One cannot simultaneously be a trader and a market ideologue. Of course, we all have our biases about how the markets "should" behave but that's in a perfect world. We aren't in that world. I personally would have liked to see more consolidation and level testing in the S&P before ramping up to new all-time highs from the October 15th v-shaped bottom. But that's not up to me. So instead of worrying about the market being overbought/oversold, disconnects from fundamentals, or plunge-protection teams, we should re-focus our efforts on profiting off the market's next move.
Although timing market moves can be difficult, it's not entirely impossible.
If one pays close enough attention to small details, the larger and not-so-obvious trends start to appear on the charts. One of the more obvious ones are the brutal short squeezes that tend to occur on the days prior to monthly VIX expiration dates. For example, looking at the chart above, we can see that the month of September showed a well defined trend of increasing volatility. However, the trend seems to abruptly break on the three days leading up to the September 17th expiration, only to resume immediately the day after.
October 15th's v-shaped bottom happened to occur only several days before the month's VIX expiration, slamming the index almost entirely in half in about four trading days. I don't entirely discount the fact that VIX front-month rollover may cause sudden erratic behavior in the index, but I have to admit that there are some strong peculiarities behind the timing and magnitude of these movements around these dates.
Regardless of why this occurs, we can attempt to use this trend to our advantage. If there is a period of volatility in the weeks leading up to a VIX monthly expiration, expect some volatility slams on the days just prior to expiration.
Having said that, I'm looking for volatility Thursday and Friday of this week. Why? Another rule, straight from a CBOT pit trader, Danny Riley:
The converse is also true: look to short any strength on the Wednesday or Thursday morning. However, as with any rule of thumb, don't count on it to forecast trends with 100% accuracy. Be sure to do your own homework and back-testing.
Taking a look at the December S&P futures, the grind upward has seemed to lose momentum this week:
Decreasing volume on the upside in addition to the heavier density of trades occurring at subsequently lower levels in the S&P seems to indicate a slowing of momentum on this rally and a need to pull-back and retest some lower levels. Notice that 2037.5 was rejected nearly five times today.
If the index decides to sell-off this week, look for 2024 and 2012 as major levels of support, of course keeping in mind that next Wednesday is this month's VIX expiration. Having said that, if the markets decide to continue their upwards trajectory without any consolidation, look for even numbers as levels of support: 2050, 2085 (20% S&P gain from Feb. lows), and 2100.
Looking at the monthly USD/JPY chart, Bollinger Bands seem to indicate extreme "over-bought" signals:
However, if USD/JPY decides to continue its upward trajectory without a pull-back, we should look for long positions on US equity indexes, albeit cautiously.
Remembering that we are in uncharted all-time high territory, there are no technical areas of resistance to stop the indexes from achieving high after high. Are we near the top? No one can be certain but having said that, there is ample liquidity and an enormous amount of stock buy-back that can justify these levels.
The limits of this bull market are only bound by zero-interest-rate-exuberance, which, to quote Chairwoman Yellen can last a "considerable amount of time". Good luck this week.
Although timing market moves can be difficult, it's not entirely impossible.
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| VIX expiration dates. Yellow line outlines time period between subsequent expiration. |
If one pays close enough attention to small details, the larger and not-so-obvious trends start to appear on the charts. One of the more obvious ones are the brutal short squeezes that tend to occur on the days prior to monthly VIX expiration dates. For example, looking at the chart above, we can see that the month of September showed a well defined trend of increasing volatility. However, the trend seems to abruptly break on the three days leading up to the September 17th expiration, only to resume immediately the day after.
October 15th's v-shaped bottom happened to occur only several days before the month's VIX expiration, slamming the index almost entirely in half in about four trading days. I don't entirely discount the fact that VIX front-month rollover may cause sudden erratic behavior in the index, but I have to admit that there are some strong peculiarities behind the timing and magnitude of these movements around these dates.
Regardless of why this occurs, we can attempt to use this trend to our advantage. If there is a period of volatility in the weeks leading up to a VIX monthly expiration, expect some volatility slams on the days just prior to expiration.
Having said that, I'm looking for volatility Thursday and Friday of this week. Why? Another rule, straight from a CBOT pit trader, Danny Riley:
The S&P tends to make a low on the Thursday or Friday the week before the expiration (more so on the quartiles). The rule is to look to buy weakness on that Thursday or Friday, looking for a low to hold into Monday or even into the expiration itself. - Mr. Top Step
The converse is also true: look to short any strength on the Wednesday or Thursday morning. However, as with any rule of thumb, don't count on it to forecast trends with 100% accuracy. Be sure to do your own homework and back-testing.
Taking a look at the December S&P futures, the grind upward has seemed to lose momentum this week:
 |
| ESZ14 (Dec. S&P500 Futures) |
Decreasing volume on the upside in addition to the heavier density of trades occurring at subsequently lower levels in the S&P seems to indicate a slowing of momentum on this rally and a need to pull-back and retest some lower levels. Notice that 2037.5 was rejected nearly five times today.
If the index decides to sell-off this week, look for 2024 and 2012 as major levels of support, of course keeping in mind that next Wednesday is this month's VIX expiration. Having said that, if the markets decide to continue their upwards trajectory without any consolidation, look for even numbers as levels of support: 2050, 2085 (20% S&P gain from Feb. lows), and 2100.
Looking at the monthly USD/JPY chart, Bollinger Bands seem to indicate extreme "over-bought" signals:
However, if USD/JPY decides to continue its upward trajectory without a pull-back, we should look for long positions on US equity indexes, albeit cautiously.
Remembering that we are in uncharted all-time high territory, there are no technical areas of resistance to stop the indexes from achieving high after high. Are we near the top? No one can be certain but having said that, there is ample liquidity and an enormous amount of stock buy-back that can justify these levels.
The limits of this bull market are only bound by zero-interest-rate-exuberance, which, to quote Chairwoman Yellen can last a "considerable amount of time". Good luck this week.
