A Unified Field Theory of Price & Volume...04.28.16

Well, it's a work in progress.  The recent TLT Perspectives posts on the ATR have gotten me into a major new research project with very encouraging results so far.  These are high odds trades using the daily volatility metrics of open/close, ATR and previous close to current low.
Turns out there may be some very actionable signals derived from looking at the standard deviation of those metrics.
The top 2 studies look at the PCL trend in TLT and QQQ. and highlight potential short signals that can be derived from upward penetration of the standard deviation band with a 38% retracement before a subsequent penetration.
The Lowest study (SPY) demonstrates that we can derive both short and long signals based on the PCL's cross of a .9% trend line if that line has retraced back to the .65% level before beginning a new leg up.
What we're showing here is of course premature for commitment of capital and the whole idea needs to be converted to a more empirically benchmarked and tracked platform. Once in a more controlled analytical mode I suspect that optimizing the standard deviation and retracement values for a specific ETF or stock input will produce a whole new persspective for evaluating market opportunities.

 Finally, a long/short SPY model

More TLT Perspectives...04.27.16

While the 163 hedge funds that were long Apple reconcile their balance sheets this morning here are a few more TLT considerations.
First the delta neutral TLT/TBT model has been slowly chugging along reflecting a nice linear revenue stream even as TLT has technically broken down to support levels.
Jeff Gundlach (arguably one of the great bond traders of all time) posted some encouraging opinions for longer term treasuries yesterday and so far today's action has followed suit. Our May 135/131 credit spread still looks like a safe bet given the low odds the FED will make any move before June.
Now...something to ponder.......The lower chart with the yellow bars is a simple TLT trading setup.
Many Mosaic users do trade bonds, especially TLT, and here's a quick look at how the ATR trend values on the long term volatility chart have consistently signaled  at least short term TLT BUYs.

The TLT BUY setup tracks the ATR trend only and looks for situations here 2 conditions are met>>
1. The ATR trend passes through .8% and hits or penetrates 1%.
2. For new entries the ATR trend must retrace below .08% before a new hit of 1% can be triggered.
To preserve gains >> standard limit stop of .06% of the entry price and a trailing stop of .03%.
Over the past 2 years there have been 7 signals, all net positive although in 3 cases the positions were held for < 3 days.

APPLE Crashes and PONZO Updates....04.26.16

Once again it appears the Barron's gurus may have demonstrated stunningly bad timing in their analyses as Apple's earnings and sales were WAY DOWN leading to a current 8.5% selloff in after hours.and thereby following the historical selloff range of $8 mentioned over the weekend.  
Whether this is now a great time to pick up some cheap Apple shares remains to be seen.
Guess which way the markets will open Wednesday.?
Meanwhile the Ponzo charts are pretty much following suit from last week although TLT is showing momentum cracks and a riskier downside consensus longer term.....which will largely be dependent on the FED's rate program of course.

VDX Updates ...04.25.16

There are times when fundamentals (as in earnings reports) trump technical signals and 4 times a year we are witness to that decoupling....currently underway.  The name of the game is of course, SURPRISE earnings, in which the surprise tends to be to the downside with resultant price collapse and generally hesitancy going forward. Such was the case with GOOGL,MSFT and SBUX last week and XRX today.  Sometimes those analyst A rated stocks just don't deliver the goods.
Apple is out tomorrow to further shake the uncertainty tree and for now we are taking a cautious and low exposure stance.  Delta neutral is the safest way to play earnings season IMHO...similar to a straddle or a strangle but somewhat easier and faster to navigate.
Note the inclusion of the SPLV VDX chart at the bottom, which we'll be looking at in greater detail as the week goes by.
Why do the SPLV  VDX and VDI+/- charts look more like TLT than SPY???????

M6 Outlook & SPLV...04.23.16

This week we feature a slightly revised M6 model which includes a new input...SPLV, an ETF comprised of the S&P low volatility issues.
There's not a whole lot of volume on SPLV but if you spend some time studying its idiosyncrasies along with me next week it may become one of your favorite trading ETFs.
The general tone for next week is reserved and don't forget APPLE's out Tuesday with earnings that will surely drift the markets either up or down. Just to put things in context Barron's reports this week that their stable of investment pros favorite stock is......APPLE.

 And here's the current M1 study of SPLV all by itself...in the mean reversion mode.

Market Odds Outlook.....04.21.16

Here's tonight's M11 odds outlook for the market using the momentum and mean reversion modes.
SH is slowly migrating from the right side of the ranking matrix to a more dominant position.
After the market closed SBUX and MSFT announced weak earnings and both stocks are down heavily in the after markets..  Expect negative momentum to prevail tomorrow as the selling in Apple continues to warn off positions at these levels. Historically Apple moves about 8 points up or down on earnings day and with Apple comprising 20+% of the Qs the 25th could be particularly volatile.

TLT Perspectives...04.20.16

Checking the M1 platform (mean reversion mode) shows TLT struggling to reach new highs but the recent PONZO suggested a likely consolidation at this level so we may have to adopt a more passive approach to milking TLT for the time being.
One possible vertical call spread is shown at the end of this post although savvy readers can probably improve the risk/reward by toying with the parameters a bit.

PONZO Updates for SPY, VIX and TLT...04.19.16

If you believe the markets are irrational, non-linear and highly manipulated then you'll love this week's updates which have SPY wildly bullish, the VIX modestly bullish and TLT basically in a stalled consolidation pattern. So far earnings haven't been great although that hasn't stopped the market's recent low volume climb. IBM earnings report generated considerable selling and the Qs are looking weak relative to SPY and IWM (for now).  Later this week a number of big tech firms report and then on the 25th Apple reports in the face of declining expectations.
Expect considerable volatility thru and beyond that date.

A WIld Reversal...04.18.16

Overnight the markets were down big time based on the DOHA collapse (thanks to Iran) and then the Saudi oil workers decided to go on strike and everything changed.  Volume was  very low (about 55% normal) and Apple traded almost as many shares as SPY as earnings approach on the 25th and the short term consensus on the #1 tech stock has turned decidedly negative.
SPY is now extremely overbought going into the 21st, which promises to be a watershed day with earnings on deck for SBUX, MSFT and GOOGL, among the big names.
M6 is favoring the short side and TLT for tomorrow.

VDX Updates and More...04.16.16

Over at Zero Hedge (a favorite site for years) it looks like the shorts rule the day. If he's right then it's best to gird your loins and prepare to hunker down with a heavy bond coat (we still like TLT's odds).
Before we look at the VDX updates here's a fascinating (to me) article on a Equinix (EQIX) server facility in NJ.  It may give you a perspective on what's really going on during the trading day with the robots and the institutions while you await confirmation of your 1000 share order.
Now to the VDXs>>>
The chart I always consider is the VDI +/- and TLT is the only one with a positive VDI divergence.
How do we reconcile both SPY and the VIX having downslope VDI+ readings even though the overbought/oversold charts are diametrically opposite? One clue may be the volume chart of SPY which is clearly on the wane.  We have no volume data for the VIX so a metric comparison is not possible. One other caution on the SPY...current price action is blow the RSQ line.
Although there is the camp arguing for a breakout to new SPY highs, or at least a quick pop to 210, the technical odds are not so supportive.
LQB shifted its focus to bonds and away from equities over a month ago and so far that decision has been a good choice.  Longer term we believe that bond models offer a higher risk/reward payoff than equities but we're always prepared to change course if market conditions warrant.  

4 More Volatility Peak Studes...04.14.16

As a follow up to Monday's post on Volatility Peaks here are 4 additional studies of STOP Volatility that illustrate why SPY is an excellent target for high odds success while other sectors do not demonstrate the same linearity.

First, XIV.... the VIX inverse ETN...which hypothetically should offer great correlation odds if our peaks are based on volatility. Not so, it turns out and I've mentioned many times before how SPY volatility does not necessarily correspond with VIX volatility.  This study shows that volatility itself does not correlate highly with XIV price and in fact displays a distinct lag..

Then let's look at XLE, the energy sector, for which over 90% of traders currently have a bearish view. The latest issue of Modern Trader had 10 articles on the oil sector and not one was bullish.
The volatility peaks just don't work reliably for XLE.

Then there's the financials,,,XLF....a sector we might expect to correspond with SPY volatility..but this also turns out to be a low odds game. We do see a fair degree of volatility peak/selling correlation but the intrinsic volatility of the sector itself tends to muddy the waters a bit.

Finally gold, not a sector but a widely perceived inflation hedge.  Needless to say a quick look at this chart pair should make you dismiss forever any thought of trading these volatility peaks.

M6 SpIn....04.13.16

After 2 big up days the markets may slow down a bit into Friday's options expiration.  At least that's the odds based on the mean reversion mode of M6, which has managed to hold on to some modest gains using a top 2 ranking sort.  Compare the equity curves of the mean reversion and momentum modes to understand why the MR mode is preferable.
It was also a good day for delta neutral SPY players, although it looked a bit iffy in early going..
SPY is now at 208 and at MAJOR overhead resistance which we noted a few weeks ago as it was struggling at 204..
The big news overnight came out of China, which drove the global markets higher ahead of today's action. The few bad tidbits from retail sales figures failed to dampen the enthusiasm.
Note that the past 2 days have shown volume about  70% normal and that today's push was led by the Qs and XLF....the 2 sectors that we generally associate with high odds bullish moves.
We've seen these low volume melt-ups before...in fact they tend to be the norm, but a few bad earnings may reverse course in a flash.

PONZO Updates for SPY, VIX and TLT....04.12.16

This week's PONZO forecasts suggest an increase in SPY volatility although VIX and TLT remain in a fairly confined and low volatility channels.   SPY continues to demonstrate daily ATRs > 1% which is good for delta neutral players although the technical alignment of SPY and the VIX has deteriorated to the point that the XIV/VXX relative momentum signal is now underperforming the SPY/SH signal (dollar value adjusted).  This situation is a bit worrisome since its hard to reconcile a volatile SPY with a benign VIX.
Short term the outlook is neutral (no large breakouts/breakdowns anticipated) as long as prices stay within our bullish/bearish brackets.

Best Odds Parts 2.....Do the Opposite....04.11.16

A tip of the hat to long time Mosaic user Robert who emailed me after Friday's post to advise me that the way he trades the long term stops volatility chart is to short the peaks...a strategy he notes has limited the time he's in the market and has been successful 6 out of the last 6 times he's done it..
He uses his own signal to determine when the peaks are about to exhaust but basically waits for a 3 bar reversal signal on the 130 minute chart using a PSAR (parabolics).
Good job Robert!   Just goes to show that 2 heads are better than one and that there's more than one way to use this volatility data..
Keep in mind these are directional moves...in this case short....so no delta neutral protection but the
win/loss ratio does argue for some risk off exposure.
Top chart with arrows is the SPY , as is the bottom chart with SPY price action.
Middle chart is the VIX for comparison and confirmation purposes.

VDX Updates, MOD and More...04.10.16

Looking forward to next week earnings continue to set the trend.  Technically, the charts suggest a bearish skew but there are underlying currents in the bond sector (where short interest is huge) that may frustrate our algorithmic strategy.  For example, even though TLT faltered on Friday the OTM calls collapsed far beyond the value normally ascribed by implied volatility.  And, on Thursday, even as TLT was performing like a rocket the OTM calls were actually flat.. I look at these things during the trading day just for possible clues as to what the big boys are doing and lately there have been more than a few decouplings like the TLT/option behavior.
Bottom chart is latest consensus sector interest courtesy of State Street.

Delta Neutral Best Odds Entries....04.08.16

The popularity of the delta neutral approach appears to be increasingly based on the number of questions I receive and based on the squirrelly behavior of the markets recently its easy to understand why.  One continuing question is..."Is there a time when the odds of a good delta neutral entry are better?' and the answer is "Yes".
Below is a snip of the M3 delta neutral volatility and stop charts and yellow arrow lines indicate situations in the skew and TrendX charts and patterns on the stop charts that typically offer the best odds for detecting impending volatility pops and hence good delta neutral returns.
On the Skew and TrendX charts the crosses of the zero line indicate periods when long/short volatility is neutral and the odds for impending volatility pops are highest (which we want to capture with the DN tactics).
On the ATR, PCL and OC charts we look for patterns where the trend lines are hugging the RSQ line. When the P6 has diverged significantly from the RSQ line these are poor times for new entries as it indicates at least a short term volatility spike is already under way.
On the lower 2 year composite stops chart we look for periods of volatility consolidation which can actually last for several months when the markets are stagnant. The longer the flat pattern the better since as time goes by there are only 2 directions left...up or down... and often with some gusto.
Final question>  "Can the delta neutral model produce returns in a flat or stagnant market?"  And again the answer is "Yes"...but we need to reduce the size of the limit stops to reflect a lower volatility trading environment (let M1 run the numbers for the best current setting) and the trailing stop may also need to be increased to allow the trades more "breathing room".

Back to Delta Neutral Basics...04.07.16

Bit of a FED backlash today as yesterday's happy dovish FED minutes were rethought as an indication of global weakness, uncertainty and hence, danger.  It was an S2 pivot day for SPY  on sub-par volume (surprisingly).
Gold and TLT (bonds) were the big winners as the VIX jumped 18% at one point.
On days like today the true worth of the delta neutral SSO/SDS (SPY X2) model becomes apparent. Not everyday is a big winner like today but the DN tactic does produce a steady ultra low risk return when properly monitored and with a trailing stop in place.
The lower panel shows the relationship between the previous close to low, (PCL),  ATR and open to close (OC) trends....all nicely aligned....the type of synchronized pattern that bodes well for high probability trading odds.

TLT WIth the MOD Dashboard...04.06.16

This is the MOD view of TLT (20 year treasuries) as of Tuesday's close...a pretty dramatic signal to the short side which was played out in today's action...along with the bullish MOD signal for XLE forecast yesterday. I'm continuing to tweak the pair portfolios (not the algorithms) to find which correlated pairs really do provide a tell for impending reversals.
An attractive feature of this TLT/pair MOD using various world currencies as the B side of the pair is that virtually all the gain comes form the TLT side of the trades.  This is an important distinction to make when analyzing the MOD dashboards.  If  the % returns are skewed in favor of the B side of the pair then there's a lot more trading involved to generate the posted returns and the trading model itself loses its utility as a consensus model focused on a single issue...in this case TLT.
The new MOD is still a work in progress as I build a portfolio of trading pairs but recent efforts have certainty been encouraging.