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Volatility Games
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Volatility Games

by The MoleJune 17, 2012

As you know at best I usually ignore the news. And often I even fade whatever popular theme makes it to the top slots of the daily headline queue, anticipating that retail once more is being led to the slaughter by the usual suspects. Then there are those times when the risk/reward ratio of being in the market is so skewed that the best policy is to just hunker down and wait things out. This quite often occurs during limbo periods – if you don’t know what I am talking about then please take some time to peruse last Sunday’s post.

Today I however want to dig a bit deeper into the concept of volatility – or more precisely volatility in volatility (ViV):

If you are confused by the meaning of ViV then take a look at the chart above. This is simply an hourly plot of the VIX in blue/green with average true range (ATR) plotted below in yellow. As you may know average true range represents volatility – ergo, we are looking at VIX volatility here, which just happens to plot volatility in itself. Thus ATR on the VIX represents ViV.

What you usually want to see as a trader is for the VIX and ViV to move more or less in unison. When I see ViV rise I usually take note as we may see a bit of a storm. But when I see the VIX drop hard and ViV push in the exact opposite direction then tornado alarm bells go off in the evil lair.  And divergent ViV is exactly what we are seeing right now.

For the subs I do have a few perspectives that may unfortunately not predict where we’re heading on Monday morning but demonstrate why being exposed right now is not only a very bad idea but that chasing whatever direction the tape may taking early in the session could result in a good ole’ spanking. And not the type you may enjoy 😉

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More charts and cynical commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero or Geronimo subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
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While equities shot higher late Friday our TLT:JNK ratio has been going sideways. What does that tell us? Well, it seems that credit traders are a lot less enthusiastic about the rumor mill that has been so conveniently stirred up ahead of the Greek election. Can we trade on this? Hell no – but we can decide NOT to trade. And knowing when to stay out is often more valuable then when to take a trade.

FAGIX vs. VUSTX – same story here. Credit is not buying the hype right now.

Copper is still irking me. This is not an easy chart to read and I’ll try to explain it. The orange arrows I painted show us how both moved in unison on the way down – most importantly we are seeing a similar level of magnitude. On the way up (if you could call it that on the copper side) we are seeing equities pull away hard. I know we are above 1330 right now but that does not give me much confidence in the current push higher.

Interesting perspective over on NYSE up vs. down volume. The divergences at both the top and at the bottom are sure noteworthy, yes. But what really gets me is the magnitude of the recent ratio spike up in comparison with the spike down. Seems to me that a lot of energy has been expended to get the tape above 1330. Can we trade on this information? Hell no! But ask yourself this – IF we spike higher on Monday then what are the odds of a sustained move higher without seeing a shake out first?

Very same picture on my NYSE adv/decl issues ratio. Divergences  – check – we always like those near tops/bottoms. But the magnitude here is rather large and even if we spike higher Monday I would not expect for this ratio to make a b-line for 2.5. And if we drop hard then the same applies: This is just too juicy of an opportunity to shake out some weak hands, especially if they happen to trade according to the headlines.

Bottom Line: We are heading into a tornado on Monday and I think there will be a few big winners and a lot of sour losers. I don’t see why anyone would want to participate with anything more than a few lottery tickets. Don’t be worried about missing the boat on whatever direction the tape will take. Rather be worried about losing a large chunk of your trading equity. Let’s remember that our prime directive is and will always be capital preservation.

As they say on my side of the Atlantic: No vale la pena 😉

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Cheers,


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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  • Th3_ACist

    Good Stuff!

  • https://evilspeculator.com molecool

    🙂

  • newbfxtrader

    Nice work Mole. Not taking any sides today. Let us know when to tread into the shark infested waters again!

  • http://twitter.com/law6 law

    muchas gacias amigo 

    vaya con dinero

  • http://chartsandthat.blogspot.com/ ultra

    Silver looking weak – and I know you guys like an NR4 inside day 🙂

    http://scharts.co/N5YNRO

  • rothstein

    hey Mole- what is the url for that arb or fv site you put out a loong time ago? know what I am talking about? tia

  • AMCabrera

    nice one mole thank you! 

  • AMCabrera

    1.2722 yup that worked out real well Oanda. now dicks like me couldnt take advantage of a early sunday profit.

  • tradem4alpha

     1.2722? So it seems that the gap up is considerably smaller than the one last week, when the Spain bailout was announced…

  • simon n

    1.2704… 

  • AMCabrera

    very much so.

  • Fibz

    Syriza will get the majority if the ND/Pasok coalition fails.

  • AMCabrera
  • tradem4alpha

     Thanks

  • beentohardknocksU

    The pre-market jumps may well provide some tempting targets, but I think Mole’s advice to sit on the sidelines here is pretty sage.  This could explode or collapse or both – and all of that before markets open tomorrow!

  • http://practicalt.blogspot.com/ Darth_Gerb
  • MonkeyBusiness

    crazy action in gold and silver…..gap and crap

  • amokta
  • newbfxtrader

    monkey business…

  • Joe_Jones

    Sell the news event…

  • Fibz

    USD/CHF SSI also now net short. Bullish for USD.

  • lnskrlssn

    Mole: ZFX seems to be down, time is updating but not price.

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

    http://www.cnbc.com/id/47799542Cramer doing his bit to ensure the “sheep” remain “sheep”

  • saints51

    couldn’t sleep and woke up to ES bouncing off 1330 lol. Here we are again. Gonna take Mole’s advice and sit Monday out.

  • https://evilspeculator.com molecool

    I’ll fix it.

  • lnskrlssn

    Thakns!

  • https://evilspeculator.com molecool

    Alright, she’s ticking again.

  • Skynard

    Sunburnt already, Hehehe. Games in this market are endless. Good luck this week all, remaining long thru Month end or first week in July.

  • Schwerepunkt

    Big fade on the ND “victory” in Greece. LOL.  I guess we now have support at 1300/1330 SPX. 

  • https://evilspeculator.com molecool

    How is everyone?

  • AMCabrera

    doing well. I sold some EUR/USd yesterday and NZD/USD which I think I will keep the latter for a long period. EUR/USD is already gone. you my dear friend?

  • https://evilspeculator.com molecool

    About to hit the gym – let the kids deal with the first few hours and then dive in to pick some victims.

  • AMCabrera

    ahh exercise..The very secret ingredient to successful trading. 

  • captainboom

    Sitting on the sidelines.  Busy season, so not trading.

  • http://practicalt.blogspot.com/ Darth_Gerb

    it’s not KY jelly?
    dam! they LIED to me!!!

  • Skynard

    AAPL consolidating for a new high:)

  • ridingwaves

    Playing GENE for scalp..
    Bio seems to have some big players hanging out…

  • AMCabrera

    LOL no that just makes the other thing easier.

  • ronebadger

    VIX approaching lower BB….it “could” just ride it down…keep watching…it could bounce off, like last week

  • http://practicalt.blogspot.com/ Darth_Gerb

    ..not that it (price) sells off, but if it did, 1320 I will be watching.
    in the classic resistance becomes support meme.
    [/ES] 
    http://s15.postimage.org/q978q92wb/cheese.png

  • amokta

    I am struggling to understand this meerkat
    Is the market is holding up well, considering all the gloom and doom?
    http://www.marketoracle.co.uk/images/2012/Jun/vix-16.gif

     

  • StrikeFirst

    It’s all good.

    Facebook just hit a new intraday high.

    😉

  • amokta

    Thanks, im long a few beat down stocks, but am bearing in  mind what Jesse told me in 1929 – ‘no stock is too low to sell’

  • beentohardknocksU

    audjpy exploding rather out of synch with the rest of the market apparently

  • https://evilspeculator.com molecool

    Quite a move on the AUD/JPY there – wow…

  • amokta

    What is the Feds mandate – price stability, or price stupidity?
    What is the price of stupidity anyway?

  • amokta

    SIMO = SIMOnster today
    Have a look at the chart and explain to me, there were unusual big red volume candles near end-of-day selling on friday, yet today it launches upwards++ (so far)
    I am hoping we can all learn something from this
    (or is this the modus operandi behaviour of low-float, high-beta, ADR stocks)

  • http://commodmarkets.com/ volar

    My weekend travel…. have to love estes park CO

    11 miles, 2K climb to fish at 10.5k/treeline.

    http://content.screencast.com/users/wprosser/folders/Jing/media/f3f3f3da-6cbd-4575-b084-fce49fa4fdbb/2012-06-18_1110.png

    http://content.screencast.com/users/wprosser/folders/Jing/media/f045c8ff-7779-4c20-b9d7-a30c6e92faff/2012-06-18_1113.png

    never caught/saw so many greenback cutthroat trout in my life – bright red fish in crystal clear water.

    Freaking amazing- only reason to live in Colorado. My 3rd trip this year- first one to not get snowed out.

  • https://evilspeculator.com molecool

    Very nice!!

  • http://commodmarkets.com/ volar

     soo hard to get back to a desk….

  • ridingwaves

    gotta love nature….what was average size? Nice hike…

  • http://commodmarkets.com/ volar

     oh i would say all about 6-9 inches (not that big) but I did catch one on the upper lake about 15 inches. Only place that i know when the sun shines you can see 30 feet into the water of a lake and it will be crystal clear. Def. the only time i have ever caught fish with only using my net in the clear feeder streams.

    One of my favorite spots- you can see thousands of miles- and up there on a bad day you might see one other person.

  • AMCabrera
  • AMCabrera

    Volar! Oh me me! 

  • amokta

    Is this bear country? (us folks in England not used to bears!)
    Nice trip!

  • https://evilspeculator.com molecool

    Someone has been slumming at ZeroEdge again…. mal habíto!

  • supervilin

    I love Estes Park! will have to go back there someday..

  • ridingwaves

    cuttys are never really big to begin with but that 15 inch fish is…nature cleanses like nothing else..especially a grueling hike…to labor is to cleanse….I’ve been taking sojourns into the trinity alps lately, not many cuttys though..mostly rainbows..good catching to you!
    http://en.wikipedia.org/wiki/Trinity_Alps 

  • ronebadger

    VIX below BB

  • http://commodmarkets.com/ volar

     nice that sounds fun!

  • http://commodmarkets.com/ volar

     moose and bears 🙂

  • AMCabrera

    slumming is the perfect word for it. We are on a much higher scale uh.

  • amokta
  • https://evilspeculator.com molecool

    ¤ø„¸¸„ø¤º°¨¤ø„¸¸„ø¤º°¨ 
    ¨°º¤ø„¸  N E W  „ø¤º°¨ 
    ¸„ø¤º°¨ P O S T “°º¤ø„¸
    ¸„ø¤º°¨¤ø„¸¸„ø¤º°º¤ø„¸

  • amokta

    Thats a gimme!
    Anyway, looks like a trend day?
     

  • https://evilspeculator.com molecool

    I’m on the case – see my next post.

  • https://evilspeculator.com molecool

    “oh i would say all about 6-9 inches (not that big)”

    What are you guys talking about again?