What Would Livermore Do?

When facing various setups in the tape I often ask myself: What would Livermore do? Believe it or not – quite often the spirit embodied by his work does point me in the right direction. Volar’s apt choice of the prior post’s title ‘Cover Short On Panic Days‘ is yet another popular mantra among seasoned traders credited to good ole’ Jesse. And nothing visualizes the concept of panic and fear like today’s VIX spike:

The spike to 32 yesterday was already way outside both my 25-day and 100-day Bollingers. Now both of them are set to a 2.0 standard deviation – I use this combination as it works very well for me. Of course there are other ways to stack your Bollingers – you could for instance use an increase in deviation from a standard 20-day moving average:

What we have here is a stacked 2.0/3.0/4.0 deviation from a 20-day SMA. And that push to 39.25 today breached the 4.0 mark. So, I ask you this – what are the odds for a push higher from here? I’m no math genius but I’d safely bet that it’s very low. The only issue that remains of course is what has driven the past few sessions: Yes, the odds are low but we still ride lower.

One aspect actually enabling that drop lower was the ‘bearish bullish candle‘ on Wednesday which I was (rightly) worried about. A push higher in an ongoing downtrend needs to catch a continued bid or it will fail and only serve as a ‘sell the rip’ opportunity.

The weekly SPX shows us that its 100-day SMA was touched and instantly repelled. The 1169.24 mark is now the line in the sand which must not be breached – if we do the expectation would be a visit of the 1000 mark.

Before I run – here’s the short term spoos chart. As you can see today’s NLBL didn’t have a snowball’s chance in hell to be touched. Monday it’ll descend down to 1258, still quite far up but closer in reach for next week. If you are more speculative then watch the hourly cluster around 1217 – 1219. Didn’t think we’ll see those numbers last week, did ya? 😉

Bottom Line:

Rome wasn’t build in a day – but I concede it burned to the ground rather quickly. It’s quite possible that we drop further from here but we are not crap shooters – we are traders. The odds just do not support a short trade here and if you are mathematically inclined I strongly encourage to peruse Volar’s pertinent post (what is this – Batman?). I’m keeping my eye on those Net-Lines on the buy side but thus far we are still far off any type of confirmation.

The take away message here is one painful lesson fledgling traders hopefully learn before they get wiped out in emotional markets. Although the odds can be sometimes clear the cost of being on the wrong side of the trade can often outweigh the feasibility of a trade. For instance yesterday is a good example: Had you put on a long trade in the futures hoping that a 19:1 D/A ratio was reason to go long right away then you had been right on statistically but paid a steep price this morning (by now we snapped back).

As an anecdote of how strange and risky trading can be during volatile times take this: Had you been long call options last night you may actually have been fine, even during the drop this morning. Why? Simple – vega, which boosts your premiums when volatility spikes – like for instance this morning’s push to VIX 39.25. We are still above yesterday’s close of 32.07 and if you are holding naked long calls then I strongly recommend you take profits or leg into some type of vertical spread.

Yes, the trials and tribulations of trading the markets. But you got to admit – it’s a heck of fun if you get it right, and especially once you learn how to avoid those nasty cattle prods those market makers employ on a regular basis. On that happy note I part with you for the weekend.

Cheers,

Mole