Sunday, December 14, 2014

Smack My VIX Up

I don't have time to expound on this, so I'll leave you to draw your own conclusions.  Presented below are 4 charts that show the VX futures over the last 3 years. (The VIX itself follows the same pattern).

The vertical red lines are equity monthly option expiration days.  Keep in mind that the purchase of put insurance generally peaks with the spikes higher in the VX.  That is when they are most expensive, which leads to the ensuing VIX crush that transfers a lot of money from the put buyers to the put sellers.  

There are two ways I consider a VIX crushing to be successful.

1.  If the VX spike happens early in the expiration cycle and then leads to a slow drain into expiration, as seen in the upper left to lower right chart movement.


2.  If the VX spike happens near the end of the expiration cycle and then gets crushed into the current expiration and also has a slow drain into the next expiration because a lot of the puts purchased will be made in the next month out.

Utilizing this definition of a successful VIX crush, there has been only 3 months in the last 3 years that haven't been a success, and all were muted months.  As you will see, some months are more dramatic than others.

The fourth one from the left is the closest to a VIX crush fail.  But note there was still a crush into friday and how dramatic the continuation was into the next month where most of the puts were likely purchased.
March 2013 - Oct 2013

Oct 2013- May 2014
Here's the current month.  Keep in mind, even if something was 99%, you never know when you're dealing with the 1% it doesn't work.  So while I think equities will bottom this week and have a VIX crushing rally over the holidays, there is no certainty in trading.

May 2014 - Dec 2014

Market Analysis for Week of 12/15/14

For me, everything revolves around the reaction of the dollar to the Fed.  Will they change their language or not?  Does the dollar need to pullback further or not?  It had a great run but even strong bull markets don't go straight up.  I still believe the dollar is going much higher, but if we need to pullback to $85 first, I'd like to avoid that.  It's probably all about the language.

Here's the dollar monthly.  I'm open to the idea of a deeper pullback if they don't change their language now, but if I was the Fed and I knew I had to remove "considerable time" from one of the next few meetings, I'd do it right before the holiday break to give the equity markets a couple weeks to digest the news in low-volume-senior-traders-away-from-the-office trading,

Here's the dollar daily.  Notice how the green 20-day EMA has supported price for six weeks now.  That's typical of strong trends.  This chart looks great.  It's just about the Fed. 

Check out the monthly Yen futures chart.  I usually look at the USD/JPY.  But on the futures you can clearly see the horizontal support that gave it pause.  If the dollar pulls back we could see this triangle fill up a bit.  

Yen futures weekly.  I don't know how people stay short when it gets this oversold.  

The Euro had a pretty strong week.  Knowing the LTRO was Thurs, I should have trailed my stop tighter.  I gave back more than I should have.  I'm looking for reentry short, but I will wait till after the Fed. It would be a gift to do it from higher prices.  The long-term future of the Euro is doomed. 

I was feeling pretty good about being so patient before I bought my gold and silver puts, but it was clearly not patient enough.  This is how I do damage control: if I still like the overall trade but I think I'm early, the first thing I do is cut the position in half and look for opportunities for short-term trades in futures to make up for it.  Clearly, this too will depend on the Fed.  It's entirely possible gold grinds up to the larger downtrend line just under $1300.  If it does, I will add back the other half of my puts at really cheap prices and look for it to rollover again.  Only a strong close above that trend line turns me bullish.  I don't currently believe that will happen and am open to the idea of a dollar pop, gold drop out of the Fed.  

Gold weekly.   We've seen this before.  The net Spec positioning in gold gets too close to net short, there's a short squeeze with new long buying that runs out of steam and topples over to continue the downtrend lower.  This is why I chose puts instead of futures.  Even if the premium is jacked, the risk is contained without worrying about a stop.  If I'm right I'll be able to cheaply re-add to the position because I gave myself until spring.  If I'm wrong, I expect to lose money, and with puts not only is the risk contained but it frees up futures to trade against it. 

Silver daily.  Notice how it's clinging to the underside of the downtrend line.  That's typically bullish.  If it breaks through there it may backtest the $18.17 breakdown area, but $17.50 is a spot to watch too.   

The RSI on the crude weekly is 12.  Would you believe the Spec longs added again?  As a group they've been long since $105.  And while there are a lot of individuals within that group, and I assume there's a good deal of hedging in other ways, the fact is they are averaging down their long position.  Which means when the inevitable bounce comes, the Spec longs will be selling into it. This could stay ugly for a long time, especially in the face of a strong dollar.  The risk/reward of the short side is diminishing as we approach the lower $50s.   

Sidestepping the pullback in the ES was one of my better decisions lately.  I didn't anticipate the selloff as much as I thought the risk/reward wasn't good.  It was a a day trader's market last week.  The old weekly uptrend line is at 1975-ish, but since it's already been violated in Oct, it's not as strong, so we could see the 200-day EMA get tested at 1938.  If you take a look at my VIX post, I'm thinking we bottom this week and see a VIX crushing over the holidays, so I'm looking to buy the ES but I will wait till after the Fed. 

 While I do think the oil collapse could be a game-changer for equities it may take some time before the impact is undeniable.  Every selloff feels like the end and there's always a good reason, but they keep popping back up.  Clearly, the bull market is weakening internally, but there's no reason why the inevitable bounce here won't pressure out the shorts and continue the same pattern we've seen for the last two years.   

Sunday, December 7, 2014

Market Analysis for Week of 12/8/14

My overall thesis continues to be that the Fed is forced to walk the plank toward tightening while the ECB heads toward its own QE as the BoJ bounces off the walls of the insane asylum they live in.  A week from Wednesday, December 17th, is the next Fed meeting.  The risk is dropping "considerable time" from their language, which would certainly add fuel to the dollar rocket ship, and crush gold and silver.

There's minor overhead resistance in the dollar just over $90, but I would think the $92.53 peak from 2005 would be a decent spot to see some profit taking and form a new base to launch from on its way to $99.  

The Euro looks on its way to short-term targets that would correspond with that.  Apparently, the ECB is announcing the scope of their LTRO this Thurs, I believe, so be aware.  

The USD/JPY blew by 120 and looks headed to 124 to test the 2007 peak. The pullback here should coincide with the eventual pullback in equities, so it might not happen until Jan, but both are very overextended, so it could happen anytime.  

Gold and silver are likely in big trouble.  I picked up my puts on Friday after the jobs number.  Fortunately, the market rallied into the US open so silver was only down like .15 cents and Gold was just under $1200.  I was hoping to get a spike upward from NFP, but it was not to be. I'm not worried about a few ticks on what I think will be a big move.  The best prices were actually Thursday due to a little premium erosion during the consolidation this week, as opposed to the top of the big spike on Monday.  There's no reason to be long this market unless it clears its downtrend line.  The risk is very high of gold and silver getting destroyed over the next couple months.  Target in gold is $1040/50 and silver $13.  Then another move lower after that.  A close above the downtrend line would negate it.  If it grinds up to the $1204 area you might be able to find a low risk entry, but that's a game time decision.  

Gold weekly. 

If you're someone who sees the bullish side of trades better than the bearish side, here is the inverse of the gold chart.  See how it's just pulling back into support?  Would you short this?  Not unless the trend line broke.  

Silver daily.  The yellow line is the 50-day EMA.  See how it stopped price?  It's not likely to get through there now, especially as we head into execution day on Dec 17th, and especially if it continues rolling over this week.     

Silver weekly.  Why would this downtrend not continue in the face of a soaring dollar? 

Equities are at a point that I can no longer psychologically handle.  There's never a time that you can't day trade, but I can't hold anything here.  For me, it's pick-up-some-blinds-as-you-wait-for-a-premium-hand mode.  Check out the weekly ES chart.  Note how every time it reached the top of the channel it eventually snapped back to the yellow weekly uptrend line.  I would like to avoid that even if it means missing out on upside.  Being that we're headed into holiday season, chances are we grind along this upper channel line in the most annoying price action possible.  In order for me to build a position to hold I will wait for a pullback to the old highs at 2014, which may not happen until January.  With the ECB sounding likely to initiate QE in the 1st quarter, and the soaring dollar, which should keep pressuring the Yen and keep the carry trade alive, I'm expecting the overall uptrend to continue into the Spring.  It's just a matter of dodging the bigger pullback that will come at some point.   

The only thing I have to say about oil is it's not likely done on the downside.  The Specs actually added to their already net long position on the OPEC crushing, so there's plenty of longs still to liquidate if it keeps going lower.  I'd really like to know who these funds are and how they are still in business.  Check out what the bottom looked like in 2008.  See how it went sideways for several weeks and tested the bottom before turning back up?  There's really no reason to try catching the knife until you see something like that happen.  Keep in mind that the rocket ship it turned into out of the 2008 bottom was driven in large part by QE and a loosening Fed.  Now we're headed into a soaring dollar and a tightening Fed.  This could stay ugly for a long time.  

I don't think it's even possible for the Fed to normalize interest rates, but they can head down that path until the soaring dollar forces them to back off.  I would love to believe in the magic of QE but I don't.  All they've done is mask the symptoms of a depression and the lack of real demand that can't be compensated for by flooding the economy with cheap debt. Eventually the consequences of defying the laws of nature will catch up with the central banks, so while I'd love to see a strong jobs number every month for the next three years, I believe this "recovery" is dependent on repressed interest rates, creating money out of thin air, and deficit spending, all of which would be impossible if we lived in a world with any wisdom or respect for history.  Until we see the gov't balance its budget, the labor participation rate return to normal levels, interest rates stabilize at 4%, and the rest of the world not collapse into default, all the people proclaiming "the recovery is real" should be forced to stand in front of  "Mission Accomplished" banners.     

Monday, December 1, 2014

Market Analysis for Week of 12/1/14

Pretty impressive short squeeze in gold and silver.  I'm not a believer in the sustainability of this rally, but I am torn about it.  On the one hand you can view all the action below $1180 as a blow-off bottom.  However, it would take a close above $1300 to validate that, imo.  And nothing has changed in terms of the current monetary environment, or the underlying cycle of positioning.  This is what you can expect when the Specs get too close to being net short.  In order for me to become a believer, I would need to see the dollar lose its uptrend line and the Fed change its tune about raising rates.  Otherwise, you can expect the buyers to run out of steam as the Commercials absorb every long contract thrown at them. The question is when.

I was bummed over the weekend because I took some time off over the holiday and it looked like I missed the big short trade I've been stalking for weeks.  We'll see how the rest of this week goes.  If gold pulls back and consolidates above $1200, I'm likely going to buy a third of my puts on Friday after NFP, which is often the spike high before it rolls over.  I'm still thinking mid-$1220s for gold and lower $17s for silver.   However, if gold clears this downtrend line at $1220 and closes strongly above it by Friday, I will probably hold off and look to do it higher.  I did snag a nice day trade with futures today, which helps with the risk to fade it short.  At least, I think of it like that.

I would like to add that I much prefer gold to be going up and want it to return to a bull market.  I just don't believe that is going to happen.  We're still in a deflationary environment, the Commercials are still looking to get really short, the Fed has not given up on talking about raising rates yet, and the dollar is just pulling back to support.  As impressive as this squeeze is, it's just a squeeze at this point. The mentality hasn't changed yet.

I would like to point out that this reversal stick in silver is EXACTLY what I look for in a reversal, however, for the reasons mentioned above, I'm not convinced it's sustainable yet.  It does put a damper on my short mojo, but I'll be comfortable with my initial risk if I'm wrong.  Still looking at April puts.

The dollar would have to lose its uptrend line and the 50-day to make me a believer in the sustainability of the rally in the metals.  If the dollar breaks to the upside I believe the metals will run out of buyers.  All the pieces have to fall into place.  It is worth considering that the dollar long side trade is kinda full, but trades can stay full for a long time.  Look at how long it took for oil to rollover from its record long Spec positioning.  All trades unwind at some point.  I just think unless the Fed changes tune dramatically that it's not time for the dollar.  And therefore the metals.

We're getting the post holiday profit taking in equities.  Not surprising.  They had to pullback at some point.  The 20-day EMA is at 2041.  That's the first spot to watch.  I'm gonna wait until NFP day to see if we can get a deeper pullback.  Hopefully down to previous highs at 2015.

Same for the NQ.  First spot is the uptrend line at 4266.  I would love to see a deeper pullback to the previous highs at 4124, but that might be a long shot.  This is likely the typical "between expiration" pullback that finds a bottom and rallies thru the holidays.

The Euro is still holding its downtrend line.  It will be interesting to see if we get a resolution on NFP day, or whether it will take until the Fed. The triangle in the Euro will run out of room before the Fed, so maybe it breaks this week.  

A lot of big name stocks are not healthy on the charts.  And the market is clearly overvalued as a whole.  But that still doesn't mean we're topping anytime soon.  Every single pullback feels like the end.  And there's always a good reason.  I would love to be shorting the rallies, but I'll be looking to buy the dips.