Education
Now Reading
The Market’s Purgatory
113

The Market’s Purgatory

by The MoleMarch 31, 2016

The mindset of the average retail trader is pretty predictable. For example, if markets are strongly trending to the upside then most participants wonder: ‘how much more upside?‘ Inversely if markets are falling hard for days on end then most of the discourse revolves around ‘how much more downside?‘ If however we’re stuck in a sideways range then all they can think about is: ‘how much more of this’?

So it seems that a large number of traders seem to run their operation from the market’s purgatory, which really isn’t a way to spend a good amount of your daily existence. Plus usually it doesn’t work out well for one’s account either. Constant top/bottom guessing is one thing but not being able to accept the tape that’s right in front of you seems almost pathological to me. Now the inverse cognitive bias would be one of recency bias – always expecting more of what already lies behind you. The financial media is certainly guilty of that and so are many fund managers.

So what is the answer? I personally always let price do the thinking for me and as such I focus on clear price inflection points in combination with momentum as well as volatility measures. Let me give you an example – let’s take the EUR/USD:

2016-03-31_EUR_volatility

For a U.S. expat who spends extensive amount of his time in Europe buts earns in the U.S. this is not a fun move as you can imagine. And when something hurts it’s tempting to focus on the pain and let that dominate your thinking process. Fact is, and I have made that point here over and over again, we simply don’t know when a turn will present itself. The ping-pong between the Draghi and Yellen is a finely honed game and few of us are privy to what is happening behind the scenes. Many have tried and failed to predict the machinations of central banks and we are certainly going to start trying our luck now.

However what we do know is the following:

  • Draghi’s pain threshold seems to start kicking in near the 1.4 mark – quite often we see a push a little above.
  • Price advances usually occur in conjunction with expansion in realized volatility. That is actually interesting and atypical to what we are used to in equities markets. What this suggests is that advances often are the result of short squeezes where accumulated short interest gets punished. The reason for that probably relates to the fact that internationally traders/investors/speculators use the EUR or the USD to hedge against price volatility.
  • Price declines are also usually accompanied by a rise in volatility – which is what we would expect.
  • Sideways periods only comprise about 30% of the tape in the recent year (and probably beyond). As such I would call the EUR/USD a ‘mover’ – it’s a fun symbol to trade assuming you find yourself on the right side of the tape.

Now what stands out to me is that a good chunk of the recent advance is actually accompanied by a drop in volatility. This suggests we are not seeing only a short squeeze per se but that something else is going on. A more ordered slow advance suggests buying systematic buying interest and that could easily push the EUR/USD to the extremes of our current price range. Maybe even beyond! So I would be very cautious about betting against the Euro’s advance here and although I would consider taking out short positions when the time is right I would have to see price momentum support that. Perhaps something like a Retest Variation pattern which is Ivan speak for a spike high followed by a drop followed by a push toward the highs (but not a breach).

2016-03-31_spoos_LT

Another symbol that seems to be wearing out retail is the S&P (here showing the futures). That’s as systematic an advance as I have seen it over the past two years. So let’s not under estimate the mojo of the bulls here either, or should I say let’s not under estimate the weakness of the U.S. Dollar? 😉

Alright two more goodies below the fold for the subs:

evil_separator

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.

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


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.
  • captainboom

    Mole, I think you mean Draghi’s pain threshold is around the 1.14 mark, not 1.4 mark.

  • Time Bandit

    Yep, I think 1.14 is what he meant to say but a 1.4 Threshold would be outstanding considering I’m long the EUR/USD. :)

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

    Yes, watch that dollar.
    I’m not confident it will fall, but IF it does. then who needs a chart?

    http://www.movie-locations.com/movies/c/CloseEncounters_DevilsTower.jpg

  • mugabe

    Re the euro, medium-long term, it’s interesting to look at the monthly as it’s the 31st. There’s a lot to make you bullish.
    1) First monthly close outside the range.
    2) Monthy close decisively above long term ma.
    3) Monthly MACD bullish crossover
    4) Bullish RSI divergence at the bottom (seems) confirmed

  • ridingwaves

    pick up in buying in beat up bio sector, XLF gets over 100sma and it could get bear ugly…Fire sector is not participating up here…

    Kudra was a day early in ACAD buy….looks like late to cover shorts are now the target..20 days to

  • kudra

    ACAD doing well today. Yesterday, it closed just above my $26 stop, so held it overnight. sold some; still holding 1K. Thnx for the symbol idea, RW.

    ACUR, one i’ve been holding for 8 months, looks to be doing well as of late. Might be worth a look.

  • kudra

    ACAD’s been on a tear since 10:30 AM. Steady price appreciation with almost no backsliding.

  • ridingwaves

    Kudra, I’m happy that you are in the money….the PDUFA date is 5/1
    Shorts are fighting big money (institutional investors) and unmet medical need in parkinsons disease…if buy out rumors swarm, 40+ could happen fast…put your trailing stop in to protect your winnnings…

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

    Got back into GDX short

  • kudra

    Thank you, RW. twas a nice setup post FDA announcement (prior was a crap shoot); buys in the 25’s and even 26’s looking good. Stops in for remaining 1K shares (cost – 25.75). Looks like I sold the other 2.5K lot ( cost – 27.08) too soon. I’m not familiar with having winners, and this one’s getting juicier.

  • ridingwaves

    In bio sector remember to set stops, especially low floats…risk is reduced greatly and any loss is the price you pay to play in the crazy sector…don’t average down!!!!!!!!!!

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

    Yeh after seeing the tape consolidate for a bit, let go of the initial shorts put on EOD yesterday. More sector rotation.

  • ridingwaves

    FIRE sector is going to get hurt this earnings season….XLF about to make decision on direction soon…I believe it’s heading south…but believe has little to do with anything in this game….
    http://s23.postimg.org/mm1utmhvv/XLF_approaching_prime_time_move.jpg

  • Edd

    Kudra,
    Are we reading this correctly? You deployed 15% of your trading capital on one very speculative play? It is kind of RW to help you earn some money, but my friend you are either not telling the truth of your situation, or you are, and will truly and surely destroy yourself if you do not stop the way you are going

  • kudra

    You are correct. The position was too big, hence my over anxiousness to get out.

  • kudra

    stopped out on remaining 1K shares. caught a nice profit on ACAD to help defray some of the big losses i’ve taken this year.

  • ridingwaves

    Do a google search on Rod Carew…..see what made him great at baseball….use the same approach on bio….unless you can jump into a low float symbol on great news followed by intense volume with heavy short ratio….the risk/reward is not worth it the way your playing….Hit singles, doubles, throw in a triple every once in while…you can’t be Hank Aaron in this trading landscape…

  • kudra

    Thank you. Great advice.

  • mugabe

    The real problem was your anxiousness to get in in the first place. You are not controlling your trading, your trading is controlling you.

  • kudra

    great observation. I chased it yesterday and added too much as it faded. Got bailed out today. When positions get too big, they indeed control you.

  • mugabe

    no, the point I’m making is that you shouldn’t be doing anything at the moment. you thought the same two days ago but for reasons best known to yourself you’re back at it. anyway, for the second time, I give up. good luck, because you are really going to need it.

  • kudra

    Understood. thank you. Important for me going fwd. to trade with patience and without urgency, despite being grossly underwater. I need to let go of any desire to make back losses and begin to establish good habits. I understand that my bad habits are so ingrained that it will be a struggle.

  • kudra

    I understand that time and space away from trading will be beneficial.

  • Mark Shinnick

    Yeah…back into TVIX in the 4.30’s

  • ridingwaves

    eventually the gap circled near 19.80 and 20 will fill….and the long tail in early august will come into play….the month is over…bonuses are in….
    time for some pain me thinks…

  • ridingwaves

    Baseball is in the air so here is another for you

    Sometimes I sits and thinks, and sometimes I just sits.

    Satchel Paige

    learn to sit and your thinking gets clearer

  • http://evilspeculator.com Sir Mole III

    The lack of participation in here makes me want to take another vacation :-(

  • http://evilspeculator.com Sir Mole III

    Don’t get me started with this guy…. he cannot be helped.

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

    Yeh I’m looking for a short entry too but not a big fan of the contango costs w VIX products now. They are bleeding like crazy now

  • http://evilspeculator.com Sir Mole III

    Gambling addiction – he cannot be reasoned with as he’s suffering from a psychological mental disease.

  • http://evilspeculator.com Sir Mole III

    Yeah, that’s about where I drew the line.

  • Round we go
  • Yoda

    Calm before storm? With employment numbers coming out tomorrow, I don’t blame anybody to just sit and observe.

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

    Yeh I’m pretty neutral at this point and just taking small stabs here and there. Although SPX is in a decent selling zone for me, I’m also seeing a lot of indexes that have broke over their descending trendlines. Not clear to me at all

  • Round we go

    shit, well I am going to call you Dr. Mark cus that was some nice knife work. congrats.

  • kudra

    You have all helped me a great deal.

  • Round we go

    all those tvix shorts will cover sometime 😉

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

    Haha I meant short equities. I covered TVIX short yesterday

  • ridingwaves

    thinking most are spent on this bear market rally…I like all of this shaking and baking as distribution since 3/17

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

    That would do it.
    Gartman just threw in the towel.
    a final check over at Slope, to see what Tim says..
    and we may have a Tri-fecta.

    EDIT: treasuries (TLT & IEF) are getting a bid.

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

    Yes then finally the market would sell off :)

  • ridingwaves

    tomorrow will be tricky and ….as funds rotate…more clarity next week…

    one interesting note is the strength in tips move….everyone see’s inflation except the Fed…..

  • Yoda

    I suspect a bunch of people are going to get fooled by the tape tomorrow

  • Yoda

    LOL

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

    Priced to perfection.

    front runners !@#$@#$

  • Ronebadger

    Take the vacation and we’ll see if the market really tanks…..

  • Mark Shinnick

    All in a morning’s distraction…and to what real avail today? Covered in the 4.40’s

  • Time Bandit

    That was funny. Nice to see that Gartman still has it. :)

  • Time Bandit

    It was like watching paint dry today. Could be the calm before the storm. Or maybe we see another period of nothingness for awhile. Who knows?

  • mugabe

    massive breakout from the aussie this month (though now at area of resistance)

  • Time Bandit

    Got stopped on Long GBP/JPY for a -.78R Loss and Booked +2R Profit on EUR/USD Long for a Net Gain of +1.22R between the two pair. Not a home run by any means but better than a poke in the eye with a sharp stick. :)

  • Round we go

    nikkei taking a header. they have a habit of leading the crash. vix futures are perky.

  • Billabong

    US NFP report 08:30 EST. CL sliding this morning … LOD

  • Round we go

    silver joining the crash

  • http://evilspeculator.com Sir Mole III

    Hey guys – I’m running a bit behind today and may not be able to put up a post until later.

  • Round we go

    now what? you just scalping?

  • Round we go

    looks like you got oil short just in time. :)

  • Round we go

    purgatory turning to hell?

  • Time Bandit

    So far so good. :)

    It’s been kind of a weird week. I’m kicking my ass a little for not flipping to a Short on the GBP/JPY. But I needed the current candle to complete before making any new moves. The EUR/USD probably has more to go but this pair has always been a challenge for me so at +2R, I was reluctant to give any back going into a Friday and the weekend.

    You should make some hay on your Naz Short today. I’d like to see a decent whack myself because Oil companies are very close to being a short by my lens and a sell off in Crude and the general markets should get them weak enough to short before the COB today. We’ll see if prices cooperate.

  • Round we go

    huh I thought you already were short oil? I thought your rules would have put you in at the 40 break.

  • http://pugsma.wordpress.com/denalis-turning-points/ denali92

    Large Gap downs on employment day

    Largest employment gap down since 2007 is 27pts in September 2015 –
    but given the SPY daily RSI before the event was not that high (42), it
    is probably not that relevant. Just looking at 10pt or greater down gaps
    when SPY RSI is above 50 on the day before –there have been 10 since
    2007.

    Conclusions

    -Lower lows are ahead. With just 1 instance (April 13) marked the corrective low

    -2 instances where the market did rally post employment, but then topped more significantly post employment (Nov 11 and Aug 10)

    -7 instances where the market kept going lower, but never for that long
    with Jul 2011 (opex week) representing the longest period without a
    significant rally – that rally started 10 days after the employment
    report

    Bottom Line

    -Highly likely that the market continues lower, but the pull back may
    not last that long. Given the high on Wednesday. Both the average and
    median correction time from pre employment high to post employment low
    was only 7 days.

    Assuming this is not April 13, Nov 11 or Aug 10, this correction should only last in to next week.

    More later or Monday,

    -D

    Here are the instances:

    1. Jul 11 (RSI was 75) MAJOR TOP day before 15pt gap down was faded –
    market closed down 10, But market kept going lower. Total correction was
    61pts

    2. Jul 12 (RSI was 63) MAJOR TOP day before 13pt Gap down was not
    faded, but market came back from being down 19 to close down 13. Market
    bottomed 6 days later after a 52pt correction

    3. Aug 10 (RSI 62) MAJOR TOP Monday after – 11pt gap down was faded
    when the market was down 19 – closed down 5. With the FED the next
    week, the market actually bounced and topped on the Monday and then
    headed much lower – finally bottoming post opex

    4. Nov 11 (59 RSI) 10pt Gap down – got as low as 22pts down before
    closing down 8 and rallying in to a MAJOR TOP on the Tuesday after and
    heading much lower

    5. Jun 08 (57 RSI) MAJOR TOP Day before – 12pt gap down and the market
    closed -45pts! Correction kept going till the following Thursday –
    ended up being 116pt before the first bounce

    6. Mar 15 (56 RSI) – 10pt down gap – closed down 34pts – eventually
    bottomed on the Wednesday after 30pts below the employment day close

    7. Sep 11 (54 RSI) – Topped the Wednesday before and bottomed the
    Tuesday after post holiday. 25pt gap down. Market closed down 31pts on
    the lows. Fell another 35pts in to the Tuesday after before bouncing

    8. Apr 13 (RSI 53) 21pt gap down was faded immediately. Market had
    been falling since the previous Tuesday and was down 41pts at the low –
    Market then rallied hard until the Thursday after

    9. Sep 07 (53 RSI) – Gap down was 17pts – low was down 29. Market
    closed down 21. Market bottomed the Monday after some 17pts lower.
    Total correction was 56pts from the Tuesday before

    10. Jul 09 (53 RSI) 12 pt gap down. Market closed down 25 on the lows. Bottomed the Wednesday after 28pts lower

  • http://pugsma.wordpress.com/denalis-turning-points/ denali92

    Mole: Have gone for the Euro Fade above 1.14 – but done it in the CHF – as that is my currency of pain… in at .9570.

    -D

  • Time Bandit

    I am Short Crude via SCO.

    What I’m waiting to short is Oil Companies by Charting IXE and trading ERY.

    Although they are correlated they do not always sinc up at exactly the same time by my lenses.

  • ridingwaves

    is there any room to short there as most oil services sold off over the last week

  • Time Bandit

    Ooooh yeah. Look at the January 20th Low on the IXE of 501.47. The last print on the IXE was at 610.20. That’s a shitload of ERY dollars inbetween. :) But don’t forget, my style is to get in after a trend is perceived to have begun and not get out until price has already been established as going in the other direction. I want the middle section of any move.

  • ridingwaves

    if it breaks down here 586 is very doable for first leg down….

  • Grant

    Mole, I would like to see your blog bring in people who a new to trading. People without pre learned bad habits, faulty thinking, gambling addictions, etc…. If you want to grow your blog, you need to be teaching the basics all the time. I know this may get old to you but having time set aside to teach new traders is the life blood of new participants. The veterans are just going to clutter the comment section with their desired lens / faulty ideas. I was new 3 years ago and Ivan helped me a lot. He set me on the narrow path to compounding 1% trades. More of this needs to be taught consistently and often imo. Once this is established, you create a natural pipeline to your systems and fantastic discretionary trades because you will have a somewhat more humble audience and trained traders. Just my 2 cents. Build some tiers

    1. Free stuff to newbies (training)
    2. Intermediate (systems) fee based
    3. Experienced (discretionary) fee based.

  • Billabong

    Financials are right on the edge of a sell signal. I had one this morning for about 20 min. It’s one of those situations for me, waiting until EOD is prudent.

  • Time Bandit

    Absolutely. But price has to cooperate. If current price levels hold and if it was 3 PM today right now I would be putting a MOC order to buy ERY. But because of the type of volatiliy of this sector and because I’m trading off of a slower daily, I’ll wait until the end of the day to make sure price still qualifies as a short. As you know, a lot can happen to price between now and today’s close. So it’s a waiting game for me.

  • Time Bandit

    So what are you saying that there is only one method that works and that’s Ivan’s way?

  • ridingwaves

    today is full of trickery…but after looking at your trade instead of commenting without looking (dufus alert) it’s pretty sweet in view of my filters…
    I have a lot of shorts on some auto group symbols paying rewards as we speak…though I have some play money that I might use to follow your lead…

  • Grant

    Negative, I don’t believe I said that. I did say that some form of learning curve would help bring in new participants…. Some conformity of thought, especially 1% trades would be a good place to start.

  • Kishore Kumar

    I agree. The comments section has become the private property of a few “know it alls”, with blinders on. Fresh blood will bring in a lot of different perspectives.

  • Kishore Kumar

    That’s what you seem to be reading.

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

    Trimmed off 1/2 GDX short near potential support. Lowered stop for rest

  • Time Bandit

    You don’t have to be a smart ass.

  • ridingwaves

    I’m trying to see where you add any value with your comments and see zero?No charts, nothing….

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

    Grant, out of curiosity how many of these trades do you make with target of 1% do you make in a year?

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

    And I am assuming these are futures trades?

  • Time Bandit

    I hear what your saying Grant. I believe we’ve tried something similar to this when Mole and Scott had many sessions on System Building etc. I know Scott didn’t spare too many words about how few really want to pay the price of time and effort to do the work necessary to be successful in this business.

    I have a deep respect for Ivan and everything he has brought to the table. One thing we have in common is that while you worked with Ivan, I had the privalege of working with Scott who was originally trained by Ivan.

    Most importantly is what I have learned from Mole, Ivan, and Scott is to have a Rules Based System that fits my personality and desired style. This is probably why there are so many different lenses.

    I believe that what Mole provides here is a wealth of information that is put out Smorasbord style where a person can take what they want and leave the rest.

  • Time Bandit

    Outside of a few snarky remarks, what have you brought to the table? Have you posted any trades at all? Have you posted any results?

  • Time Bandit

    It’s a good thing I no longer have a “love need” RW. :)

    This guy has tried to bust my balls more than once. I don’t care if he likes what I say or not. What does piss me off though is that he doesn’t add anything positive. Only negative shit.

  • Mark Shinnick

    Looks like something of a apex zone here at mid TVIX 4.30 area.

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

    And Grant pls feel free to share what you are doing. This is the only site I have ever seen that focuses on system based trading. All the others are about discretionary trading. Even the little snippets that Scott leaves when he is here have been really enlightening.

  • http://evilspeculator.com Sir Mole III

    Yeah, that’s basically what we’ve been doing over the years but I recognize that some of the old material should be reposted. As a matter of fact I’m planning to put together an ongoing on basic option theory. I posted some of that in 2010 and it was very popular then.

  • ridingwaves

    he doesn’t even open his comments section in disqus to viewing…so he/she might just be a canard….

  • Mark Shinnick

    Not by preference; I’m actually looking to position. Its a biding-the-time strategy awaiting a upside range break…or resumption of down trend. The exits are discretionary when not seeing the needed confirmations of market selling.

  • Time Bandit

    Slow and easy along with patience is a beautiful combination. :)

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

    You have.
    Being around for 5 (?) years, I’d say the turnover rate is about every 2.

  • CandleStickEmUpper

    Happy Friday everyone, hope youre all well. I havent been posting much because, well, I havent been trading much lately. My scalp style sucks in this type of low VIX market so taking it slow right now. I did put on a small long position at NQ 4177 earlier based on the Zero signal this morning, just letting it ride. No scalping. Mole, Im still readong your posts everyday, just not actively daytrading. See you all when things pick up.

  • BKXtoZERO

    same here. I trade VIX so that is dead, also w/out VIX moving, everything else is stagnant.

  • ridingwaves

    FOLD when it comes off hold might be lots of fun, I’m scalping L into volume off 5 min
    massive short position, EU good news..huge gap fill to 13 Daily

  • Yoda

    That’s what she said 😉

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

    Bears need love. Embrace the love.

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

    Good to hear from you and using different time frame during a market type change is probably a good idea.

  • Time Bandit

    LOL That must be from the original Turtle Trading System.

  • Time Bandit

    Mole or anyone who can answer regarding ZL (Soybean Oil) and ZC Corn Futures Trades, what is the actual time frame that these things can be traded? I’m trying to figure it out from the CME Website and it’s kind of confusing.

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

    Very smart Candle knowing which playing field is best for you

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

    Just got back to computer and stopped out on second half. +1.25R

  • Time Bandit

    I think I was able to answer my own question by calling and I can now figure it out from the CME Website. But what’s confusing is that some of these things have different opening, closing and settlement times along with different times that they’re on break. The reason I was asking is that I’m thinking about adding a couple of futures such as ZL and ZC to my stable.

  • ridingwaves

    a mean fast reversal on miners….

  • newbfxtrader

    Yeah. Its Chicago time too. Take the ones with the best setups. Doesnt have to be /ES. Keep one eye on the COT data.

  • Billabong

    Liked your thoughts the other day on using QID like an option.

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

    Yeh I was looking for it to break support but I guess not this time. Tough thing to trade

  • Yoda

    Everybody gets to be on the receiving end of April Fools’ Day: first bulls, then bears. The day ain’t over yet. Curious to see who will end up being the fool at the close

  • Time Bandit

    Thanks. I’ll begin to backtest grains, soybean and cotton etc. over the weekend and think some of them might be a decent fit for me. I’ve traded /ES Futures before and $50 a point per contract gives me indigestion and the other Equity futures move a little too fast for my blood. :)

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

    I’m glad you understood what I meant. When you think about it, the Theta burn with the 2X ETF’s (Shrinkage) is minimal compared to what it can be with options. Yet the 2X’s have the good parts of Delta and Gamma while having no Vega price built in to screw you over. The downside is that the 2X’s tie up more capital because of having much less leverage. However, I would argue that this extra capital needed for the 2X’s is actually a lot more stable.

  • Mark Shinnick

    Falling off of a bear flag from that zone; measures down to 3 handles.

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

    Not me.
    two rules.
    No trading Month Begin.
    No entries on Friday with Big Numbers.

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

    you caught the inference.
    smart man!

  • phylum

    methinks he is referring to R = 1%