• Weekly Comments for October 19, 2015

    Last week was options expiration and as stated on the ZH article below, recent history shows that the week following OE has been negative.

    http://www.zerohedge.com/news/2015-1...t-nothing-good



    We can see below that Thursday and Friday featured two similar trading patterns: a dip below the LOD followed by a run until the end of the day. Note that the strength of the price run was equivalent in both cases.



    The strength in the CTick was weaker on Friday, while the 20DMF strength was about equivalent for the two days. This indicates that large caps were more the target of these runs, because options on large caps are more liquid and the market is deeper.





    As a consequence, the S&P500 is now at the top section of its price envelope.



    Using the Breakout calculator on the past two years, I tried to either buy or short the S&P500 for a look at possible returns.

    Long SP500 at the close of Friday

    A long trade is obviously not a good idea.



    We can see below that the returns do not improve after holding a long trade for 20 days.



    Short SP500 at the close of Friday

    Trading short offers slightly better probabilities to make profits.



    Holding for 20 days also tells us that a short trade is better.



    The above stats however offer only a "static" view of the probabilities. They do not measure long-term momentum or tactical event linked price behavior.

    Conclusions:

    I suspect that just to make a point, the market will try to push higher on Monday morning, but that this will fail.

    ----------------------------------------------------------------------------------------------------------------

    Digression on how to keep things "under control"

    Below are intellectual elucubrations from someone who has nothing better to do over the weekend than think about the markets.

    When I reconsidered today's post, it came down to one question: is this market manipulation? If yes, how is this legally possible? What is the real intention and how is this allowed to continue?

    I am not in the conspiracy theory camp. I am more a believer that large investors have been very efficient at adapting their tools and methods to get the best of an evolving monetary ecosystem... and I also think that they have the information, the brains and the power to continue to adapt to whatever changes are in store. The goal is to make money and to keep control of how money is made.

    The ecosystem is clearly one that was initiated by the Fed and built for many years using the backbone of a reserve currency and the military projection power of the United States. This backbone is now challenged by both Russia and China and might lead to more "adaptation of the ecosystem" as China liquidates US Treasuries and as the US uses its US$ weapon to fight against this challenge.

    In 2009, the Fed intervened in the markets and started to provide liquidity (against worthless paper collateral) on a regular basis. The Fed also rescued the TBTF banks and "motivated" them to become the Fed's hands (gold's assistants) in order to use this liquidity as best as possible for the common goal of stability.

    This ecosystem has worked very well and is still in place, even though QE has stopped. All the liquidity detection mechanisms and alerts are still available and can be used at any time depending on circumstances. The QE liquidity was made available through specific channels, but this liquidity must have been spread through agreed upon mechanisms that cannot be legally challenged. This means that phone calls stating "I am buying here at that price" or private tweets or specific secret messages are a thing of the past. What probably has been developed is a way to inform "the channel" of the TBTF that liquidity is on the way. This liquidity injection detection mechanism is I guess embedded in the biggest trading algos. This means that no collusion is necessary to push prices higher: only one lead investor is needed to ignite the move and everybody else follows.

    The main objective is profit generation. The Fed or the SEC have no way or even intention to intervene, because this ecosystem is important to preserve. It is a key tool that will allow a smooth management of the coming political challenge to US hegemony.

    What does this mean for private investors? Probably one or more of the following:

    1. Market stability is a must. Hence, weakness will be bought, especially on specific market events (such as options expiration.)
    2. Value investing in specific stocks will be extremely well rewarded, because the event based liquidity interventions distort value discovery.
    3. Thinking will be more necessary than ever... especially in terms of game theory. The question will be: "How and when would I corner the market if I were GS?"
    Comments 4 Comments
    1. gapcap1's Avatar
      in addition to zero hedge, your lead chart has been all over twitter, which makes point #3 all the more relevant and compelling. probabilities serve two roles, one potentially positive and one potentially negative. to the good, win rate is an input to expectancy; to the bad, it’s an input to expectations. HUGE difference. the former sets us up to be realistic, the latter sets us up to be disappointed. the former allows us to act uniquely, the latter puts us in with the herd.

      the problem with market probabilities is context; as a complex adaptive system it is impossible to fully set the context of historical data. even if if something happened 7 of the last 7 expiration's; that sample size just doesn’t cut it for defining a true edge. all it does is prompt other participants to position themselves for 8 of 8, morphing the true underlying condition further by failing to account for all of that anticipatory positioning.

      let's say expectancy was only 80% and not 100%. an odds-maker would require us to bet $400 for every $100 we win. how could the market allow us to make the above short bet at the price we want, and how great could the potential payoff be relative to the risk? getting back to setting the context of this month's expiration compared to last month's, brings up a vastly different situation relative to the term structure of the vix. at this time last month the vix's term structure was in backwardation 90 days out and this month the vix's term structure is in contango. considering all the attention and blame affixed to risk-parity and VaR strategies as the underlying driver of last month's sell-off, i believe this to be a very salient fact.

      chart in forum under the heading "vix term structure"
    1. PeterR's Avatar
      The following criticises zerohedge as the blog, that popularises the article, even if it is not the original publisher.

      Key is that zerohedge constantly selects "research" that fits their bias and narrative.

      (I could not fill all points- it's only a chart)

      Baloney Detection Kit
      by Carl Sagan / MICHAEL SHERMER

      1. How reliable is the source of the claim?
      - not very, IMO
      - (see below)

      2. Does this source often make similar claims?
      - constant doomsday bias
      - anti american tendencies

      3. Have the claims been verified by another source?
      - unknown, probably not

      4. How does the claim fit with what we know about how the world works?
      - ...

      5. Has anyone gone out of the way to disprove the claim, or has only supportive evidence been sought?
      - August is missing
      - April did not break - but is visualised as such

      6. Does the preponderance of evidence point to the claimant's conclusion or to a different one?
      - alternative explanations possible

      7. Is the claimant employing the accepted rules of reason and tools of research, or have these been abandoned in favour of others that lead to the desired conclusion?
      - low sample size

      8. Is the claimant providing an explanation for the observed phenomena or merely denying the existing explanation?
      - ...

      9. If the claimant offers a new explanation, does it account for as many phenomena as the old explanation did?
      - ...

      10. Do the claimant's personal beliefs and biases drive the conclusions, or vice versa?
      - zh constantly selects "research" that fits their bias and narrative

      --------------
      So I conclude for me to look to fade a selloff.
    1. Pascal's Avatar
      Quote Originally Posted by PeterR View Post
      The following criticises zerohedge as the blog, that popularises the article, even if it is not the original publisher.

      Key is that zerohedge constantly selects "research" that fits their bias and narrative.

      (I could not fill all points- it's only a chart)

      Baloney Detection Kit
      by Carl Sagan / MICHAEL SHERMER

      1. How reliable is the source of the claim?
      - not very, IMO
      - (see below)

      2. Does this source often make similar claims?
      - constant doomsday bias
      - anti american tendencies

      3. Have the claims been verified by another source?
      - unknown, probably not

      4. How does the claim fit with what we know about how the world works?
      - ...

      5. Has anyone gone out of the way to disprove the claim, or has only supportive evidence been sought?
      - August is missing
      - April did not break - but is visualised as such

      6. Does the preponderance of evidence point to the claimant's conclusion or to a different one?
      - alternative explanations possible

      7. Is the claimant employing the accepted rules of reason and tools of research, or have these been abandoned in favour of others that lead to the desired conclusion?
      - low sample size

      8. Is the claimant providing an explanation for the observed phenomena or merely denying the existing explanation?
      - ...

      9. If the claimant offers a new explanation, does it account for as many phenomena as the old explanation did?
      - ...

      10. Do the claimant's personal beliefs and biases drive the conclusions, or vice versa?
      - zh constantly selects "research" that fits their bias and narrative

      --------------
      So I conclude for me to look to fade a selloff.
      Thank you Peter for posting this analysis regarding ZH.
      You are right to fade a sell-off. The question is down to what level? When would you start buying?

      Once again, the BC can help. You can see below that buying a pullback down to the 5MA (2014.47) offers you a R/R of 1.24 (and a 13.2% probability that we will reach this level today)

      A pullback 0.5% below the 5MA has only 4.8% chances of occurring today, but offers a better R/R ratio.


      Pascal

      Attachment 32803

      Attachment 32802
    1. PeterR's Avatar
      TY for your reply.

      I will have to look in more detail at your breakout calculator. ( I have not done this yet)

      From my own, current, counting for the NQ (NAS100):

      I look for normal pullbacks of 45-60 pts (92 pts would be unusual)

      I combine this with other TA, inter market analysis (heavily influenced by Gary / gapcap1) and your wonderful tool EV.

      good trading