Don't Look Good....07.09.15

Despite the NYAD opening at an amazing 10.32 it was all downhill for the rest of the day and according to the ergodic/ADX convergence it was real selling, not HFT arbitrage. That nasty little plunge at the the last 5 minutes doesn't bode well for Friday, which has bearish odds of 75% .
The VIX weekly chart going back to 2013 below shows that there might be a washout day about to occur.  Past surges in the VIX have culminated at the R3 level....we're not there yet and Friday or Monday could be ugly.  By the way we have a new final, last chance, we're not going to put up with this any more line in the sand for Greece...this Sunday....after which we'll probably have another line in the sand if things don't get worked out. Many "experts" claim a Greek departure from the Euro is already pretty much factored into the markets as a result of the slam/bam declines we've seen in the past 2 weeks.
Overnight the Chinese markets rallied and ended the day up 5%...basically flatline for the entire US session. Now this looks great on the face of it but you have to realize that overnight the Chinese banned short selling and threatened to arrest anyone who tried it and barred anyone with >5% position in a Chinese company from selling for the next 4 months.  There were a few more rules designed to slow the fall including market breakers at various levels but the net affect was to hamper both speculative and vested sellers from the entering the arena.  

Back to 204 Support and the Ponzo Update....07.08.15

A truly ugly day with the VIX rising 22% and SPY plunging close to the 204 line in the sand. Yesterday's action turned into a Trap Door from today's open and there was no rebound to allow a gracious (net zero loss) exit.  Both VXX and XIV were +/- 10% and the surprising thing was that despite the pervasive selling SPY did not penetrate the S2 pivot.
China was down another 7% and there may still be room to fall on that issue (FXI) before we see some stabilization.  That, coupled with the situation on Greece (next deadline in this Sunday) kept the markets in upheaval.  We saw some big names crater today (like Apple), illustrative of breakdown patterns that had not been evident before.  Technically we are are the edge of a fall into the abyss (SPY 199) but are also extremely oversold once again.
Below is the latest SPY Ponzo update with the risk forecast for the next 18 weeks.  One thing that is immediately apparent is the disparity of the forecast lines as well as the expanding range of those forecasts as compared with the previous few weeks. Not a good sign.

SPY, China and VIX....07.07.15

In the first 2 hours today SPY dropped sub S2 pivot to hit 204....the mid term support level and then began a steady grind up for the rest of the day.  Coming off extreme oversold levels this recovery move was technically expected but the Greek,China, PR situations still have the markets spooked. Volume was about 25% above normal and that pace was evident from the opening.
The metals were particularly hard hit, with gold and silver being down +/-5% for most of the day.
China dropped another 6% early on but recovered to 4.5% down at the close.  The VIX index was equally wild with over a 20% swing intraday.  We are in cash with a bullish bias.  This may hold for the next 2 days but unless Greece gets resolved by Friday we expect Friday to be negative and the following Monday to be another explosive sessions.  For now we'll just play it one day at a time.
The 4 hour bar charts of SPY, China (FXI) and the VIX are shown below.

To Hell and Back..07.06.15

Geez....listening to the late national news on Sunday night you would have expected the DOW to open down at least 250 points today.  As usual the talking heads exaggerated the situation a bit. Nevertheless it was an ugly open and real roller coaster ride for the rest of the day.  Our models are now mostly in cash having been stopped out of the SPY and SSO positions in early going.  Greece has now become something of a bad joke and Tsipras's credibility is near zero so we're likely to be hammered with Greek induced volatility for some time.  When they finally do get it ironed out we can expect one whopper of a rally.....unfortunately there will likely be a number of false starts before we get there.
Farther down the page is the FXI (China) chart, which continues to deteriorate (down another 4% today).  There's actually fairly strong support down at the  42 level and if we get there it may represent at least a modest risk/reward opportunity. Note the nice technical alignment of the ergodics and the ADX on the FXI chart...this is real selling.  The same 4 hour chart on SPY in much more technically convoluted.

 

SPY VDX and TrendX Update...07.04.15

Hope your July 4th is safe and sane....various situations around the world and at home are anything but.  Here's Mauldin's latest post with some frightening info on China and Puerto Rico.
Monday promises to be explosive in the aftermath of the July 5 Greek referendum vote.
Meanwhile Thursday's closing 10 minutes could almost be considered bullish ( back to the pivot after hanging around S1 much of the day).
The latest SPY VDX update is posted below and also the daily TrendX chart. We certainly don't want to see a breakdown below these levels.  If that happens things could get ugly in a hurry.

Trap Door Opens....07.02.15

No surprise but the Trap Door setup kicked in at the open.  Hope you avoided that one.  Our AM post suggested a trailing stop on SPY at net zero and that worked out well. If you're not completely exhausted by the Greeks here's Schwab's take...an objective analysis suggesting the "crisis" may be somewhat exaggerated. Nevertheless, traders hate uncertainty and the HFT's love to game it so as noted in yesterday's post Monday may be another blow out day.
Meanwhile, here's the latest MR research and there's been a quantum level discovery in the process.
Below are 2 examples of the XX version with XIV and VXX volatility ETNs as the only inputs.
In the first panel we use a slower momentum algorithm than M3 and we trade only the top ranked issue with a 3.4% limit stop.
In the second panel we use the same algorithm but we maintain an on-going position in both VXX and XIV (equal dollar amounts) at the end of each day and let the 3.4% limit stop cull out the loser as appropriate on a day to day basis.
Note the max drawdowns in each version.  Which one would you trade?  For me the second version is a no brainer.  The risk/reward factor is so attractive that's its hard to make a contrary argument.
The first panel is a true momentum model while second version is essentially a market neutral model trading volatility arbitrage.
Why is there a third ranking slot?  That slot accommodates a neutral outlier as mentioned in a previous post which may or may not be active depending on the current in or out of paradigm regime.
We are currently "in paradigm" based on the position of the equity curve relative to the RSQ line, so no outlier is needed.

Trap Door ALERT...07.01.15

We're done with June, historically a down month and calendar watchers were not disappointed.
The bulls, on the other hand,........... OK, now what?  the days before and after July 4th are historically red.....just something to consider and since the markets are closed Friday tomorrow is effectively the last day of the week = 72% red odds. The rally today was marginal and we can see from the daily chart below there's actually pretty good odds that we could revisit SPY March/April support @ 199.  And don't be lulled into the bulls camp thinking the Greek situation is resolved with Tsipras's letter kinda agreeing to European parameters. We've got miles to go before that issue goes away and the Europeans are inclined to wait for the July 5 Greek referendum before moving forward in any way. Bottom line, we are are the ledge of a potential Trap Door, when rosy hopes turn into dismal selling......and, in case you missed the fun last Monday we are now poised to have another explosive opening next Monday based largely on the upcoming weekend events in Greece.