Back To Reality

Now dreaming about the future can be a lot of fun (of course your mileage may vary) but until we actually get there there’s quite a bit of work left to be done. After all those fancy hover cars and food replicators won’t pay for themselves. Or perhaps – will they? 

Since after Christmas I have been quietly observing the relative lack of progress in equities whilst attempting to form a halfway intelligent idea of what may lay ahead. Meanwhile the Dow has been flirting with the 20,000 mark and just missed it by a few pennies on Tuesday. Clearly rounded numbers have little significance beyond the psychological milestones, but it’s clear that the mojo we experienced ahead of Christmas has been suspiciously absent.

Our realized volatility indicator may offer at least some answers. The patterns we have been observing has been one of exploding RV followed by a drop which often (but not always) turns into a depleting volatility trending period (DVTP). How long that trending period can persist in part depends on the preceding peak in RV. A good example is the sudden drop last summer followed by a gradual falloff during the ensuing ramp higher.

Of course that isn’t always the case. Depleting volatility can also be accompanied by sideways tape, especially if the prior RV peak was gradual and less pronounced. When attempting to plot the path forward it’s perilous to convince oneself that the very same scenario is once again beyond the horizon. However, that said, as events unfolds the probabilities do start to gradually narrow. For example the chart above shows us that the current depletion of RV seems to have been concluded as RV is once again on the rise. This possibility would gain more credence in particular if (and only if) the indicator once again pushes above the upper standard deviation and thus turns green.

Because if it does then probabilities once again shift toward an increase in RV and that means a fast move (up or down) would take quite a few participants by surprise. If that fast move resolves to the upside then the potential for a blow off top (and the trigger of Dow 20k celebration) raise considerably. Once that happens we would be looking for a reversal pattern, at minimum a spike high but I would prefer a valid Retest Variation Short pattern.

However if it resolves to the downside then I would actually be looking for buying opportunities, especially if it happens before the Dow scrapes the 20k mark. I concede that this perspective is rather contrarian but unless I see a clear trend trading signal I cannot justify being long here.

In case you wonder a trend trading signal would be a failure of the RTV-S pattern or a breach of a prior significant spike high. If nothing else in times like these our Zero indicator should also be giving us valuable clues, e.g. participation and possible divergences suggesting either accumulation or distribution.

Now silver was a great entry yesterday and I actually had it marked for you guys until I got sucked into writing about virtual reality and our glorious future as 21st century traders. However that setup has actually gained in probability now and I’ll be sure to grab a long position in a drop back to the 16 mark. My stop would be a respectable distance away near 15.38.

The weekly panel suggests that it’s really high time for silver to either finish its business or get off the pot. Let’s not forget that the trend is still to the downside here and currently near a possible reversal point. However it’s also possible that silver may finally reach escape velocity and break the current trend.

Of course that means that a short position right here and with a stop above the recent highs may turn out the right way to go. If you’re sharing that view then this is a good spot to pull the trigger.

More setups below the fold.

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Welcome Back BobbyLow!

After a little row misunderstanding last year I was elated to see that Bobby Low has decided to return to our comment section. Bobby has been a long term participant and prolific contributor here at Evil Speculator and I consider his return a very good omen for the new year. Welcome back buddy!