MOMO Update

I may as well move my butt to Australia now as most of the productive discourse in the comment section seems to be happening during nighttime in the U.S. Much of this clearly is due to Scott’s untiring willingness to lend a helping hand. And as grateful as I am for his contributions I am however horrified by the level of inexperience reflected in many of the questions. Clearly over the years we’ve seen a quite a bit of reshuffling here in our audience. Just go back a few years and look at the comment stream – many of those people have long disappeared. Some of the old timers retired (hopefully happily and flush), others chose to move on after having reached self sufficiency, but unfortunately a much larger number never managed to do what it takes. In the end they either got wiped out or decided to call it quits after hopping from one flawed approach to another (or perhaps got led into ruin by shysters). The financial markets have always been an attractive destination for gambling types bent on ‘trying their luck’ at brain surgery whilst being incapable of properly peeling a lemon.

My point here is that 90% of the material that Scott shared as of late has been covered here over the years and in much detail. Perhaps it is all my fault for not featuring some of our favorite posts of the past more prominently. Until I get around to placing them in a more accessible place I strongly recommend that you all point your browser to our favorite posts page and work your way through a veritable laundry list of hands-on trading knowledge. There are also quite a lot of handy tools under our – you guessed it – tools menu. There is simply no excuse for not understanding key concepts like position sizing (as in R), SQN, expectancy, etc.  And how can you even think about trading futures/forex without our handy risk calculators?

Again perhaps I only have myself to blame for not featuring our educational stuff more prominently. Please understand however that after eight years plus of running this blog I am oftentimes tired of regurgitating material I deem to be essential for survival in the financial markets. But clearly my audience is hungry for this stuff as every time it’s being covered here the comment section explodes and subscription rates increase. Hint taken and I’ll do my best to selectively cover these things again – perhaps one educational post per week? I’m open to suggestions.

Alright – with that covered let’s talk market momentum today – we are at an interesting stage here as the annual ritual of a pre-XMas-Rally-Shake-Out seems to be gaining credibility.

So let’s start with the easy stuff. You may recall that about a week ago I proposed that we would shift into a sideways depleting volatility cycle. However I was wrong about the sideways part as we actually transitioned into a trending depleting volatility period. One which now has us back in our ‘normal’ volatility range pre-sell-off. I put the word normal in quotes as volatility is a very relative concept and there simply is no ‘normal range’. You can define certain ranges as historically low or historically high but your normal range is always the current range – if that makes any sense.

That said, given the current readings it is reasonable to suggest that in the near future we are most likely not going to see the large daily ranges of the past two months. However given recent ranges and the fact that we are heading toward the base range does permit another increase in the near future.

Before we talk about the implications let’s take a peek at the long term picture which has us solidly above a weekly NLBL with a monthly NLSL in close grasp. Both of those are very bullish long term signals, in particular in the context of an impending X-Mas season. Very rarely do we see large sell offs during November or December – it’s not impossible of course but as traders we deal in probabilities. So let’s look at the current momentum.

We start with our trusted VXV:VIX cross – if you are unfamiliar with VXV then Google is your friend. In short the VXV measures quarterly volatility expectations whilst the VIX uses a mixture of the near term month VIN and the VIF which represents the far term month. Not to be confused with the VXO show below, which is the old VIX – again Google is your friend.

The ratio shown is a 3-day SMA which has been forming a pretty pronounced falling diagonal and we’re right at the upper range. That suggests to me that we may be seeing a little shake out here in the coming weeks, most likely concluding in early to mid December. As this is a long term chart I wouldn’t be surprised to see another stab higher (as volatility is depleting, leaving room for more trending tape).

VIX:VXO is basically the short term brother and here I am comparing *front month to front month* – the main difference is that the VXO measures options near ‘at the money’ (ATM) whilst the VIX is more weighted via VIN and VIF. The difference is that the VIN covers the entire front range of the near term month while the VXO covers near ATM premiums of both the near term and far term months. I know – a bit confusing and it makes my brain hurt as well.

Now this ratio seems to be building its own falling diagonal but if price doesn’t respond soon then we most likely will see another push higher before a shake out. This has happened back in April/May of this year. Since this is more short term I would use those diagonal touches for quick sell off opportunities or profit taking. I’ll be sure to post it here in the coming months.

Okay, but now let’s get to the good stuff 😉

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Words to the wise: I am not trying to predict the future here, all I am highlighting are probabilities at the current state of affairs. Things are constantly in flux and thus can be leveraged quickly by surprise moves. But until those happen I would propose that the bulls run the tape into early next year with a little shake out on the way in the interim before Christmas.

Cheers,