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That was fun

There we have it.

The S&P in moderate panic mode on news (presumably) that a budget deal is in the works. So good is bad for another Fed fix. It’s been a long time since we saw such a smooth ride down. I like this chart, look where we stopped, surprise.

ES Chart

For those of you looking at Fib extensions we have a bit more downside. (Or not…) What was so fun (and profitable) about today’s trading was the failure to find 1800 again and then the breakout under 1792.

These opportunities are rare these days, it was a beauty.

ES Chart Levels

The VIX screamed higher 10% to 15.42. This in itself isn’t so extreme, but if the end of the week shows some follow through we’re in for some volatility. Finally!

The other possibility is we’re going to find a range here 1775 -1805. That also offers some interesting possibilities.

Good Trading.

Selling Vol on the radar.

Johnny Cash

Johnny CashI have no explanation for it. Johnny Cash sings in my head. I don’t think his last name has anything to do with it, but I can’t entirely exclude the possibility.

Driving back to Paris on Sunday, I hear The Caretaker on FIP. Last night a friend in New Jersey tells me he’s coincidentally been on a Johnny Cash hokey-sentimental-reunion-tour, pulling out vinyl.

Maybe it’s the classic lines: The beer I had for breakfast wasn’t bad so I had another for dessert, or the holiday arriving, and A Johnny Cash Christmas subliminally starts to leak back into my consciousness.

I’m off track, and that, thanks to Grant Williams, who is growing increasingly frustrated with the state of the Gold Market. Aren’t we all?

His latest TTMYGH is as good as most, even if you’re tired with his fixation on Gold, you’ll learn something from his (what’s the adjective?) latest newsletter. He deconstructs Gold Price fixing. There is little doubt that 2 times per day in London a mini-cartel, with no legal constraints around their ability to trade or share trades, profits handsomely from their insight into forward prices. No manipulation there… He draws a common sense parallel with the London Gold Pool failure in 1967. Worth the read, again.

Besides Johnny Cash and Grant Williams, I’m intrigued today by the weakness in the S&P index. We’re all looking for signs of a top, might this be it? The VIX is creeping upward, and we see crowded Long Nikkei/Short Yen bets. What would a reversal confirmation look like, in a market that’s been climbing for years?

The chart mavens are calling in sick.

Following a $6.7 Million VIX Call Spread

On October 18th Bloomberg published an article (here) about a trader or institution that bought 160,000 February 24 calls and sold February 29 calls (in equal measure).  The open interest today is at 170,000 and the cost for the trader on October 18th was 42 cents per contract or $6.7 Million. I’m following this trade for fun.

It was very likely a hedge against the SPY (or maybe some SPX futures?). Almost 30 days later the pair would trade at about the same price but what’s interesting is to imagine what this trader/institution had on the other side.

Look at the 6 month VIX and SPX chart below.

VIX-SPX-Call Spread

The SPX is up about 50 points since October 18th and the VIX has barely budged from 13. What would the hedge be? Long SPX or short SPX? It’s a call spread so presumably long SPX (remember VIX has a pseudo inverse relationship with the SPX). The hedge will make money as volatility increases and a quick look at the chart above shows strong resistance at 13.

So how many shares of the SPY (or SPX futures) would you own, if you put in place a $6.7 Million hedge? That’s a good question…  But whatever their long position even 30 days later, it looks like a good trade.

 

Missed Gold Trade of the Day

It’s always good to go back and review your trades, so I hear… This is the trade I thought about, lines drawn, etc. but didn’t pull the trigger on. The RSI was indifferent, telling me nothing at all. When that happens, I sometimes go get a coffee, walk the dog or turn to other contracts. I could have setup buy orders on what eventually turned into a nice breakout. This was staring me in the face and I missed it. C’est la vie…

Have a good weekend.

Gold Chart

Shifting Fed

Now we can explain why bad news is good and good is bad.

This morning the claims numbers missed slightly and the ES is rallying. Personal income rises, and spending falls. Ok. The logic apparently is: if the economy slows or stays flat, The Fed continues buying. A stock market methadone drip. This is now the only factor of any import, left for investors. How much have central bankers primed the system? (source: FT):

  • $12 trillion of financial asset purchases by the big 5 central banks
  • 520 central bank rate cuts
  • $33 trillion of fiscal and monetary stimulus according to the BIS1 (an amount equivalent to (46% of the world economy)
  • The lowest US government bond yields in 220 years
  • 50% (or $20tn) of global government bond market cap trading with a yield below 1%

The effect withdrawl will have on the EMs or Europe, is unclear. And yet I have gold in the back of my mind… Gold remains the outcast, only recently she was the prom queen. What to make of the paper selling in gold?

S&P-Gold Chart

All of last weeks worry was unwarranted. Really? That was quick. Is the VIX buying it? She can’t decide what to wear to the prom and gold is not in fashion.

VIX Chart

So when will QE end, slow, stop or be spun into such schizophrenic confusion that rehab is the only option? Never? I find that hard to believe. When the economy starts working on its own? That’s vague. Maybe they can take it in 12 steps. Friends of Ben.

The risks of shock to the equity euphoria are huge. Being long here feels dicey to me, but based on the charts it looks smart. We met one of my pull-back targets, but I personally traded it poorly. I was expecting more time to pass, end of July was my target time horizon. Here’s the chart and my logic is here.

S&P500 Chart

Leaving aside the BOJ, ECB, and Fed, the most confusing action for me is gold.  Is it not a safe haven investment after-all? Have we been mislead? Where’s the simple reasoning that gold will protect against inflation? Is that no longer a major risk? Check out the gold chart. Ugly.

Gold ChartGood Trading.

 

Good Morning Viatnam – S&P Retracement Levels

This morning it was ALL Japan – not Viatnam – I admit, but I woke up with Robin Williams ringing in my head.

 

The Nikkei extended their losses after:

  • BOJ REFRAINS FROM EXPANDING J-REIT, ETF PURCHASES
  • BOJ LEAVES FUNDING TERMS UNCHANGED AFTER JGB YIELD VOLATILITY

This sent the US and European markets into a tailspin. Expectations were obviously not met. It’s not often you see a gap open in the S&P down 1%. A bit unexpectedly the ES has been working off it’s overnight fear all day. Remember there’s a big buyer stalking…

Considering a slightly longer term, I’ve been looking at some potential cycles that might make good targets. If you’re even slightly bearish this perspective might interest you. If you’re bullish these might make good entry points.

I looked at three of the last major retracements during this bull market on a yearly chart.

  • September-November 2012
  • March – June 2012
  • May – September 2011

I measured the range as a percentage and measured the duration between the high and low. I’ve written about it, here. This is what I come up with:

Retracement Targets

If history rhymes, the medium term levels to keep an eye on:

  • 1558
  • 1515
  • 1400

And if this pullback continues we should be attentive around:

  • July 23rd
  • August 1st
  • October 24th

Even at these targets on the yearly chart, the market will still be trending upward. Count on the bears coming out of the woodwork.

Good Trading

Robin Williams