Keep Your Powder Dry

Considering that equities are still trading a bagel throw away from all time highs it was fascinating to observe a 28% rise in implied volatility over the past week. Now I concede that current levels are probably more in line with where the VIX should be given that we’re heading into a seasonally bearish market period of the year. August has acquired a bit of notoriety over the years due to a handful of negative outliers, however on average it is September and not August that you should be worried about (see Tuesday’s post on the subject).

I would be lying if I said that the thought of a meaningful correction hasn’t crossed my mind. After all we are trading near all time highs, momo indicators like my VXV:VXO ratio are starting to signal the potential of some bearish tape ahead.

Clearly market makers are getting a bit more antsy with the VIX pegged near 11. So are we going to see single digits again soon?

The VX futures currently suggest a retest of the previous lows but in my experience a quick spike higher usually is followed up a few days later. I think we’ll have to see where we close the week. If we dip back into single digits then it’s possible that this was nothing but a little shake out of some weak hands.

Let’s put things into context on the pricing side. Clearly it seems that a 30 handle drop on the SPX must feel like a raging bear market to some younger market participants. But obviously prices have not given us any true indication that they are ready of reversing. Yes there are some cracks in the armor but I could have pointed at those several weeks ago.

On the short term side our big inflection point right now is around 2474.  All the bears have to work with at the moment is an exhaustion spike followed by a little bounce.

Which for the record wasn’t accompanied by anything resembling a bullish signal. That is a potential door the bears will have to walk through however. For now there is the potential for downside but price needs to point the way. More weakness today or perhaps a quick spike higher followed by more weakness would get me more interested in taking out some lottery tickets.

Beyond lottery tickets I would have to see a breach of 2450 followed by a retest – the proverbial last kiss goodbye. Again for now we remain inside that volume island that has been accumulating for the past few weeks.

Bottom Line

There currently is a window of opportunity for the bears to drag equities lower ahead of what seasonally is considered a bearish market period. If you have taken out some long term puts back when the VIX was dipping below 9 then IV alone should have greatly benefitted your premiums and offset any loss in time value. Which was the idea in the first place: NOT having to burn trading capital picking highs but establishing downside protection when insurance was available at a discount. For now a few short term puts as lottery tickets are worth a shot but I discourage you from ‘backing up the truck’ just based on a whim. Although premiums should rise on a quick dip lower the odds of success are much higher on the almost obligatory retest.

Currencies

Meanwhile the Dollar index is looking like it may actually try to make a run for it. That series of higher highs and higher lows is starting to resemble an early  floor pattern.

However I remain a bit skeptical as the USD/JPY continues to point downward.

The EUR/USD meanwhile is also pointing down (with the USD being the quote currency). Don’t get me wrong, I’m not complaining, however unless I see the USD/JPY gain strength I don’t think we are going to get a bonafide rip-your-face-off Dollar squeeze.

Campaign Updates

A strengthening of the USD/JPY of course would quickly put a damper on our ongoing long campaign in gold. Thus far it’s looking very promising, especially after it sliced through a daily NLBL near 1275.6. If the Dollar was still heading lower, like a week ago, then I’d be certain that gold would make it all the way into 1300. For now however I’m raising my trail to near the upper 100-hour Bollinger to lock in a bit of profit. Easy to over think the situation which then leads to trading one’s opinion/worries instead of the tape in front of you.

Crude is starting to look increasingly promising as it’s produced quite a bit of context over the past few days. Of course it’s not time yet to relax as it yet has to actually make a run for it. For now I’m leaving my stop where it is – which incidentally was well chosen if I may say so.

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