Scaring The Children

One of the rare traits I share with George Carlin is that I do not give a rat’s rectum about being politically correct, and thus have made it my personal mission to roll over the gentle feelings of my contemporaries’ with a mental monster truck equipped with an Army edition flame thrower.

That’s right nothing like getting in touch with your inner feelings. I say – we need more flame throwers and a lot less politicians – enough said.

Another disdain I share with Carlin (and W.C. Fields) is that of children. Now, I don’t really hate children. Don’t get me wrong – I guess I can appreciate the appeal of creating little feces flinging copies of yourself and to call them cute names. To each his/her own. But where my already stretched sense of tolerance comes to a screeching halt is when the little rascal decides to test the high pitches of his brand spanking new vocal cords within the echo chambers of a public building. Much to the dismay of my eardrums which are already taxed by decades of high decibel Rammstein exposure.

In the good old days you simply slapped the little stump behind the ear and be done with it. These days however you quickly find yourself cuffed in the backseat of an LAPD squad car surrounded by an angry female mob chanting unreasonable demands involving a branding iron and your testicles.

So, the only place left where it’s relatively legal to scare the children are the capital markets and it’s one of the reasons I became a trader in the first place. It’s the only remaining vestige where it’s legal to prey on the hapless, the unsuspecting, the weak, and the retarded. The latter in particular had it coming – what were they thinking – oh, right – they weren’t.

Looking at equities today scaring the children just begs to be the theme of today’s post – so, let’s look at some charts:

If you were a Zero sub then the gap lower this morning probably didn’t impress you very much. And if you weren’t then thank you for being the fool on the other side of my trade. I promise to spend the money in an ill advised fashion – most likely lap dances and easy to pawn bling.

Now take a look at the blue arrow on the chart above – it seems thus far my 25d MA is holding and this morning’s tape was a nice shake out of some weak hands. Was this it or will there be follow through to the downside just like back in November? (marked by the orange arrow)
[amprotect=nonmember] Charts and commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
[/amprotect] [amprotect=1,9,5,2]

Alright, now take a look at this chart and tell me if anything stands out. Come on – I know you can do it – just rub those two remaining neurons together, a bit of friction usually does the trick. Yes, that’s right – Mr. VIX did not push above Tuesday’s highs this morning, despite the fact that we briefly made new lows. That (and the Zero Lite reading) should have been the give away that this was a long opportunity.

Of course this does not mean the longs are out of the woods yet – the day isn’t over yet. But even IF we continue lower the downside potential here is pretty limited. The MAs on the VIX chart are dropping and the 100-d MA on the SPX chart is closing in. So, if they decide to take this thing lower then the 1290 – 1300 cluster should pose as some might support.

This is something I hacked together this morning – simple SPX:VIX ratio plotted against the cash S&P. On the bottom you have a little histogram plotting the delta between those two for further illustration. Now, if you use this chart over several years it becomes useless as those delta spreads are most likely relative to a few months time. But short to medium term this chart offers pretty nice clues about the momentum of the unfolding trend.

And what we’ve been seeing in the past few weeks was a long overdue pig skewering which was followed by the obligatory short squeeze. That’s right – Mrs. Market is a cruel mistress – you better wear a helmet. Now, look at the blue arrow – despite the fact that we institutional traders indulged in scaring the children this morning the delta between SPX:VIX and the SPX is increasingly narrowing. In other words – less risk is being priced in – and that means that market makers are looking up, not down.

To round things up here are my current net-lines buy/sell levels – again inspired by Chris Carolan. Always remember – plagiarism is the highest form of flattery 😉

The new buy level dropped to 1330 today and considering today’s drop lower it will be 1320.52 tomorrow. And that’s currently 13 handles away as I’m typing this. Not exactly a bagel throw distance but definitely attainable, maybe by early next week.

Bottom Line:

I am not discarding the chance of a follow through drop over the next few days – it’s very much possible. But SPX 1310 is a great spot to get positioned long with a stop a few handles down – especially if we get an inside candle tomorrow or Monday. If I get stopped out I’ll definitely jump in once we reach 1300, IMNSHO that would be one sweet long setup given what I’m seeing on the momentum and volatility side.

Cheers,

Mole