Picking Over The Survivors

Long term survival in the financial market is just that, surviving the myriads of traps and tribulations you will invariably encounter during your trading career. Although the risk of a complete wipe out on a day to day basis is pretty small it only has to happen once in order to dissolve years of hard work and compounded assets, sometimes in mere minutes. Of course what spells disaster for those unfortunate or dumb enough to have gotten a tad to greedy near a market peak or those attempting to catch a falling sword, means exciting opportunities for the patient and more seasoned survivors.

Lest we become victims of explosive market volatility ourselves, lets however review a bit of technical evidence and then decide if the time has come to strike. Shown above is the VXV:VIX ratio I mentioned yesterday and of course many times over the past few years. This particular chart is more of a long term version with a slower BB in combination with a slightly smoothed SMA of the VXV:VIX.   What that does for me is to cancel out some of the noise and appreciate the big picture.

But as always we are not taking trades courtesy of indicators alone – all we are doing here is to assess the momentum in implied volatility. Based on prior observation there seems to be a decent possibility that we’ll see a snap back, meaning that IV is ready to revert to its mean. But you can also see that the smoothed signal has not yet pushed > the lower BB. So we don’t have confirmation yet and any entries taken here would be speculative.

The SPX:VIX ratio shows me a little divergence near the close that could possibly drag prices lower again. On its own it’s not a signal but if it subsists we should definitely take note.

The SPX on its own shows us a volume hole between 2700 and 2735ish. That one may be difficult to cross and there may be push back.

UVOL vs. DVOL. The bears were putting up a haphazard fight yesterday morning but then simply walked away in the afternoon. That looks pretty bullish to me and alleviates some of the concerns mentioned above, but it does not outweigh them obviously.

What pushes me back towards equilibrium in my outlook is the Zero signal which looked rather supportive yesterday. There were clear attempts by deep pockets (+2 and +3 signal spikes on the Zero in the right panel) to bang the tape higher and pin a positive close.

I have decided to take out an early exploratory entry near 2680 with a stop < 2610. We are talking a tiny 0.2% position and if it survives the day I’ll add more meat to it. The odds here are probably < 50:50 as it’s equally possible that we’ll see one more retest of the lows. Please don’t make big BTFD bets here, I don’t think we’ll return to business as usual anytime soon.

Update on the EUR/USD campaign. I’m taking profits here at about 1.2R much to my chagrin. To be frank I was quite disappointed by the lousy performance of the USD on Monday and Tuesday. Not sure where all the money went but it’s not going into Dollars or bonds.

Speaking of which my trail on the DX campaign now advances to about 0.5R. Better than a loss but come on – this thing should have exploded higher but the old greenback seemed completely unimpressed and barely pushed higher.

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