Quick And Dirty

Here’s the quick and dirty on the current situation: The past week managed to effectively wipe out three months of upside progress across equities. Beyond the obvious carnage what I found most interesting is something a bit more obscure and thus it often escapes the average trader: A shift in market behavior as evidenced by the failure of three consecutive BDFD lottery tickets. It’s a bit like not seeing the forest for all the trees. Let me explain.

After being active in this racket for nearly 20 years I have gotten pretty good at reading the tape. And when I engage in speculative campaigns I usually know what I am getting into, thus I structure my exposure accordingly. They call it lottery tickets for a reason.

Now my success rate for these types of speculative campaigns probably hovers around the 60% mark and I expect the regulars in my readership will confirm that. Thus I may strike out two in a row here and there but it’s actually quite rare. And I almost never miss three consecutive long entries as I usually pick them rather wisely.

I have breached the sermon of accepting your losers along with your winners here for many years now and I’m sure that lesson has sunk in among most of you guys. What I have not focused on as much, again as it’s a more advanced topic, is that by monitoring your own systematic (not erratic) actions you are actually able to glean how they align with the current market environment.

So in other words: If your win rate drops then either you simply hit a bad streak, made too many mistakes, or Ms. Market is trying to tell you something. I don’t think that I’m in a bad streak as we’ve seen a ton of volatility in the past week, thus we are clearly in a disruptive period. And I am sure most of you would agree that I have not done anything different from what I usually do here, so these stop outs are not due trading errors.

Which leaves option three as the most likely possibility – the market environment is changing. Yes, again. Here I was looking forward to a juicy earnings season with low volatility tape and easy trending campaigns. You know – the general idea of finishing a rather turbulent trading year in style. Well, that’s all in my head and when conditions shift I will have to adjust my activities accordingly.

In a nutshell: Sometimes the market is trying to tell you something, and all you have to do is to listen.

Now the danger here is to jump to conclusions and assume that we are now officially heading into a bear market. We don’t know that yet and at this point all we know is that:

1. We are completing a medium term correction, evidenced by several BTFD campaigns.
2. Realized volatility has jumped and thus has created a jump in implied volatility.
3. Market psychology has taken a huge hit after three months of upside progress has been wiped out in one week.

The implications of all that have been discussed in the past few posts but it all boils down to this: Let price show you the way as speculative entries based on being mentally anchored to either bullish or bearish perspectives can quickly produce a slew of painful losses.

More specifically I would not want to be long right now unless I see a breach of ES 2800 and preferably a retest of that level. On the bearish side there is no reason why we can’t drop through 2700 if 2710 is being breached. Remember that market psychology always trumps technical levels. As Julie pointed out the other day – the market climbs up the stairs and takes the express elevator down.

I posted this chart yesterday but it is becoming more relevant now. The IVTS suggests that a short term buying opportunity is drawing near. It’s not one I would want to take on a Friday unless I get an entry early in the session and can ride out the wins into the close. Otherwise I would probably choose to close out any open equity campaigns.

Medium term however this ratio is suggesting that equities are looking at more pain ahead. It’s one of my best long term momo charts and thus I have to keep it for my intrepid subs:

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Enjoy your weekend!