Monthly Archives: May 2013

The Divergences Screaming, Hello?!

Rambling about nothing is better than proclaiming some truth based on limited information.

And as we know, we know very little when it comes to predicting market moves. Just this morning, for example, terrible numbers hit the tape and the S&P continues oozing skyward. Good is Good, Bad is Good, the Fed is Good, indefference is even good. Until it isn’t.

So I thought I’d ramble about a few divergences which have me perplexed.

The first jumped out at me yesterday while the VIX was climbing on momentum WITH the S&P. Technically that happens but it was screaming  “look at me” yesterday. Options in general and puts in particular were getting bid up while the market was climbing. Fear of a rising market?

VIX ES DIVERGENCE

The second has been obvious all year, but it’s worth thinking about. The Gold Story – some would call it the Apple Story…

If you take the premise that gold is a hedge against inflation, gold isn’t worried, atleast paper gold isn’t. That surprises me, because there’s another argument: easy money from the central bank leads to inflation. This argument seems on firmer footing, every central bank in the world is printing. Yet it’s the divergence which has me looking for a trade.

ES GC Divergence

Here are some other good divergences, credit/macro/vix/10yr, labeled ‘just plain silly‘ from ZH.

 

End of Cycle?

The contradiction of a rising market and morose sentiment, the Armageddon crowd and the permabull talking heads; where’s a guy to look for some clarity? I’ve been wondering how to get some perspective on the S&P futures market for a few weeks now. I’m not the only one, obviously. We’re all a bit nervous getting long at these levels. A few ideas and a few trades have come to mind. Be patient for a moment while I set the context.

One of the frustrations I have with my trading platform is that its charting implementation is relatively weak. My specific complaint is that I can’t ‘push’ the chart left to sketch scenarios on the right (future). This is constraining for obvious reasons, but please Interactive Brokers I make money on the right side of that chart, you make money on the left. Fair is fair… So I fished around, again, for a charting platform better adapted to prediction and playing with my lines. I was looking for a 3rd party charting platform like Sierra Charts, which in my opinion is weak. TD Ameritrade’s is good and I use it occasionally to visualise option spreads, but I’d rather trade with IB.

I did manage to find something which works for me on tradingview.com. I would prefer something I can manage locally and not web-based, but for quick and dirty chart analysis, as a “brouillon“, it’s very well done. Bravo.

Here’s the chart I’m playing with.

ES 4 year chart

What stands out is the cyclical nature of this bull run. You can see very a fairly consistent cycle after the initial bull reaction in March 2009 – a. I filtered out some of the churn to make my point, but the cycle is still clear.

  • 71 day decline
  • 170 day advance
  • 74 day decline
  • 178 day advance
  • 36 day decline
  • 107 day advance
  • 43 day decline
  • 180 day advance (today)

That’s the time cycle, what about the price range? Well, what jumps out here is the second green bar starting in October 2011 – b, a 534 point advance to about where we are today. (Cloned from the 534 point advance off the 2009 lows.) The second advance, starting in july 2010 – z is a 360 point advance. That move makes me doubt the pull-back I’ve labeled 3 and 4 because it seems to fall between the two, and both 3 and 4 bounced firmly off the 200 DMA,  so under another scenario you might ignore those two pull-backs, but if you don’t the 360 point advance off 3 in May 2012 also brings us near today’s levels. In other words the b and z advance, supports a pullback in the the short term. Assuming that started today, a big assumption, medium term downside targets should be 1517, 1480, 1350. Even if we pulled backed to 1350 on a 100 day cycle, say end of September, we’d still be in a bull market.

Calling a top is a fools game, still I think we’ve a good potential trade here, somewhere…

The objective will be to limit loss on the upside and keep the downside open to atleast 1517. I’ll be back after lunch to share a few trades.

Good Trading.