Sunday, April 14, 2019

The Volatility Squeeze is On!

A very wise man - and professional trader with a track record at that - once said (paraphrase), "you can't make any money if prices aren't moving." He provided numerous examples, and he also stated, while some (dumb money) traders try to trade through low volatility, the primary recipients of the profits are the brokerages and investment banks who take in the commissions, exhange fees, platform fees, trader inactivity fees, (etc.!) whether the traders are right, wrong or out to lunch!

With that in mind here is a chart of the daily VIX. Let's call it the VIX crush!

VIX - Daily - Caught Between Trend Lines

Just like volatility was being squeezed from - especially - January into late February, so too is it now caught between another set of trend lines forming a wedge. And it seems like a massive game of "chicken" is being played to see who will 'flinch' first. 

If you don't think this is the case, here is hard data from the weekly Commitment of Trader's report. See the bottom panel of the chart below.

ES E-Mini S&P 500 Futures - Daily - With Commitment of Traders

Note how the current situation is grotesquely different from the decline into December. The commercial traders (red) were correctly short going into the December decline, with the more speculative traders (blue & green) largely on the incorrect side of that decline, and massively so - as usual.  But now look! All three groups are netting out their positions and have very little "open interest" in the contract. The interested Elliott analyst should have a look at the recent volume and open interest figures for themselves.

And so, if volatility is being squeezed - what does it mean for prices?

S&P500 Cash Index - Daily - Wedge

It means that prices are still wedging, making gaps and diverging. This is the surest method for the retail brokerages to pump up their accounts, with money from the small trader and/or day trader. How many gaps would you like? There are many more than the few large ones I've highlighted.

From an Elliott Wave perspective, it is a keen observation which almost anyone can make that prices have bumped up against that upper wedge trend line roughly seven or eight times by our count. So the trend line seems quite significant. And, the higher prices are still diverging from the Fisher Transform indicator. As of Friday, prices were still making gaps higher, and there is no reason they can not overshoot the wedge before falling back. Most wedges typically fail when prices are about 70% of the way through the wedge, and so, this one is a bit over-due.

This does not mean prices will turn tomorrow - or the next day - prices can go 'nowhere' if they want for a while. But, below is my Elliott Wave perspective on the situation.

S&P500 Cash Index - Daily - Line Chart

The three waves down to the December low - while they may have seemed slow and tortuous on the way down, can be looked at now through the lens of time. And they may be described as being faster and less complex than the up wave since the December low. So what this may represent is excellent alternation within a corrective wave. 

If Elliott wave theory cited by both Prechter and Neely is correct, this means that a possible C wave down (whenever it begins) could either be simpler and faster than than A:3 wave down, or it can be more complex and tortured than the B:3 wave up. Either form would represent alternation within a corrective wave.

Keep in mind that B wave rallies are often described in the Elliott Wave literature as "suckers rallies" or "bull traps". They are often noted to have a volume signature that "dries up at the end". And that is a current observation.

Can a B:3 wave "go over the top"? You know that it can. It could form the "expanded flat" variety if it wants to. If it does, the C wave down might potentially get quite deep, but there are other possibilities, as well. I know it seems odd to be talking about the C wave down. Most people are thinking, "we're so near the high". True enough. And the $NYAD (advance-decline line) is at all time highs. Maybe we do go over the top first, but it is not required. Again, the B:3 wave does not have to go over the top. It has already done everything it is required to do by hitting the 90% level.

Now it just seems like the question of "who will blink first!"

Have an excellent rest of the weekend.
TraderJoe

20 comments:

  1. New here, but hopefully up to speed. Your "W" peak ("c" leg of abc) seems to fall short of even the .382 of "a". Is this a concern? thx

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    1. If you compare it to the VIX count, it is equally possible to put the W wave on the top of Mar 4th. Then leave X where it is. In either location it doesn't change the overall meaning the chart at all. At this point, I am showing it as "the longest correction in time" in the sequence. It is not necessary that SP500 and VIX count identically.

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  2. https://www.zerohedge.com/news/2019-04-13/war-has-broken-out-vix-complex

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  3. ET, Thank you for the VIX chart! January last year I started a lower trend line for VIX and every time it's been tested it's bounced. Friday was the first full bar under my trend line, weekly is still holding.
    My lower trend line starts November 24th 2017. It was January when I picked up the trend change which lead to the SVXY traders getting wiped out.

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  4. Joe,
    I assume that you believe we are in wave 2 from 2009, with wave 1 ending in october 2018. If so, does this wave need to be longer in time than the lower degree wave 2 in 2010/2011 which was an expanded flat? Also if this is a higher degree expanded flat wave 2, then what are the restrictions on the abc of this flat versus the lower dgree flat?

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    1. fyi, using the similar lower degree expanded flat (approx 1.618B wave) puts us at 3300. So when you say "over the top" you are allowing for a monster rally, which you would call a B wave, and others would call a fifth wave. Then at that peak both counts would look down (one at start of wave 2 and your in C of 2. If its a ABC down, then bothcounts will reconcile, but yours will be "right" because of the time that second wave will have taken. So question is are you fine with continuing a corrective count all the way to 3300 or would that change your current count to something more bullish long term?

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    2. Not necessarily. As I have posted numerous times, when you start with only "three waves down", then "everyone wants to 'know what the count is'." It is like the Fourth Wave Conundrum, and it still may well be. Few people have the patience it requires to count waves as they occur according to the rules and guidelines.

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  5. Thanks Joe for the analysis. Would there be a chance you see 2019 as another 1999 scenario where all the rest of sidelined monies get sucked in for a last hoorah rally?

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    1. There is almost always a 'chance' of 'anything' in probability theory, so I don't know how to answer your question well.

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  6. So my work says were are starting the ii in 3 down of gold. May not get much, maybe just retrace back to 1300. Any comments, concerns, complaints are welcome.

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  7. Very narrow price changes again overall, today. The count remains the same but the small degree waves are getting murky from all the compression. Higher local highs are not ruled out.

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    1. WHEN ARE higher local highs ruled out (if they are not ruled out now)? Do you mean you are not changing your count if market goes higher but in other scenarios higher highs would call for a new count?

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    2. Higher local highs are ruled out when there has been confirmation of a completed count. At this point, completion of a count is not yet able to be confirmed.

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  8. A new post has been started for the next day.

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