Low Volatility Melt up Monday
This is Scott. Mole is ass deep in code for a new system we are launching soon, so I’m making myself useful by doing some guest blogging. Of course just after I agreed to do it, I realized the market couldn’t possibly be more boring, and its hard to think of things to say.[Mole: Welcome to my world.] I figure we should look at the bigger picture here.
Let’s look at a long term view, and then we can zoom in.
From the monthly you can clearly see that the bears had the perfect opportunity to start carving out a series of lower highs and lower lows. They failed to capitalize, and the last chance for the bears was effectively the day Trump was elected.
Make no mistake those bears have now been stopped out or are being stopped out.
The lesson is that there is a heavy price for the bears to pay. And the price action we have now is something we have all seen before, many times. The move is nothing impressive, but just gravity defying and boring at the same time.
It is a classic low volatility melt up. When volatility spikes, and then decreases with a melt up, typically counter trend trades have a dramatically lower win percentage. Which is what we see here.
In the boxes on the chart are the potential topping patterns, none of which worked. This is a lesson for the future, in a low volatility melt up, the topping patterns look really perfect, but still don’t work. The bears who have to cover fuel the melt up, which is why we have weeks of going up with almost no participation. It makes for frustration on the part of both bulls and bears. I’ve been long, and I’m still long NQ futures and emotionally it has felt awful.
So the future. Typically these types of moves reach an unsustainable low and then reverse suddenly. However betting on a top in this situation is futile, and you should not do it.
When this type of thing happens there are always better pickings to be had in the other markets. Let’s look at the US Dollar, which is showing all the signs of being a sustained bull move, currently nearing the end of a counter trend move.
You can see from the monthly chart we had a very strong move off the lows, then 20 months of trading range, then a recent breakout. Either that breakout is a false breakout (very low probability) or we should have a significant move. There are a number of supporting factors we can see when we zoom into the daily.
Arguably we have transitioned from a trend to a trading range. In a trading range the optimal place to buy is near the lows of the trading range, because you can get long with a tight stop.
The only trade I see that I really like is this. You can get long with a stop below the trading range lows, for approximately 3:1 risk reward to the top of the range. This is a trade that should work around 55% of the time. Betting odds. You could take the same trade on EURUSD. Short with a stop above the swing high 1.0775.
If you take it you might want to bank some profit at the high of the trading range, and then hold a little in case it breaks out.
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I’ll be taking over all week, hopefully things start getting interesting again soon. No shorting equities until you get really solid evidence of an increase in volatility with downside participation.