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Realized Volatility Release
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Realized Volatility Release

by The MoleAugust 14, 2018

The eternal ebb and flow of realized volatility (RV) is a key concept in order to understand what has been happening in equities over the past week or so. For over six months now we’ve seen a marked increase in RV which in the process it has claimed numerous victims in both the bullish and bearish camps.

A rise in volatility is traditionally attributed to downside corrections, but we are talking about realized – not implied – volatility here. The former is comes as as signed value and the latter as an unsigned value. The indicators I use on the other hand normalize the signed value as I’m mostly interested in the magnitude of the swings. Clear so far?

From a pure price perspective all one needs is a cursory glance at the weekly E-Mini panel to realize that we are in a completely different market phase than that of early 2016 into late 2017. Even the bullish reversal from the lows near ES 2560 has been spasmodic and chock-full of traps and tribulations. So simply from an RV perspective this is not the same smooth ride in the sun we enjoyed until late last year.

Here’s a 60-min chart of the recent price action via my preferred RV indicator. If you want to recreate it you can use an ATR(14) and then wrap your favorite BB around it, which should make it look similar (but not a cool – haha). What I’m highlighting on this hourly chart via blue candles are the swings from below the BB back into it, which is usually followed by an increase in RV.

Now again, we never know whether it’s going to be a swing to the downside or run toward the upside, although RV itself is directional the way we express it here is not. All we do know is that odds support an RV increase, especially if the BB has been reduced to what I sometimes call the ‘head of the anaconda’ as we saw just last week.

In other words, the tape had been slowing down to a sideways crawl and that is not usually a situation that prevails for a long time. What we got of course is a quick wipeout downwards instead of what many had expected: a breach of the coveted 2900 mark, and in the process of course the recapture of the early 2018 all time highs.

If you look at the chart above then you see that the signal has gone straight up and will at some point re-enter earth’s atmosphere and then drop below the BB signaling a gradual reduction in RV. When I set out to my research in realized volatility cycles (RV cycles) a few years ago my hope was that I would find patterns that would show me directional bias when it came to various RV cycles.

Unfortunately the answer is not as clear cut as one would like, in that it is strongly market phase dependent. In trending markets a decrease in volatility usually favors the underlying trend. Wave wankers would say that RV decrease happen during the 4th and 5th leg of a wave formation. For the rest of us those are the late phases of a trend.

If the trend is weakened or if we’re in a small sideways range then reduction in RV means just ever smaller swings all over the place. Which in turn will at best help you when setting your stops as a swing trader or scalper.

In larger high volatility sideways ranges RV rolling < the upper BB is often accompanied by a reversal, so in that context it’s a good way of planning your entries and exits. And in a way that makes sense as RV expresses the velocity, the vehemence, of the price action in a particular time period. As a side note it seems to me that the high velocity side is usually the one winning out in the end, as for example shown in the swings in late June (left of the RV chart above).

So where does this leave us today? Well, we are most definitely not in a sideways range – at least not yet. RV was minuscule and now increasing sharply – we are not even seeing signs of a reduction, thus pushing the signal back < the upper BB on my chart above.

I think that this week marks an inflection point as a lot of market participants were mentally primed for the potential of new all time highs. Serving them the oppose this week was that big monkey wrench many were not prepared for. I pose that RV will remain elevated for quite a while, at least going into mid next week.

So looking at the double bottom I can’t help but consider two scenarios: This is either a massive bear trap or we drop much much harder than anyone currently anticipates. Either way I want in. So I’m long right now with a stop near 2820. If that gets taken to the woodshed then I would want to be short, preferably after a LKGB retest on the short term panel.

I hope this helps, if not just ask away in the comment section.


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at the usual social media waterholes.
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  • StockTalker
  • StockTalker

    Short /CL -3

  • daverg

    So I’m long right now with a stop near 2820. If that gets taken to the
    woodshed then I would want to be long, preferably after a LKGB retest on
    the short term panel.” what is LKGB and why you go long in it ?

  • http://www.captainboom.com/ captainboom

    Last Kiss GoodBye, and I think he means Short, as that’s what’s on the chart.

  • StockTalker

    Yes, the bears are back

  • HD

    c=a 2835 pivot

  • StockTalker

    /NQ to lead

  • StockTalker

    Below 7400 should get things rolling.

  • randomuser6789

    “This is either a massive bear trap or we drop much much harder than anyone currently anticipates. Either way I want in.”
    I concur, good sir! My expectation is that we drop much harder, but I will let the tape tell me the real story.

  • StockTalker

    Seeing a massive move coming here. Stay tuned

  • HD

    curious what you’re seeing. I was thinking we shouldn’t overlap 2791

  • StockTalker

    Various end moves in this market, commodities, etc……we may be there:) All my indications are saying short.

  • StockTalker

    Playing when you least expect it:)

  • daverg

    ty, sounds like Joe Granville. That astrologist market timing fellow out of Tucson went 100%, or 200%, whatever (he doubled up) on shorting the market in August newsletter after being short at beginning of year. Others are seeing a double top in the SP. So when everyone sees the same thing, that means what ?? (do the opposite?)

    https://www.thestreet.com/investing/sp-500-this-is-no-double-top-reversal-14682181?puc=_htmlmkr_pla1&cm_ven=EMAIL_htmlmkr&tstmem=173477184&utm_source=newsletter&utm_medium=email&utm_campaign=MKR&utm_term=Is+the+S%26amp%3BP+500+Headed+for+a+Double+Top+Reversal%3F

  • StockTalker

    Crude oil below 68 (now resistance) is a short play. Weak hands are out

  • StockTalker

    Here comes the dollar

  • StockTalker

    Short /NQ now

  • HD

    small hit from that level followed by 10 handle rally, Will maintain this count unless yesterday high is taken out.

  • BKXtoZERO

    what is with those 2 large candles in the last few days back down to 95.20? fake prints or real? you guys still see massive squeeze higher in DXY

  • StockTalker

    Worm is about to turn.

  • HD

    The IV crush on 9%+ rallies is now 85% success rate. VIX down 8%+

  • StockTalker

    -3 /NQ, bears turn

  • BKXtoZERO

    Long NUGT from 17.32 today… today only unless GC keeps going.

  • BKXtoZERO

    Mole… Nice post on Volatility. Thanks!

  • StockTalker

    Yes, time to pick it up a notch.

  • StockTalker

    Dollar about to make her move.

  • StockTalker

    No news is good news

  • ridingwaves

    if you were fishing, you would be out of worms right now…..

  • StockTalker

    Lol, don’t fret buddy.

  • ridingwaves

    no worries, I’m taking a beating on largest holding…but its long term and allowing me to add….but fishing is hard you know…

  • StockTalker

    Not if you are good at it:)

  • nirav777

    The mkt open has a considerable divergent view on ZERO panel, well maybe… at least https://uploads.disquscdn.com/images/58340b5081548c9616bbb23301fd3e387ae5bac0fd1c76eaefd81a13296f3ad4.png a lack of notable bearish activity

  • ridingwaves

    surprised no one is discussing the widow maker lately, sitting under inflection point of 3 going into strong seasonality…..maybe its just to hot to talk about it….

    a LKG might make me long…

  • StockTalker

    Long way down hill from here bulls

  • randomuser6789

    Do you have a chart to post or any meaningful analysis?
    You have posted a lot today, but I need something I can sink my teeth into not just cheering for the tape.

  • HD

    Props to Mole. He keeps BTFD and it rallies everytime for him.

  • StockTalker

    Armature crude oil bulls in trouble, hehe. You can only stretch the rubber band so far and then….SNAP.

  • randomuser6789

    SPX 2840 getting rejected for the 4th time today. But not much follow through.

  • https://evilspeculator.com Sir Mole III

    Yo, how’s my crew! 🙂

  • nirav777

    Long and pushing for higher ground..

  • HD

    Guess we all parked our stops there, made a market for them, and now we have to pay up.

  • https://evilspeculator.com Sir Mole III

    Thanks mate – I hope that my perspectives this morning were helpful.

  • Julie 35 – 25 – 36

    SPX Yes What I have been waiting for . The bounce to a lower high to short
    JULIE

  • Julie 35 – 25 – 36

    Doing great Chief
    JULIE

  • https://evilspeculator.com Sir Mole III

    Would agree with randomuser here. We don’t mind opposing views whatsoever, but vapid claims without proper analysis is just noise and at best just pure luck if it plays out.

  • https://evilspeculator.com Sir Mole III

    Glad you enjoyed it 🙂

  • https://evilspeculator.com Sir Mole III

    Sorry I guess I messed that part up. Yah, a LKGB would have been the opportunity to short. First you would get a breach lower, then a push back higher to the breach zone, which is the LKGB.

  • BKXtoZERO

    I am perhaps with you… surprised at the bearishness for such a small pullback. Lots of movement on VIX for small amount of points lost…. 2800 not even tested…. sorry I missed my beloved TVIX but not chasing it here. Trying for a long gold play here at 1200

  • https://evilspeculator.com Sir Mole III

    No, I don’t double down, mate. I simply take a loss at inflection points. For me it’s all about inflection points and getting a seat on the bus. Had I been wrong with my long position this morning I would have simply eaten my loss and then (hopefully) ridden the inverse move lower. Yes, sometimes you get a double loss but it’s actually quite rare as most of the regulars here can probably attest to.

  • https://evilspeculator.com Sir Mole III

    SORRY

  • StockTalker

    Euro in big trouble

  • https://evilspeculator.com Sir Mole III

    Although it’s ancient history now I of course meant ‘short’ after the LKGB. I made the correction though so that my thinking is hopefully clear for everyone. Sorry for screwing this one up but it seems the regulars all understood what I was saying.

  • Julie 35 – 25 – 36

    Hi BK GLD The selling climaxes have not worked so far … I went long (small position) at strong support 115 and took a small loss. GLD perhaps now a washout to rid the weak hands. Will attempt another long with a bullish close above the daily 5 ema approx 113.87
    JULIE

  • BKXtoZERO

    stopped out of NUGT for a small loss.

  • Julie 35 – 25 – 36

    RW stated on previous threads and I concurred. Watch the Banks … XLF and $BKX. Watching $BKX at 109.72 and XLF at 28.12 on a bounce (shorter high)
    JULIE

  • nirav777

    I get the sense that most are generally bearish on the stream… or is it just me.

  • Julie 35 – 25 – 36

    Good man BK If wrong not wrong long ! The sun sets only to rise again
    JULIE

  • ridingwaves

    its you, I’ve been preaching new high for 60 days or so….damn these slow rides north…

  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • bankwalker

    the bears are just more vocal I think … I wouldn’t read much into it …

  • Julie 35 – 25 – 36

    Chekout the Ichi Cloud GG ! Down to the baseline 21 matching the 34 ema BAC. Now a bounce attempt. Love the coud and fib ema’s Now oversold https://uploads.disquscdn.com/images/9930fe0250f4eecfa801a8dd710ce6215b03da28db48172b1c2e0e67ea5d49aa.png JULIE

  • Julie 35 – 25 – 36

    RW SPX Double top ! Could be IMO perhaps a shorter high on bounce attempt What i am watching.for Not going to force a trade. RW good call on the Banks to watch
    JULIE

  • https://evilspeculator.com Sir Mole III

    It’s just you – I hope, or I’ll have to knock some heads! We don’t have directional bias – all we care about is the tape in front of us.

  • https://evilspeculator.com Sir Mole III

    Except Julie – she only takes short trades for religious reasons

    😉

  • ridingwaves

    too close to all time high for the big boys now coming back from vacations not to go after, everyone is still too bearish, thus helping the wall or worry rally…..Adv/Dec is saying bulls in control

  • https://evilspeculator.com Sir Mole III
  • StockTalker

    This is what I refer to as the bulls “Last Stand”. Full short position

  • Darrell Osgood

    I’m doing much better, thanks for asking. I have been out of commission for the last five weeks from a fall taken on a cycling accident. I broke both radial heads (elbows) and broke off a 1 inch chunk of my orbital socket (eye). No permanent damage – I missed brain damage by an infinitesimally small fraction. Arms still hurt, but my recovery has been swift due to clean living and excellent private healthcare (no thanks to the VA).
    By pure luck, I was bullish at the time of the accident and the market has been climbing most of the time.

  • nirav777

    That’s what i thought as well// , but might have to knock some heads as the general feel is were looking to dine in hell… or maybe Stocktalker overly short bias is the loudest on the stream… probably more of that

  • Julie 35 – 25 – 36

    Speaking of “last Stand”. Custer National Battlefield should be on everyone’s bucket list. Also the Big Hole National Battlefield ( Nez Pierce Flight Chief Joseoh)
    JULIE

  • HD

    A long against yesterday’s low or a short against yesterday’s high. Both are trades. Nothing more.

  • randomuser6789

    I have a bearish outlook short term, but I expect new all time highs in Sept or Oct.

  • Julie 35 – 25 – 36

    Like you HD and the Chief Roll with the flow long and short. However now a slightly bearish tone to wit the banks
    JULIE

  • Julie 35 – 25 – 36

    Chief LOL!
    JULIE

  • ridingwaves

    wow, that sound like pain…..here’s hoping recovery keeps on getting better…

  • HD
  • Julie 35 – 25 – 36

    Love the poop volume BAC on bounce attempt. Getting ready to throw the kitchen sink at it on a short. Initial target on bounce 31.17
    JULIE

  • daverg

    good. I wasn’t referring to you doubling down. The astrologer in Tuscon double down. !!

  • Julie 35 – 25 – 36

    Yipes! Take care of yourself. I imagine much physical therapy
    JULIE

  • nirav777

    Looking for a new high in this hour to further support the bull case

  • https://evilspeculator.com Sir Mole III

    😉

  • https://evilspeculator.com Sir Mole III

    Well if nothing else I don’t trade by consensus, I simply look what’s ahead of me. If people post charts and ideas I always consider them of course. But just because people are bearish or bullish does not affect my lens or plan.

  • https://evilspeculator.com Sir Mole III

    Actually, here’s a good example in trading psychology. Take a step back for a moment and think about WHY you are so eager to analyze the consensus of the group. Could it be because there is a lot of confusion among participants and noise and whipsaw in the price action?

    All that creates camps and people get exposed, which again leads to larger resolutions as the wrong side is forced to cover. The market is a constant mind game and if you put yourself in an neutral position you have a much better perspective on the market plus you will be able to take advantage of inflection points.

  • Julie 35 – 25 – 36

    SPX Guys cant’ wait for this test Upper gap window macthing a resistance and the 61.8% retracement …. Yeah ! JULIE https://uploads.disquscdn.com/images/9f9fb146dee633cf5f511330c1ce92cc68630e8a23a973e59b6b47ef46b5ca55.png

  • Julie 35 – 25 – 36

    But 2841.65 is very important to close above
    JULIE

  • ridingwaves

    natural gas is starting to take shape as a bullish bet, using UNG weekly chart as exmple damned it may be…might be able to pick up at 23.50 area on pullback but seasonality coming into play, first weekly candle above 50 since 1-17, trends look bullish, 100sma about to push over 200sma on daily, which looks bullish as well..

    https://uploads.disquscdn.com/images/654f57cfb6a67c4c6b76a355a1afcc282057f125184f7ba9b513f3a7763d77a6.png

  • BKXtoZERO

    Some conviction on this one!

  • Julie 35 – 25 – 36

    Guys $NYSI now below 400. 400 is the line in the sand where a possible correction can occur. Bulls beware JULIE https://uploads.disquscdn.com/images/20335d772f3efa9b780adcff8f8c3c93f6a3902782045e3424a3060d99c2229f.png

  • Julie 35 – 25 – 36

    $NYSI also below it’s 10 sma not shown on chart for clarity
    JULIE

  • Julie 35 – 25 – 36

    Chief Love the coiled rattlesnake Looks like it may bite a bull in the leg ! LOL !
    JULIE

  • Julie 35 – 25 – 36

    Anyone go long $RUT the oversold bounce off the 55 ema and center https://uploads.disquscdn.com/images/74a1f2ecf30ac8ddb68aaeb70651234640ddf9e6cc6d39715b7e6996be37d293.png line MACD test.? Possible bullish ascending triangle developing Just saying JULIE

  • Ronebadger

    SPY volume very light today…just part of the puzzle…

  • nirav777

    ding ding ding…

  • https://evilspeculator.com Sir Mole III

    How’s everyone?

  • https://evilspeculator.com Sir Mole III

    No VWAP touch sort of contradicts the weak signal. I’m not complaining – thus far cautiously optimistic.

    https://uploads.disquscdn.com/images/512f1026146e658e245b3e03c89dc33bbb0b88f3164e55c7e9442bc1a18c88de.png

  • http://www.captainboom.com/ captainboom

    Long and strong. Almost time for an afternoon nap.

  • Julie 35 – 25 – 36

    Doing great Chief Getting ready to short SPX and the banks
    JULIE

  • http://www.linkedin.com/in/sharondsessions/ Sharon

    busy job hunting

  • Ronebadger

    ended VERY light

  • Ronebadger

    VIX BUY STEP 2

  • Julie 35 – 25 – 36

    Sharon You will land a nice one
    JULIE

  • randomuser6789

    I saw that. I don’t know what to make of it, as it still seems like this market is gonna get clobbered in the next few days.

    But rules are rules.

    I exited 1/2 of my TVIX position today, I will jettison the other half tomorrow if SPX shows continued strength.

  • randomuser6789

    Step 3 confirms the signal. If it looks like a confirm day tomorrow, I don’t want to be short.

  • Ronebadger

    If the VIX is up tomorrow, the set ups restart…you have to wait for a new Step One.

  • Mark Shinnick

    Yeah…we wouldn’t usually be hanging-around the upper here unless it meant something.

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    USD,
    well, that was fast.
    double your pleasure..
    https://uploads.disquscdn.com/images/13283edf9bf9aad67c686cc3877e94a895e1bb9fb6389187fd6db0e50f146ecb.png

    prophylactic measures may be in store.

  • Benson Burns

    I think Turkey was a terrible catalyst for any real move down. Just jibber jabber.

  • BKXtoZERO

    usually a fast rising dollar causes stress and issues… no?

  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • BKXtoZERO

    Peter Schiffs fund I think…. anyway, dollar was rising into early 80s, into 2000, rose sharply in 2008 and rising sharply now. also not good for profits so I thought….. so we’ve been told.

  • https://evilspeculator.com Sir Mole III

    It’s ALWAYS jibber jabber Benson. Just ignore the news and watch your trading improve markedly.

  • StockTalker

    /NQ below 7400, took a lottery ticket in /GC