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Reset Your Market Perspective
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Reset Your Market Perspective

by The MoleNovember 15, 2019

Most retail rats launch their trading endeavors (calling it a ‘career’ would be a vast exaggeration) by voluntarily checking themselves into a financial industry indoctrination camp where they are force fed a corrosive diet of nonsense such as magic candle patterns, Elliott Wave theory, moon phases, solar cycles, Bradley Turn Dates, Hindenburg Omens, etc.

The list is long and unfortunately growing on a daily basis. If you ever wondered why there is so much available (mis)information on technical analysis then ask yourself: cui bono?

Fact of the matter is that most of these so called ‘edges’ never have and never will offer anything of a kind, while others may have started to be arbitraged into oblivion back when mullets and ripped jeans were considered the epitome of modern fashion. That’s right, if your chart could get a haircut then the picture above is how it would look like.

Don’t get me wrong, even professional traders stumble upon these superstitions but are quickly forced to abandon them as the trading industry isn’t exactly known to have much tolerance for idiocy or large financial losses. After all at best the next flood of redemption requests is only one quarter away.

Of course there is a better way, but unfortunately it’s rarely taught. Over the next few months Tony and I will be working hard to help you guys ‘turn the corner’ on developing a completely different market perspective. One that incidentally happens to be practiced by institutional traders on a daily basis.

Now by all accounts the past few months have been chock full of whipsaw and sudden twists and turns. Although intra-day volatility has continued to torment us we are however now seeing a gradual reversal to normalcy, if there is such a thing.

If you look at the daily panel on the right then we are recognizing a clear trend leading higher but the ‘barbed wire’ pattern is indicative of continued short term drama.

Let’s zoom out a little more for what I call the ‘10,000’ feet perspective, which should strike you as being strange as I actually grew up in Europe. That’s neither here nor there however and I urge you to compare the tape until late 2018 until about late September or early October of his year.

Do you see a difference? I bet you do and although there have been brief periods of low volatility over the past two years they quickly hit the wall after either approaching or breaching new all time highs. The obvious question we should ask ourselves is whether or not we are due for another smack in the face.

Now this and other questions we need to talk about a concept called ‘expected move’, or EM. In case you were wondering, it’s not a chess term, rather EM represents a 1 std-dev expected range for a stock’s price in the future.

Say what???

Okay, so we all (should) know that the range of 1 standard deviation covers about 68% of all expected outcomes. Therefore an instruments’s EM is the magnitude of that stock’s future price movements with ~68% certainty.

Here are the three components that feed into the formula:

  1. The current price of the instrument.
  2. Its implied volatility.
  3. The EM period (expressed in days)

As there are many expiration cycle, we need to use the IV of the options in the expiration cycle closest to our desired time period.

Originally the CBOE only offered weeklys which expired on Friday, then in January of 2016 they added Wednesday expirations, to be followed by Monday expirations in August of 2016.

The CBOE clearly intended to expand its offerings and thus bank more ill-gotten coin in the process, however what they probably didn’t anticipate is that this explosion in option expirations would completely change the market as we know it.

Because what happened almost immediately was a marked jump in what it’s called ‘market efficiency’, which is just a fancy term for saying that asset prices reflect all available information, which incidentally also applies to – you guessed it – expected move (EM).

Now this bring us to our SPX chart which is now proudly donning an ‘expected move’ indicator. It’s done in ThinkOrSwim and I plan on porting it to NinjaTrader as well as python over the coming months.

What I need you to do right now is to stop right here and look at this chart for a little bit. First up think about what you are actually looking at. The ranges plotted for each week represent the prior week’s EM as extracted from the CBOE. We are basically mapping the preceding week’s IV against the current week’s RV.

First set of question that come to mind:

Q: How often are option traders wrong?

A Actually the majority of the time IV is pretty damn spot on. Even when price clips the upper/lower boundary it’s pretty damn close. When EM fails in a spectacular fashion then it seems to trigger a series of additional failures as it did starting in June of this year. Put that in the back of your head for now as we’ll come back to this again.

Q: Is there a way to trade EM?

A: Yes, absolutely and much of our future work here will revolve around exploiting what appears to be a clear and reliable edge. Best of which, it doesn’t make use of moon cycles.

Q: Is there a way to trade an expected failure of EM?

A: Yes, absolutely – but it’s more advanced stuff and we’ll get to it in time, grasshopper.

Q: Can EM help me trading earnings?

A: Let me answer it this way:

Here are CSCO’s respective EMs on November 13th. Earnings were announced later that evening after the close and the anticipation was move of about 2.4 handles.

Here’s yesterday’s print on CSCO (the 14th) – it opened about 3 handles lower and then bounced up to about 46, which is spot on. This  is not an isolated incident – this stuff happens ALL. THE. TIME. Market efficiency we can stick a damn fork into.

But wait – there is more. Let’s look at AAPL:

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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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  • evilasevildoes

    made perfect sense and it is opex

  • Ronebadger

    And then there’s this (not my chart…I stole from another site) The blue line is a 10MA. https://uploads.disquscdn.com/images/e4b588142a2a3e6150fdddaefc65db30c518ac06827e0e6bea2b833493167a82.png

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

    spell check.
    Hare the three components that are fed into the formula:

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

    Yep. I noticed last night that put/call ratio was getting down where pullbacks generally follow in the next few days/weeks.

  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • https://evilspeculator.com Sir Mole III

    LOL – freudian slip!

  • pepe

    Short AMD at $39.25 via call options.

  • https://evilspeculator.com Sir Mole III

    Not really what I meant but alright….

  • pepe

    Really excellent post, Sir, which I have to dig into deeper this weekend.

    I should have said that it’s just a very small “OPEX bet” position which is now up 50%. Get the direction right on OPEX can deliver 10R which is worth the bet. But only when I had a really good week. Max loss is 10% of weekly gains; max profit… 😀

  • https://evilspeculator.com Sir Mole III

    If it’s up 30% you should take profits. We usually shoot for 30% before we bail.

  • ridingwaves

    take it and head off to the panaderia……

  • ridingwaves

    check out volatility on AMRN and CLVS….both jumpy….HIIQ also

  • ridingwaves

    hair styles was akin to social media back in the day….

  • pepe

    Well, if I’m right I could fly to Paris to pick up delicious pastries for the whole crew… 😉

  • rmwaddelljr

    Sorry for being so intel challenged, but still don’t understand how to decipher your EM chart. Help?

  • Julie 35 – 25 – 36

    Chief You forgot the length of our skirts. If our skirts are short short mini the market goes up. If our skirts are long like maxi trend then the market goes down. Thanks for the post Chief
    JULIE

  • ridingwaves

    that works too

  • Julie 35 – 25 – 36

    We had a small short probe SH from last Friday’s close that was pretty much break even all this week until today. In viewing the futes last night following the Kudlow statement that the China trade deal was complete this move up today was expected.GOLD still trading within it’s falling wedge parameters
    JULIE

  • Julie 35 – 25 – 36

    Buying some UNP The bounce off it’s 13 ema and support Now above a down trend line and it’s 5 ema. We were watching the pullback carefully
    JULIE https://uploads.disquscdn.com/images/581385a7c57f1579c427a346050c2781c5e051ede90cc90b07f13d4de5e4aa5b.png

  • HD

    HD
    a day ago
    Some wavers look at this as abc x triangle. FWIW.

    Triangles are ALWAYS continuation patterns. #urwelcome

    HAGWE all.

  • Julie 35 – 25 – 36

    You too HD
    JULIE

  • Julie 35 – 25 – 36

    @ RW Nice call AMRN
    JULIE

  • Julie 35 – 25 – 36

    WFC This could be the lower high to short. Our target 53 – 54 has been achieved
    JULIE

  • Julie 35 – 25 – 36
  • Julie 35 – 25 – 36

    WFC Today’s gap up sold into at a lower high
    JULIE

  • pepe

    UNG: On the move but on low daily volume. Long since morning. Target $21.40.

    https://uploads.disquscdn.com/images/6c7ad206bdd6ff445db86dd095a0b1d26069f2420360e0b38e2cfd16e5d1a1e5.png

  • pepe

    $53.80 was previous fail on 11/13. Looks good, especially as the market “looks” overbought.

  • Julie 35 – 25 – 36

    Hi Pepe 53.61 is strong resistance
    JULIE

  • ridingwaves

    vwap 22.92 IV is 65%, shorts are most likely MM’s, 12 Short ratio….will make its way to 30

  • ridingwaves

    40 PTarget now on PNF….

  • ridingwaves

    not this water wave guy
    ridingwaves BKXtoZERO 8 days ago
    seasonality and cheap fed funds, what could go wrong…..the powell put is in…

    View in discussion
    ridingwaves
    ridingwaves BKXtoZERO 8 days ago
    3150…..might be easier….but fight the english….blood is a sure thing…

  • BKXtoZERO

    ya… those hogs..

  • http://iberianviews.blogspot.com/ catracho
  • ridingwaves

    run, run……mommy
    marketwatch.com/story/an-ominous-sounding-hindenburg-omen-and-a-ohama-titanic-syndrome-are-forming-in-a-key-stock-market-index-2019-11-14

  • ridingwaves

    rate cuts treat volatility like a $5 mule….

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

    1:11 – “Make a wish”

  • ridingwaves

    shorts are in big trouble here…..too much volume pouring in….buyer orgy

  • Julie 35 – 25 – 36

    UNP Would like to see more volume today. Watching carefully
    JULIE

  • pepe

    Sold AMD “OPEX bet” put for 1.5R. 🙂

  • Julie 35 – 25 – 36

    UNP is outperforming SPX since 1st week Oct.$DJUSRR (railroads) is outperforming SPX since 1st week Oct.UNP is the leader and outperforming $DJUSRR since 1st week Oct
    JULIE

  • Julie 35 – 25 – 36

    Everyone Have A Great and Safe Weekend
    JULIE

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

    You too.

  • Julie 35 – 25 – 36

    WFC No short yet Closed above 53.61 resistance.
    JULIE

  • Julie 35 – 25 – 36

    Cyd texted me GG and she is doing field work today and wishes you and everyone a nice weekend too. We are very careful long UNP at this time i.e. overbought market with our indicators showing negative divergences and diminishing momentum
    JULIE

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

    Field work? brutal, she’ll die out there.
    ;-D

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

    the magic of ’89’!

  • Julie 35 – 25 – 36

    No coincidence GG Wall St lies and charts do not.We love your charts as they augment ours.Three peas in a pod ! Three little pigs !
    JULIE

  • Julie 35 – 25 – 36

    Yup GG 89 Lives !
    JULIE

  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • Julie 35 – 25 – 36

    Her employer has a big 4×4 for her to do field work.A lady out in the field her manager requires her to check in on the hour.They take great care in what she does. Occasionally she must go out of town and someone in her office always goes with her
    JULIE

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

    sweet. when can I go?
    😉

  • Julie 35 – 25 – 36

    GG I will text her and let her know that you want to go with lol !

  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • https://evilspeculator.com Sir Mole III

    Remember that the Russell is full of regional banks. Now look at the XLF and it all makes sense. Which in turn is linked to the bonds perking up recently.

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

    Dankeschön

    edit:
    Ich bin dankbar fur deine Hilfe

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

    it’s that time of the year to enjoy the cooler desert.

    Hang On!
    https://www.youtube.com/watch?v=HORFzPHUNpI

  • Ronebadger
  • Julie 35 – 25 – 36

    Hi RB We both knew there was going to be an imminent pullback which tonight’s futures possibly indicate. We still have maintained our short probe SH. Also long Barrick (GOLD).Also have a long UNP and will see how the rails do tomorrow Monday The weekly chart UNP looks good
    JULIE

  • Julie 35 – 25 – 36

    Hi GG I just checked S&P down about – 2.76. What a weekend around here. How about you?
    JULIE

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

    Can’t complain. Sunny 80’s weather.
    shorts, sandals.
    that is all going to change in a few days. 🙁

  • Julie 35 – 25 – 36

    GG Friday night there were streakers downtown. They ran the full length of Main St naked. College boys and girls.from frats and sororities. Hilarious !
    JULIE

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

    We have a Main street. They could do a full Marathon.
    LOL.

  • Julie 35 – 25 – 36

    The police didn’t do anything. They were laughing too !
    JULIE

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

    That’s so awesome.
    There’s enough serious sh!t in the World. No need for a nanny state.

  • Julie 35 – 25 – 36

    I hear ya loud and clear… totally agree. College kids having fun.No one raised a fuss.
    JULIE

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

    Brrrrr cold. talk about witch’s tit.
    😉

  • Julie 35 – 25 – 36

    GG If I wasn’t wearing cowboy boots I would’ve joined em lol!
    JULIE

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

    yeah, right. but if Grizz joins make sure you have a hoodie for the woodie for him. I can’t post it. Mole would smack me.

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

    Morning. Long UNG @ $20.37. Short-term support at $20.30 (also Fib retracement).

  • pepe

    Short TLT @ $138.50. Hitting resistance and upper down sloping trendline. I think we’ll do another trip down to the short-term lows before the next bounce.

  • Darkthirty

    Is that a bullish bearflag or a bearish bullflag….only the next tweet and the algos know for sure!