The Day After

Since the onset of QEx I have seen this script play out countless times. We get a downside correction which pushes toward the edge of daily or weekly resistance (Mo – Wed). Then some news or rumor induced headlines start injecting a healthy dose of volatility into the tape (yesterday). What follows is a complete flatline – a.k.a. the day after.

The tape basically freezes and there is little participation – all the sellers (or buyers) have suddenly gone MIA. This serves to reel in anyone with a strong opinion – especially the retail crowd which enjoys playing options.

Here’s a snapshot of today’s session as seen on our Zero indicator. As you can see the signal shows almost no participation. And based on prior occurrences over the past few years both sides usually get screwed the day that follows as vega squeeze serves to devalue winning long option premiums and of course eviscerate anyone holding short. Of course that is assuming we punch higher  from here – which has been the case nine out of ten times. Should recent history be our guide? What if it’s different this time? What to do?

My answer – as always – stick with the charts. Despite the recent gyrations we now have excellent context to plot our way forward. Let’s get started – shall we? Here’s the SPX which now sports a beautiful inside day right on top of the 25-day SMA. Not only that but we also have an NR4 (narrowest range in four days) and an LV4 day (guess what that one means). So excellent context here.

The Dow cash in a similar configuration. Here we’re sitting right on top of the SMA, thus allowing both sides a fair shot at the big price.

And the RUT – exactly the same idea but the bears also enjoy a Retail Variation Short starting tonight. So no guesswork required – we have excellent setups across equities and you won’t need a crystal ball to get positioned. Simply follow price.

Now on to Forex and the futures – we’ve got some goodies tonight!

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Cheers,