Back Playing Limbo

The other day I felt the need to remind everyone that we as retail traders have one principal advantage over fund managers or institutional participants such as trade desks or system operators. We don’t have to trade unless we want to or perceive the express need to risk our capital. Now given by yet another spectacular failure to breach outside a now well established trading range it seems that we again may be well advised to claim that privilege.

As you can see a fast unceremonious slice through our current inflection zone around ES 2176 returned us smack middle into the dreaded limbo zone which extends all the way down to about 2150. That’s about 25 handles of pain which are extremely difficult to navigate unless you are a stone cold swing trader with ultra chilled freon flowing through your veins.

As you know I’m a sucker for volatility with a particular interest in realized volatility (RV) patterns and fractal formations. Shown above is the 60-min panel which, except for one or two occasions, indicates that high volatility periods (as evidenced by a signal pushing into the green) were mainly produced courtesy of buying activity. Which is exactly what should have happened near the very last line I painted, putting us near the beginning of yesterday’s session. Instead what happened was more indecision and a complete lack of interest in pushing the tape into the end zone (i.e. 2180 and above).

Yesterday’s Zero session shows us all over the place with no coherent theme. In recent times we have seen more and more days in which the Zero Lite signal (on the right) oscillated almost equally above and below the Zero mark. If you are a long term sub then you probably are aware that this is not the norm. For years we were used to seeing one side clearly dominating at least a large portion of the session. A change in that, often accompanied by a bullish or bearish signal divergence, was often a clear indicator that a ST trend change was in the works.

Recently however all we’re seeing is more and more indecision and until now I attributed this mainly to a lack of participation during the summer. However, we are now pushing far into September and clearly something else is going on here. The bulls continue to fail where they should not. A year or two back they would have kicked this thing into overdrive weeks ago as there is no bearish mojo whatsoever and we’d be trading above 2200 by now.

Take Away

• On a short term basis this suggests that we once again need to reduce our participation to playing the swings.
• On a medium term basis this type of tape is extremely toxic as setups like the one I posted yesterday used to play out more predictably. Even when they failed there usually was a clear attempt to breach. A sudden disappearance of buying interest at key inflection points suggests internal forces are at work that we are not privy off but that put in question the prevailing trend.
• On a long term basis this once again suggests that this bull market is in its last throes. A blow off top is absolutely still in the cards. It’s quite normal to lure in early bears late in a trend just to once again blow them out of the water and thus produce prime conditions for a surprise take down. Ms. Market after all is a cruel mistress. There is no predicting as to when long term trends paint their final exhaustion spike or simply die with a whimper. And we have long learned that we should not obsess over catching that final moment. However we need to pay attention here and once again remind ourselves what we are dealing with. Which is an indecisive market without direction. Anything may happen at any moment.

Where We Go From here

As you know I continue to take things on a day to day basis, focusing on the few charts that actually make sense. Although promising setups do pop up here and there we need to remain focused on asset preservation. Don’t think for a second that you will be able to navigate market periods like these on the basis of technical, fundamental, or cyclical analysis. You are not that good – and neither am I. Chaos reigns right now because it is from the ashes of a dying trend that a new one can emerge. Although periods like these can be extremely destabilizing and frustrating psychologically I urge you to focus on what you have direct control over:

• Your exposure (i.e. position sizing).
• Your participation (i.e. capital commitment guidelines).
• Your trading rules.
• Your sound mind and psychological well being (i.e. your mental equilibrium)

Remember that 60% of your activities should revolve around the qualitative aspects of trading and only the remaining 40% around the quantitative aspects. You are not a computer and this type of tape is uniquely designed to press all of your cognitive biases in order to create a staccato of confusion. And there is only one way to win in such conditions – and that is not to play, or at minimum choose your participation extremely wisely.

Dirty Humor

One last thing – and if you’re a fragile millenial snowflake then please stop reading here: Don’t be worried about missing the bus. If this thing really resolves to the downside then there will be plenty of opportunities to get in. You may have heard this joke way back when good humor wasn’t yet outlawed by political correctness:

Father bull and son bull are sitting atop a plateau looking down at a herd of grazing cows. Son bull is bouncing up and down with excitement exclaiming “Dad! Dad! Let’s run down there and f…k one of those cows.”  His father turns to him and replies calmly, “Son, we are not going to run down there and f..k one of those cows. We are going to walk down slowly and f..k ’em all.”