range. This is a trade that should work around 55% of the time. Betting odds. You could take the same trade on EURUSD. Short with a stop above the swing high 1.0775.

If you take it you might want to bank some profit at the high of the trading range, and then hold a little in case it breaks out.

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I’ll be taking over all week, hopefully things start getting interesting again soon. No shorting equities until you get really solid evidence of an increase in volatility with downside participation.

Scott Phillips


About The Author
Scott

  • Ronebadger

    Thanks Scott!

  • http://evilspeculator.com Sir Mole III

    Thanks for the post, brother from another mother.

  • Yoda

    Bus moves faster when it’s empty

  • http://evilspeculator.com Sir Mole III
  • ZigZag

    Nice to see you posting, Scott. Boy after Friday I was pretty much on the ledge – Now at least we have some movement. I thought the bots had won for good and chased everybody else out.

  • http://greenlander1.blogspot.com/ Greenlander

    Scott, great to see you back! Been reading your stuff on Quora and it’s been very educational and good reading!

  • http://greenlander1.blogspot.com/ Greenlander

    Closed out IWM short on the spike low as it breached my secondary target, also really far past the lower BB. Around the entry at top of range https://uploads.disquscdn.com/images/8a5856d23a8d4e4a3ae0869a723aa9baacfce88545a5b9d4d0475b45021a2821.png

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb
  • http://greenlander1.blogspot.com/ Greenlander

    https://uploads.disquscdn.com/images/cc1cbf0fc3848194a9f58a61e07f8c37daa0d3d51c6d6abbdfeeeff424458159.png Closed out. Could go much further if it breaches the lower trendline but trade wasn’t designed that way.

  • ZigZag

    Me too, but I’ve discovered that for me, Quora is a good way to lose 3 hours of your life without noticing. I get stuck reading all these random tales of tawdriness and despair, many of which seem to be made up, and next thing you know it’s like 2am.

  • http://evilspeculator.com Sir Mole III

    I’ve avoided Quora as they force you to sign up – I’m a stubborn SOB.

  • Yoda

    nice bull trap last week

  • StockTalker

    Flip to long for a gap fill

  • http://evilspeculator.com Sir Mole III

    “I realized the market couldn’t possibly be more boring”

    heheheheeee 🙂

  • http://greenlander1.blogspot.com/ Greenlander
  • http://greenlander1.blogspot.com/ Greenlander

    still have M from a week ago. Had some JWN also but decided to just hold M.

    https://uploads.disquscdn.com/images/5caf6ff385b9b59018d6f52d37849b88b867b7352f3010cdcb9346da9794be60.png

  • Darrell Osgood

    Mole, this is for you. How martial artists turn on a computer. (1:19)

    https://www.youtube.com/watch?v=-iCMCPVnOzs

  • Yoda

    what a timing for his post

  • Ronebadger

    I got your 1-hour divergence right here…err, above…

  • http://greenlander1.blogspot.com/ Greenlander

    Yeh I have developed a strange interest in lifting weights and testosterone supplements bc of Quora

  • Ronebadger
  • Yoda

    Gartman’s call last week to go long the tape was priceless. Short trades are safe for now as he is still long.

  • http://greenlander1.blogspot.com/ Greenlander

    wonder what the expectancy of fading his trades would be

  • StockTalker

    If market top should see some vicious moves.

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    Tomorrow is month end.

    QQQ’s – let’s see if ceiling is now support.

    https://uploads.disquscdn.com/images/7b198871e4e05b8463bb50e1828f10a32abd4b373630a02408a0626b8466346f.png

  • StockTalker

    Yep, long for a retrace, will re-short momentarily.

  • Yoda

    When he goes short then cover yours ASAP

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb
  • http://greenlander1.blogspot.com/ Greenlander

    Yeh I’m wondering whether one could make an actionable RBT from his calls

  • Yoda

    Took a seat on the short bus with SDS. No VIX play for me as I leave those to big ballers.

  • StockTalker

    Inverted 5 min, see if we breach VWAP.

  • http://evilspeculator.com Sir Mole III

    Poor Scott – it happens…

  • http://evilspeculator.com Sir Mole III
  • ZigZag

    I’m kindof tired today – woke up at 3am to the smell of burning electronics – think my av amplifier fried, which explains why my subwoofer went out a couple days ago.

  • http://evilspeculator.com Sir Mole III

    You’re lucky it didn’t burn the entire house down. This shit happens!

  • ridingwaves

    seems like a little relief move from overbought conditions…
    with a couple big IPO’s over next 2 weeks and earnings season, I would expect the market to stay elevated….5% down move might be about it….

  • ZigZag

    Great. Not only that when I went to pull the surge protector out of the wall, the ground prong broke off and stayed in the wall.

  • ZigZag

    So on days like this, shorting /es once it reaches vwap from below is a high probability scalp trade, but I don’t have enough stats for when we’re below s3.

  • StockTalker

    Waiting for a div to develop.

  • http://evilspeculator.com Sir Mole III

    It’s fair to say that this is not your day. Treat cautiously 😉

  • http://evilspeculator.com Sir Mole III

    I’m not an electrician but on second thought you may have a wiring issue and should hire one pronto. It’s quite possible that there was a major short which was taken to ground and in the process turned your prong brittle, which is why it broke. Surprising your fuses didn’t blow actually – major fire hazard. Have someone check your wiring and fuses.

  • http://evilspeculator.com Sir Mole III

    Wait for price to push above VWAP. The positive ZL signal is helping but needs to remain in place.

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    Troll ZeroSludge.
    😉
    (GG ducks)

  • BobbyLow

    Afternoon Folks, It’s good to see Scott’s Post. 🙂

    I spent all morning waiting in a Dr’s Office with my wife while hoping that she could get her current medical issue cleared up.

    The only media I had access to were headlines scrolling across the bottom of a TV screen and I guess a lot of shit hit the fan this morning of which I have no comment.

    I held onto my short Crude position over the weekend and it’s still alive for now. My long bond position has come very close to “going the way of the buffalo” but is still hanging on by a thread.

  • ZigZag

    Interesting – I’ll check it out, thx.

  • http://evilspeculator.com Sir Mole III

    Ignore those blue errors.

  • StockTalker

    Flipping short /NQ 5120

  • Yoda
  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    great.

    FAKE NEWS REALITY!

  • ridingwaves

    L AVXL and PIRS S at -40C limit

  • Yoda

    Time and space do not exist: it’s all one singularity.

  • http://evilspeculator.com Sir Mole III
  • http://evilspeculator.com Sir Mole III

    Whatever… supposedly smart people seem to be coming up with ever more hare-brained concepts.

  • Ronebadger

    Kinda messy today…not such a hot lookin’ Zero

  • Darkthirty

    Your world is as you see it

  • http://evilspeculator.com Sir Mole III

    I very much enjoyed the divergence at the lows!

  • http://evilspeculator.com Sir Mole III
  • http://greenlander1.blogspot.com/ Greenlander

    Yeh if you have an old house, def get an electrician out there pronto. Old wiring that is overloaded can overheat

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    Darky!
    where have you been?!

  • Yoda

    Dafuq waz dat?

  • Yoda

    I wish I could see beyond the 3 D that I see now, even a glimpse

  • Darkthirty

    I get glimpses, but have no control over when and where…….yet. Work on your chi generation / circulation, avoid electronic stimulation e.g. TV -internet

  • http://evilspeculator.com Sir Mole III