Equities Laying Low

One aspect I hate about winter, beside the dismal weather of course, is that we seem to hopping from one long holiday into the next. With the obvious result that pretty much nothing gets done. The situation is even worse over here in Spain where we’ve had on average at least one regional holiday scheduled every week. I kid you not. And that list doesn’t even account for Las Fallas which starts on March 1st and gradually turns Valencia into the Mediterranean equivalent of Sodom and Gomorrah by the time it ends on March 19th. I often wonder when those Spaniards actually do work as statistics claim that they work more hours per year on average as the Germans and of course the French. With all that time devoted to holidays, how can they find the time?

At least over in the U.S. you guys enjoy clear skies until Washington’s birthday on February 20th. However Trump gets sworn in on January 20th and given that I don’t expect much in terms of directional movement on the equities side until at least a day or two after – depending how much fireworks (ahem) we’ll actually be seeing.

2017-01-17_spoos_setup

Now you know that I’m not a slacker but must concede that this constant off and on really doesn’t help me get into the flow of things. It’s extremely difficult to maintain a trading campaign if participation keeps disappearing two days ahead of a three or four day weekend. And apparently I’m not alone as mid January is usually the period when we see some of the exuberance of the recent Santa rally is being corrected courtesy of low participation tape. Except that this year we’ve been getting more of those sideways gyration we’ve all loved to hate throughout most of 2016.

Anyway, based on the recent sequence of spike lows I’m somewhat tempted to grab a long position here, however it would have to be a near perfect entry in the vicinity of the 100-hour SMA. The context on the daily panel is supportive but is getting dangerously close to running out of mojo, which could be easily exploited by an organized stop run. On the positive side however we are building a strong base here which may aid us in the future.

2017-01-17_YM_setup

The YM actually shows us slightly better context and splitting your exposure between that one and the ES may not be a bad idea. For one I like that diagonal on the hourly as well as the touch of the lower 25-day Bollinger.

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Class In Session

I’m going to cover two important topics today which both relate to realized volatility (RV) and in particular how to trade your way around it. If you’ve been a trader for a while then you probably have noticed that volatility profiles differ substantially on the short term when compared with the long term. In essence volatility has a tendency to decrease toward the long term. Nevertheless many traders treat those charts the same when designing their systems, e.g. how and where they enter, where they place their stop loss, and how they handle campaign management. 

The shorter the time frame the closer people seem to be placing their stops, which of course is directly related to the visual perspective at the current time when observing for example a 30-minute or hourly chart. And that’s fine if you’re a scalper and have defined a statistically proven edge accordingly. But of course RV can still affect your campaigns in ways you didn’t expect. And those in particular can often lead to frustration and anger, both very detrimental to keeping an even psychological keel on a daily basis.

2017-01-12_silver_update

Take silver for example which we entered two days ago and yesterday I suggested that we advance our stop loss to near break/even. Now it’s quite possible that your entry was near mine, e.g. the 16.6 mark and if you trailed it with a regular stop and got taken out just before it turned on a dime and headed back higher. If that’s you then don’t feel bad – silver is a naughty and most difficult (and may I say expensive) contract to be trading and it happens to the best of us.

However there are ways I employ to protect myself against stop runners, in particular in contracts like silver, crude, and even the spoos. First up you can be more conservative and always place your stops below major spike lows. That helps but retests often drop a few ticks/pips below them. So what to do?

The Lazy Trail

The lazy trail is something I implemented into an older version of Scalpius a year or two back and it actually worked exactly as hoped in alleviating the damage done by stop runners and genuine retests. Basically the way it works is based on a timer. As soon as your stop level is reached the timer triggers and once that timer runs out (10 seconds or 10 minutes later – based on your setting) your system exits if price is still trading below your set threshold. Alternatively your timer can also be counting down based on ticks, so every time price ticks below it deducts one all the way down to zero where it finally executes. That is actually the technique I used and it worked well, especially on trend trading systems that remain active for days or even weeks on end.

The Closed Trail

The closed trail is even simpler and can be equally effective. Your threshold is only observed on candle roll overs, it doesn’t care about what happens in between. Which makes it very easy to code into an automated system incidentally. The idea here is to prevent exactly the types of shake outs that happened yesterday in silver. You may have noticed that 16.6 was touched but it never closed at or below it. And if you look at the left panel above then you’ll notice that especially silver does this stuff on a constant basis. So if you use a regular stop loss order then you’ve probably been missing out on juicy profits on several occasions in the past.

The Full Stop

Of course both of these approaches require you to set a regular stop a reasonable distance away, which is your emergency exit in case of wild market fluctuations. That can be your ISL or it can be something else – it’s up to you. Just make sure it’s a market order so that you get filled when things start getting ugly.

Finally don’t ever use any of those fancy stops for your ISL – I recommend that you only facilitate them during your campaign management, and more specifically for trailing.

2017-01-12_EURUSD_volatility

Another crucial but rarely covered topic are RV cycles and in particular sudden spikes. There are symbols which just happily chug along with the occasional spike here and there. And then there are the ones which have perfected it to a science and in the process inflict much misery and monetary losses especially on the retail trading community. Take the daily Euro for example as shown above. I have highlighted some of the wilder swings although it’s been one nasty ride here for over a year.

Now the other day I read an interesting page on the health impact of Bluetooth radiation and learned that it’s actually the rapid rise and fall times and the rate of change of the fields that inflict most of the biological damage. Wait a minute – what do Bluetooth pulses have to do with trading the Euro again? Well, absolutely nothing except that the Euro currently behaves like a giant pulsar. Not only does it change direction erratically and for no (apparent) reason, it also suddenly starts trending (as shown by the compressed bands in the lower panels), only to suddenly start flailing around again. But it’s the sudden phase changes (the changes in volatility) that really get you and is guaranteed to smash most trading systems into smithereens. If you’re trying to scalp then the trends will shoot way past your mean reversion zones, and if you’re trying to trend trade then you’ll be suddenly whipsawed to death.

There are three simple lessons here to be learned:

  • First up – train yourself to recognize symbols like that as in most cases it’s advisable to just stay away. You can use an ATR and just wrap a Bollinger around it.
  • Secondly only trade those symbols near long term inflection points, meaning support or resistance. On the EUR/USD that’s currently around 1.03 all the way up to 1.14.
  • Thirdly – if you’re scalping watch volatility like a hawk and try to avoid it. Symbols like the EUR which pulsate are actually tradeable during low volatility trending cycles. If you’re nimble enough to catch them that is.

2017-01-12_YM_update

Alright, quick update on our Dow futures campaign. If you were a sub you should be in this one. We actually barely escaped a stop run on this one as well (even with a regular stop) and I think I’ll be leaving the ISL in place for now. If it takes off then it should happen soon – recall that Monday is MKL day so we’ve got today and a few morning hours tomorrow before everyone calls it a long weekend.

One more setup below the fold:

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Back To Reality

Now dreaming about the future can be a lot of fun (of course your mileage may vary) but until we actually get there there’s quite a bit of work left to be done. After all those fancy hover cars and food replicators won’t pay for themselves. Or perhaps – will they? 

Since after Christmas I have been quietly observing the relative lack of progress in equities whilst attempting to form a halfway intelligent idea of what may lay ahead. Meanwhile the Dow has been flirting with the 20,000 mark and just missed it by a few pennies on Tuesday. Clearly rounded numbers have little significance beyond the psychological milestones, but it’s clear that the mojo we experienced ahead of Christmas has been suspiciously absent.

2017-01-10_spoos_rv

Our realized volatility indicator may offer at least some answers. The patterns we have been observing has been one of exploding RV followed by a drop which often (but not always) turns into a depleting volatility trending period (DVTP). How long that trending period can persist in part depends on the preceding peak in RV. A good example is the sudden drop last summer followed by a gradual falloff during the ensuing ramp higher.

Of course that isn’t always the case. Depleting volatility can also be accompanied by sideways tape, especially if the prior RV peak was gradual and less pronounced. When attempting to plot the path forward it’s perilous to convince oneself that the very same scenario is once again beyond the horizon. However, that said, as events unfolds the probabilities do start to gradually narrow. For example the chart above shows us that the current depletion of RV seems to have been concluded as RV is once again on the rise. This possibility would gain more credence in particular if (and only if) the indicator once again pushes above the upper standard deviation and thus turns green.

Because if it does then probabilities once again shift toward an increase in RV and that means a fast move (up or down) would take quite a few participants by surprise. If that fast move resolves to the upside then the potential for a blow off top (and the trigger of Dow 20k celebration) raise considerably. Once that happens we would be looking for a reversal pattern, at minimum a spike high but I would prefer a valid Retest Variation Short pattern.

However if it resolves to the downside then I would actually be looking for buying opportunities, especially if it happens before the Dow scrapes the 20k mark. I concede that this perspective is rather contrarian but unless I see a clear trend trading signal I cannot justify being long here.

In case you wonder a trend trading signal would be a failure of the RTV-S pattern or a breach of a prior significant spike high. If nothing else in times like these our Zero indicator should also be giving us valuable clues, e.g. participation and possible divergences suggesting either accumulation or distribution.

2017-01-10_silver

Now silver was a great entry yesterday and I actually had it marked for you guys until I got sucked into writing about virtual reality and our glorious future as 21st century traders. However that setup has actually gained in probability now and I’ll be sure to grab a long position in a drop back to the 16 mark. My stop would be a respectable distance away near 15.38.

The weekly panel suggests that it’s really high time for silver to either finish its business or get off the pot. Let’s not forget that the trend is still to the downside here and currently near a possible reversal point. However it’s also possible that silver may finally reach escape velocity and break the current trend.

Of course that means that a short position right here and with a stop above the recent highs may turn out the right way to go. If you’re sharing that view then this is a good spot to pull the trigger.

More setups below the fold.

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Welcome Back BobbyLow!

After a little row misunderstanding last year I was elated to see that Bobby Low has decided to return to our comment section. Bobby has been a long term participant and prolific contributor here at Evil Speculator and I consider his return a very good omen for the new year. Welcome back buddy!

Off To The Races

And we are officially ticking in 2017! I trust you enjoyed a memorable holiday season and are now ready to slowly abandon each and every New Year’s resolution you committed yourself to just last week. Personally I’m pretty proud of myself as I survived yet another Christmas without adding a single pound. Plus I spent much of the past 10 days collaborating with Scott and a few others on an improved version of Scalpius. I’ll be sharing more on that that as we’re forward trading the system over the coming two months.

Now this being the first trading session of the year I’m not exactly eager to jump into new positions with both feet. So to properly kick off the year let’s first run through some of our key charts to get a general idea of where we are at.

2017-01-03_spoos_update

And here it is – our first chart of the year, which of course is E-mini. It’s sitting pretty right now with prices still above the 25-day SMA but having reversed from the nose bleed highs above the upper 100-day Bollinger. As long as our current LT inflection point of 2236 remains intact this is actually a pretty good base from which to enter long again. However as I said already – let’s give it a session or two to weed out some of that new year reshuffling we’re most likely to see.

2017-01-03_gold

Gold continues to look tired and quite frankly there’s nothing to be said here unless it reverts back to 1140 where I may consider a tiny long position if it manages to hold.

2017-01-03_silver

Silver hasn’t seen a decent bid in ages and the daily panel (on the left) seems to indicate that it’s losing more and more of its mojo. We traded through an awesome long opportunity near the 17 mark which however turned into a failure. For now I don’t see much of an edge here unless you’re holding short.

2017-01-03_crude

Crude however is looking very perky these days after a sideways range that tormented us all last year. The weekly panel is pushing toward a major inflection point near 55 where we’ve got the 100-week SMA plus the upper 25-week Bollinger. The 25-month SMA plus a monthly NLBL at 56.18 are not far away and if it manages to push above all that then we are truly off to the races here and most likely for the rest of this year. This thing has been stuck inside a pressure cooker for a long time and could be trading at 80 this summer. Caveat: crude is very event driven and most likely will respond strongly to whatever happens after January 20th.

Quite a bit more below the fold. If you’re not a sub then start the year off in style and sign up for Evil Speculator Gold right now!

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It's not too late - learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don't waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.

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Happy Winter Solstice

Here comes the cold and the dark. If you are like me and hate winter with a vengeance then you may be pretty depressed today. But let’s not forget that there’s an upside. Today being the shortest day of the year also means that it only gets better from here, as every new sunrise brings us a few more minutes of daylight. The contrast in daylight hours is actually a lot more pronounced over here in Europe, even in the South of Spain. Back when I was living in Germany I recall the sun setting at half past four and not appearing again until after eight. Of course it’s even worse further up North.

Alright I’m the first one to admit that Southern California has spoiled my tolerance for cold weather and short daylight hours for the remainder of my life. So be warned: No matter where you come from and how impervious you may be to crappy weather – if you ever spend more than a year or two in SoCal it will invariably throw some mental switch in your brain. Going forward you’ll never ever stop bitching about the weather anywhere else in the world. Too hot, too cold, too humid, too cloudy, too dry. Whatever it is, it won’t ever be like SoCal. You’ll turn into that weird guy down the street who’s wearing a winter coat, boots, and gloves as soon as temperatures drop below 65 Fahrenheit 			<div class=