Some Observations - August 10, 2011

[Billy]

9770

Cumulative $TICK confirmed a very strong reversal and buying pattern by programs yesterday which usually doesn’t stop after just one day.

9771

Just a few observations while the robot is still waiting for normal statistical conditions to come back to life:
Monday morning’s neutralized long entry limit would have been executed at the same price than today’s hypothetical buy limit of 68.74 and would have resulted with an intraday stopped out loss of -4.63%.

Tuesday’s neutralized long entry limit would have been 65.23 and we would be in a long winning position with a + 6.65% return that would be covered at the open today due to a switch to a neutral short signal. Note that this gain could have been made in the last 50 minutes of trading alone!

If active, the robot would be looking to short today at a limit entry of 70.81.
The hypothetical limit buy entry (68.74) and limit short entry (70.81) are expected to remain unchanged as long as IWM closes below the yearly pivot (71.84) and above QS3 (68.17). If such conditions prevail, these would be the limit entry prices once the robot is reactivated.

The most ideal scenario would be a 20 DMF buy signal in the coming days with a close below YPP (71.84). The robot could then buy with confidence a pullback to 68.74. If a 20 DMF buy signal is triggered on a retest of the lows, the limit buy entry is expected to remain around 65.23. The only tricky exception would be a 20 DMF buy signal with a close between QS3 (68.17) and SS3 (67.70). The buy limit entry would then be 67.82 in that case only.

The volatility stop with settings 65,5 on the 30 minutes chart has contained all bounces in the decline. It is at 69.69 or just above yesterday’s high. A reversal of the stop could have bullish short term implications. I remind everyone that one needs to wait for the CLOSE of a 30-minute bar above the volatility stop for a confirmed signal, temporary violations are an alert, but not a confirmation.
Billy
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[Timothy Clontz]

Pascal just posted that a 20DMF buy signal may be posted at close. If so, will the Robot be online for that trade?

[Billy]

Pascal just posted that a 20DMF buy signal may be posted at close. If so, will the Robot be online for that trade?

Tim,

That decision would depend upon statistical aberrations still being present or not tomorrow after processing all the data.
Billy

[asomani]

Billy, do you make anything of this positive divergence in cumulative tick vs. IWM price action (attached)? Is it typically something you see near a multi-week bottom, and is it a sign of accumulation?

Thanks.

As a side comment, I notice that although the SPX closed today where it did on Monday, most stocks in the SPX are at least a bit better off than on Monday. This is a promising sign, one that you almost always see at a multi-day to multi-week low, and somewhat suggests that Monday may have marked the multi-week bottom we have been waiting for. But, we will just have to wait and see, as these positive divergences can, even with emotions and price where they are, disappear - especially if today's ES lows get materially breached (which would suggest a re-test of the Monday ES lows). The current market environment is very unique and anything can happen.

[ernsttanaka]

Based on my vix reading I am getting optimistic.

On the hourly graph I am seeing lower highs over several days - while the market is still scaring everyone under his/her bed. I often see that as an part of a bottoming process.

If I was day-trading the IWM -- I would look for long entries -- and pass by the short set ups.

BUT a vix of over 40 is also saying anything can happen.

Let's not forget people are buying options priced such that we expect the SPX to be +/- 40% in an year from now. That is 700 -1600.
Big parties are buying options or at least not to sell options at those inflated prices. That is the reason the vix stays up. So GS and like are currently thinking that this wide range to be the most probable scenario, otherwise selling premium would be the smart trade.

As for my 'bread and butter' for AUG - I was flat before the big moves - gaining again not 100% my goal. But my ego can live with that considering the circumstances.

Ernst

[adam ali]

Charts on the VIX:

http://www.businessinsider.com/putting-recent-market-volatility-in-context-2011-8

[adam ali]

Asomani above presents an interesting cumulative tick chart on the IWM that shows apparent accumulation. Yet, Manucastle in his post stated: Yesterday, the R2000 tick ($TIKRL) behaved VERY differently than the NYSE tick ($TICK) and the all market tick (TIKUSC). The R2000 declined for most of the day while the other 2 were generally rising.

Billy, do you know of an explanation for this apparent discrepancy?

[Billy]

Asomani above presents an interesting cumulative tick chart on the IWM that shows apparent accumulation. Yet, Manucastle in his post stated: Yesterday, the R2000 tick ($TIKRL) behaved VERY differently than the NYSE tick ($TICK) and the all market tick (TIKUSC). The R2000 declined for most of the day while the other 2 were generally rising.

Billy, do you know of an explanation for this apparent discrepancy?

Asomani and Adam,

I use Cumulatice TICK as a detector of buy/sell programs. There is no denying that the NYSE TICK points to program buying for the last two days. Now, as I mentioned elsewhere, the baskets of stocks being bought seems to be mostly defensive stocks. This is further confirmed by the lagging RUT TICK, since the RUT is mostly made up of "aggressive, risky" stocks. Hence, it is too early to call a potential bottom based on cumulative TICK alone, because we want to see "aggressive" buying programs, not "defensive" buying programs as first hints of a bottom.

These buy programs may also be used tactically to support prices in a consolidation before a new wave of selling.
Billy

[adam ali]

Update on regulating short-selling:

And Spain....Senior government sources tell Class CNBC, CNBC’s Italian partner, that a short-selling ban will be imposed in France and Italy after Thursday's market close.

The report conflicts with what CNBC has been told by the European Securities and Markets Authority (ESMA). The independent European Union body, which provides a forum to national financial European regulators, told CNBC on Thursday that it is increasing its market surveillance following the rumor-led drop in French banks' shares that took place on Wednesday and then again Thursday.

While he couldn't comment on whether a ban on short-selling was to be carried-out, a spokesperson at the ESMA told CNBC there were talks about such a move but that such a move wouldn't be "today, or tomorrow, or next week."

The ESMA is aware of the speculation problem, he said, and that markets have become jittery about it. "Today it’s about France; earlier, it was about Greece," he said.

Being a coordination organ, the ESMA cannot enforce such a ban, but what they can do, the spokesperson said, is offer a table around which European regulators can meet and agree on a coordinated action.

[adam ali]

Ernst,

Any thoughts on the VIX today ? I would have thought it be down more but that's a very seat of the pants observation.

[Timothy Clontz]

The VIX is the volatility index -- basically measuring how much prices are expected to CHANGE in either direction. Since the SPY is up 3% today (when an average up day since 1950 is 0.66%), the volatility remains extremely high.

Most folks are looking for a fast rush up to the long term moving averages (around 1250) before a renewed bear market. That's a LOT of price movement. The VIX should stay relatively high until a new bull market begins.

[adam ali]

Tim, interesting observation. Sort of begs the question that if the VIX continues to drop, at what point will it signal that we are still in a cyclical bull market as opposed to a new bear.

[Timothy Clontz]

If you go back through 23 years of the VIX, there's no meaningful trigger point to indicate a bull or a bear. It's just a measure of volatility. Generally market bottoms are more volatile than market tops, but determining a bull or bear market would need far more analysis than the VIX alone can provide.

P&F charts are showing a bear. 200 day moving averages are showing a bear. The yield ratio movements are showing a bear. Sector configuration is showing a bear.

And the market could zip right straight up to 1600 without blinking an eye.

You just have to be a little more right than wrong.

[ernsttanaka]

The input into the vix formula is the IV on the SPX options. The IV is importantly influence by our fear for the downside.

Since we have more or less an flat VIX - this means more or less put buy and selling is in balance.

AUG SPX contracts are not in the VIX anymore we moved to the SPX SEPT contracts.

You can currently sell the Sept put vertical 1055/1045 for $1.55. That is $155 profit for $845 risk.

We can only conclude that big parties don't like that risk for now. Otherwise orders would come in and the balance between put buy and sell would flip and the IV and in effect the VIX would come down.

Nothing has happened till 3pm EST which has hampered my earlier voiced optimism. I am making some small trades which will profit from a downtrend in the vix.

Ernst