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.



No Juice

Equities have managed to push higher overnight and the E-Mini is now crossing the bear’s Rubicon, a line I drew at ES 2062 based on the most recent daily spike high. Nothing is ever impossible but unless we see an almost instant drop right here today this play is pretty much lost for the bears. Miracles happen but as of right now it seems they’ve run out of juice.


Every handle higher from here now exponentially supports the bullish case. There is no harm in taking out a few lottery ticket shorts here but be aware that the odds are now vastly stacked against you. The hourly is looking pretty solid as well with the 25-hour SMA carrying price higher.


I’m already long the NQ courtesy of Thor – and I distinctly remember how emotionally difficult taking this trade was on Wednesday. Just to make the point that none of us are ever immune to being biased, it’s a constant battle against one’s inner instincts. However if I wasn’t long already I would take one right here with a stop below the NLSL and the 25-hour SMA – let’s say near NQ 4240.


Otherwise I don’t see anything delectable this morning. The sole exception maybe being copper which doesn’t really offer an entry right now but it’s looking like it may start trending lower here.

The Dollar is on fire this morning and the EUR/USD touched 1.11 overnight, so I better head over to the ATM! The way things are heading I may just have one installed in my trading lair :-)


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My New Best Friend

My apologies for being relatively quiet on such an exciting day. Unfortunately there was a death in my wife’s family and I had to be there to offer some moral support. Which means I haven’t been trading (much – the systems are always on) and earlier this morning there was no reason to grab positions ahead of Draghi’s announcement.


So let’s talk about the big news first – most likely I’m not telling you anything you don’t already know but in a nutshell: Despite strong dissent by both German members of the ECB’s board the decision is to issue €1.1 Trillion in QE at €60 Billion per month. That’s a mighty chunk of change aimed at countering the threat of a supposed deflationary spiral. Obviously much of that had already been priced in but the expectation had been around €50 Billion per month but what’s another €10 Billion among friends, right?

Accordingly the EUR/USD is now at 1.13 and change and there’s no telling when this free-fall will end.


Clearly Draghi didn’t win any popularity contests over in the old Vaterland today, but he’s now officially my new best friend. Looks like I’m going to save a lot of money on toilet paper and may be able to move operations into my favorite Valencian palacio. Because unless the U.S. Fed is interceding somehow in the near term future we may see the Euro on par with the Dollar at some point this year. How about we organize an Evil Speculator Euro-Par-ty over here in Spain when it happens?


On the equities side we’ve been getting exactly what I suggested yesterday – more upside and we are now approaching the point of no return for the bears. Given my post I had a very tough time taking an NQ long position via Thor last night – the short campaign had previously ended at break even. It’s interesting how I was emotionally uncomfortable about placing this trade. Scott and I were on the phone and the consensus was ‘yes, we absolutely have to take this trade’ – especially since we were both pretty bearish. Practice what you preach, so to say.


Bottom Line: Nothing has changed – 1600 is where the bears fumble the ball again and we most likely are going to see new highs. Which however wouldn’t mean that this bull market picks up where it left off a few months ago. I maintain that we are in the late stages here and I also don’t like the participation I’m seeing on the Zero. This may turn any day and I suggest that you slim down any significant equity exposure (i.e. large stock portfolios, stock based funds, ETF/ETNs, etc.).


Our gold campaign is looking very good now as we are only a bagel throw away from the 100-week SMA at 1310. Not shown on the panel above is the monthly NLBL at 1290 which we’ve already crossed. A close above this mark on January 31st would be a monthly buy signal and excellent news for anyone already long (i.e. this lowly Mole). I’ve told you guys that I intend to hold this one into 1500, that would be one trade for posterity given my 1212 entry.

That’s all for today – see you guys tomorrow.

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.


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