Volatility Pinball

I just can’t seem to be able to get over my VIX chart which is now in the process of racking up a record amount of bonus points:

The 2.0 Bollinger band is increasingly turning into a pinball bounce zone as we see 20% drops followed by 20% ramps. Rapid swings like that can be extremely painful for option holders on the short and long side alike. The good news is that we are seeing a slight expansion of the band now and I expect the lower border to start creeping up slowly during December. After all – equity buy signals at VIX 22 does not really help the shorts, does it?

Something’s afoot here – chalk if up to pre-holiday tape but wild swings like that usually precede something more significant on the horizon. My momo charts remain mixed but we are accumulating energy (i.e. winding a clock) that will have to resolve itself at some point. My best guess is that this will happen in early January – which direction – well, let’s look at some momo charts:

Most of you probably remember my ‘CPCE Deluxe’ chart – it’s basically a 10-day SMA on the CPCE (i.e. put/call ratio). And on that one we’ve been stuck in a pinball bounce zone since mid year as well. Only problem is that we now find ourselves in buy territory as the recent snap back on that SMA produced very little downside in equities. I’m keeping my eye on that diagonal resistance line  – only a decisive breach would convince me that more downside is in the works. Usually the dip buyes swarm in at that line – only problem is that they already did all last week…

This is what I’m talking about. That 23.6% fib line proved too much to handle for the bears – and we are slowly painting yet another support zone. A breach is needed here Monday, otherwise the bears will have to watch their December puts getting manhandled in the coming weeks.

That’s a slightly different view – this time I’m using a 20-day SMA, also on the CPCE. This chart marks important buy/sell signals and we have been in sell signal territory for three months now. When things slipped into extreme readings on the bullish side (e.g. ISEE Equities readings above 250) we got a little dip – yes – but thus far equities are clinging to that 23.6% fib line I showed previously.

Now, I don’t think that the CPCE has much lower readings in it – in particular ahead of the Santa Rally bonanza. And the worst thing for the shorts here would be a sideways correction which pushes that 20-day back towards 0.61 or 0.62. Which is what will probably happen however unless we see a fast drop here early next week.

My concerns are also supported by my trusted NYSE adv/decl volume chart. Folks – that is a major divergence and the fact that we are not seeing long down candles here will bite the bears in the ass, probably sooner than later.

I showed you this chart last week and as expected we are pushing higher toward the 0.1 mark. In case you wonder – the NYMO is a medium term momentum indicator and the BPNYA is a more long term P&F based measure of momentum. I simply mix both together and thus far this chart has treated me extremely well.

I have actually doubts that we’ll stop at the 0.1 mark. If the longs garner momentum during December we could see a little low volume POMO inspired buying frenzy that pushes this thing toward the old blue sell line all the way up around 1.4. Now that is where I would want to be short in January – if we get there without the Nokos starting WW3 that is.

The TNX is painting a textbook inverse H&S pattern – including the gratuitous neckline retest. The stochastic also is supported of a break out here – thus I expect yields on the 10-year to scape the 3.4% mark in the not so distant future.

Bottom Line:

Like I said last week – the bears should have grabbed the steering wheel last Monday – and of course they again failed to produce any measurable downside, despite a rallying Dollar, wild VIX swings, and bad news galore (supporting my insistence that the latter does not matter). It seems that equities remain impervious to meaningful corrections and based on what I’m seeing on the charts I don’t expect this to change anytime soon.

Again, this outlook is something I would love to be proven wrong on as I don’t see a clear edge here – neither on the long nor the short side. A fast move down would give us a nice buying opportunity but the odds for that remain low. So, the best I can hope for is a ramp into January at which point the bears may have a better shot at taking equities down. Right now and right here – well, it would have to happen on Monday. But hey – isn’t that what I said last week? 😉

Cheers,

Mole