Vol Squeeze & Control

If you've been following the ES 4-hr futures, then you might have noticed prices being 'squeezed' into a narrowing wedge since Monday's low, as follows.

This is a typical "volatility squeeze" or Vol Squeeze for short. It coincides with the VIX or Volatility Index dropping from 66 to 19 in the same period of time. This also resulted in price retracing to the 100-day SMA. And?

And I think the thing to recognize here is just who is in control. You may have heard or read in some Elliott Wave literature somewhere a cute saying like, "Corrections are fascinating because sometimes they can seem to stall until the news catches up with it."

Well, let me be clear. You and I know our accounts are too small to move the markets. So, just who is the one doing the stalling here? We know it's not us. No, it is the big money players with massive algorithms at their control who spent the day whipping price around today - because they know what they're going to do with price, and we don't. 

Early in the afternoon I said, "Nothing impulsive here". And prices continued to stall and whip. Why? This is important: the big money players have some significant advantages over you. They know that if they tell the algos to make an exact double-bottom, then that is what they will do. After all, computers just do what they're told. They'll do it to within a tick or two - and they will frustrate the breakout players. If, like early in the day, they tell the algo to "make a triangle" then that is what they will do. And the 78+% retrace will frustrate the retracement players. Both of these will likely cause retail losses of some degree, and the big money can pocket that change, too. They want it all.

But the real advantage comes early in the next two mornings when the PPI and CPI reports come out on Tuesday and Wednesday. Then, the Smart Money knows they have news reading algorithms that can read the news and react to it faster than it can even be delivered to your internet workstation. Then, they can move fast without a lot of volume to contend with, and retail is at another huge disadvantage. So, it is clearly again to their advantage to stall or triangle before major news reports.

What does this have to do with Elliott Wave?  Well, a lot. I have written quite a bit about The Principle of Equivalence: how two counts can be virtually the same (like a,b,c = i,ii,iii) until they are proven different. Part of the reason behind this Principle is that Smart Money can do a lot of things with a news report. They can impulse, they can whip, they can wait for further clarification, etc.

In the current situation, where the up wave might be a non-overlapping fourth wave, if I know this & you know this, you can bet your bottom dollar that every good hedge-fund chartist, every bank Elliott Wave analyst, and every FOMC desk chartist knows it too.

You and I both know that someone got crisped when the yen carry-trade blew up. Millions and billions were lost. A lot of vested interests want as much of that money back as possible. So, they wait for PPI and CPI: these affect interest rates. And interest rates affect their profitability and margins on the carry trade. 

So, the questions are, "will the wedge break up, or will the wedge break down?", and "will there be follow through in the direction of the break after a back-test or not?" The people who have the book know what they're going to do in each case. It is gamed out for them in strategy meetings. It is you and I who don't know for sure.

Have an excellent rest of the evening,

TraderJoe