Chicagostock Trading

Chicagostock Trading

This Week's Meltdown in Vol Windows

Trading is a game of price discovery. Like poker, you don't want to be on the wrong side when the bluff is called, or the music stops. The market is all about calling bluffs. Before doing that, it also has to set as many traps and catch people on the wrong side in order to gain enough fuel for the opposite direction. Traders caught wrong are the fuel that move the market by having to cover their shorts or sell their longs. The market trades price and reaction to those price levels create the boundaries for buyers and sellers to defend. Below are this week's 10minute intraday charts of the Emini SP500 futures.

Solid horizontal lines = Vol windows

Dash horizontal lines = intraday pivots

MONDAY:

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The market came back after the weekend, having seen Friday break an 11 week winning streak.  The market started Monday's cash open where it left off from Friday however was met with immediate selling that broke below Friday's 1968 lows to shake out longs and lure in shorts as lower vol window breached to establish bearish bias.  New lows down to 196075 made before turning around to recover above lower vol window and run into the cash open. As sellers defended the open, the market pulled in to retest the lower vol window only to see sellers unable to continue below, keeping shorts trapped and giving way for a squeeze into the close to reverse the intraday bear bias.

 

TUESDAY:

Monday's short squeeze reversal spilled into Tuesday with a cash open at 1977. The "turn around" Tuesday attempt was rejected as the market failed the test of the upper vol window that coincided with 1980 as the level the previous Friday opened below.  This retest led to rejection below the intraday low and into the lower vol window to retest 1968 support from Monday. First test sees bounce back into the opening range only to fail to attract buyers, seeing push back to the lows. Second time around buyers were unable to hold, giving way for a close below the lower vol widnow to squeeze longs.

 

WEDNESDAY:

Wednesday saw the market open 10 handles from Tuesday's close right into Tuesday's cash open. This was rejected with highs of 1974 before turning lower to breach the lower vol widnow and establish a bearish intraday bias.  New lows were made down to 195650 before rounding a bottom and seeing a short squeezed fueled by FOMC statement.  The squeeze was again rejected at the cash open with close below the lower vol window.  

 

THURSDAY:

 Wednesday's FOMC statement caught longs trapped as the market settled at 196550, only to open Thursday 14 lower at 1951.  Longs were caught off guard and forced to liquidate, seeing the lower vol window breached to establish a bearish intraday bias.  July lows of 194250, reversing the market from new highs into new lows going into the close of the month. The failure to recover 1940 led to margin selling and expansion of the lower vol window into the close.

 

FRIDAY:

Friday saw Thursday's weak settlement spill into the overnight session with the market falling into 191050.  The cash market opened above 1920 to see a squeeze through the Globex highs fail to hold as the upper vol window and pivots kept a lid on prices.  The rejection was followed by a move below the cash open and breach of the lower vol window at 1915 to establish a bearish intraday bias. New shorts were lured in below this level to see the overnight lows of 191050 taken out by one tick at 191025 before exhausting.  This failure to move lower led to sideways consolidation before turning back above 1915 to trap shorts and use as fuel for squeeze. The squeeze led to retesting the cash open only to see buyers unable to move past sellers defending the bounce and intraday bear bias.  With buyers failing to pick up and continue squeeze, sellers too back control to drop back 10 into 1916 before settling at 1918.  Going forward, longs are now vulnerable to a open below 1915 to target 1910 for another shakeout.  Shorts are squeezed on a move through 1926.

 

 

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Short term Emini Sp500 trade signals

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Top of the screen is a short term chart based on short term signals. First signal was a short @ 198250 with a 4 handle stop. Next signal was @ 198350 with a 3 handle stop. 198350 short saw first target @ 198050 (1x risk), then stops moved to breakeven which was kicked out on the bounce to 198350 late afternoon.  198250 short saw first target @ 197850 (1x risk), stops lowered to entry and the runners were covered this morning @ 197350.

Bottom of screen shows longer term setups based on daily/hourly charts. First signal short @ 1982 with a 5 handle stop. Target 1 taken out @ 1977 (1x risk), target 2 covered this morning @ 197300. One left with a break even stop and a 1952 target.

 

Here's how it looked yesterday just after the close  http://stks.co/f0qsu

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SP500 6 Month Vol Windows & Pivots

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The second half of the year kicked off this month with the SP500 seeing a spillover effect from the 1st half’s close in June with the market printing a new high of 1978 during the July 4th holiday.  The first half of the year began with the market liquidating to breach its lower 6 month vol window at 1797 to establish a bearish bias, enough to lure in shorts, making new lows on the year down to 1732.  The breach of the vol window was used as a bear trap as the market put in a V bottom with lows of 1732 and squeezed through its 6 month reversal window of 1847 after establishing the bearish bias below 1797.  By holding above 1847, the market reversed its 6 month bearish bias for the 1st half of the year, and forced shorts to have to cover as the 6 month pivots turned into support and the market stabilized above 1800.  Going into the close of the 1st half any shorts that were left were forced to through in the towel which led the market to squeeze out of its 3 month range and breakout through 1900 and into 1978.  With the 2nd half of the year beginning, the SP has traded in a very narrow range, within 1978- 1945.  This has established a new set of volatility windows and 6 month pivots for the 2nd half of the year.  The upper vol window coincides just below the psychological 2000 level which if breached, can establish a bullish bias to lure in longs and attempt to complete a 100% fib extension from 2013 low of 1553 and this year’s low of 1732, up to 2025.  The lower vol window coincides with the late June lows of 1936, just before breaking above 1956 and setting new highs.  Failure to hold the lower vol window shows the breakout above 1955 as a failure and gives room to retest next low down to 1917, followed by old resistance at 1900 in search of new support.  The 6 month pivot for July-December is extremely tight due to the opening range’s indecision, giving way to break out of this range and for volatility to expand. 

 

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Stocks and Volatility Shorts on Tight Rope

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SP500 futures have been in limbo after completing the 1955 target based off the January-February range expansion (1844-1732 = 112, 1844+112=1956).  This level has also coinciding with a major fib extension at 76.4% based off the May 2013 low (1553) to the December 2013 high (1846) and the February 2014 low (1732).

We know this year started off sideways from last years close, which was followed by a massive liquidation from 1844 down to 1732.  This selloff was reversed, with the market recovering above 1844 to squeeze out shorts.  The reversal above 1844 created the plateau to allow new buyers to come in and support prices to attempt and expand the 112 point move down up into 1956.  After 3 months of sideways consolidation and bear traps, the market printed new highs in May at 189850 followed by a low of 1859 that barely held its May low of 185450.  By holding this low, the market managed to reverse and squeeze through 1898, giving way to breaking outside of the 3 month range and expanding up to complete the target as shorts once again were squeezed.  The ECB came out on the 5th of June to cut rates to negative, giving the boost in the SP to hit 1940.  The following day was the Jobs report on the 6th of June which continued the move into highs of 184975. Spilling over into Monday, highs of 195475 were made completing the range expansion and meeting the 76.4% fib, give or take a point.  The futures rollover from June into September saw prices rollover with, falling down into 1917 to test the June lows and hold, before reversing back up as the September contract became the front month and went toward to meet with its 76.4% fib as well. 

Highs of 195975 were made during last Sunday's Globex session that further squeezed shorts after September took out the continuous highs. Since this Globex high, the cash market opened lower only to rally back and retest this high, making a new one by a tick at 1960 before going offered down to 1936.  Over the past 2 trading days the SP has fought to hold above 1940 as it attempts to defend the reversal off the 1917 lows and develop a base to squeeze shorts through 1960.  Buyers at the 1940 level need a move through 1960 to be rewarded based on their risk of defending the 1917 low.  Doing so, gives way to the next major fib level of 100% at 2025.  Failure to hold 1940, gives way down to target the 1917 low made last week.  Failure to hold 1917 confirms the new highs as a failed breakout with buyers that will be forced to liquidate which gives way down to retracing into the May breakout at 1890 to allow buyers to defend.  This would be alot healthier to the market as it would allow buyers a opportunity to buy a dip and use a break of the May lows as their exit, as opposed to forcing buyers to chase above 1960 in which will continue the capitulation of shorts and parabolic squeeze. It is the struggle to accept 1950.

 

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It is important to pay attention to VIX futures here.  After taking out multi year lows and falling below its trend line from the 2013 lows, VIX fell into 1073 early June, before bouncing up to 1289 in an attempt to come back.  This early attempt was rejected and VIX was sold down to make new lows (as the SP made new highs), falling down to 1034 before seeing a push back to highs of 1233 on the 25th of June.  It is interesting to note the take of the Volatility Sonar report from Optionmonster TV that highlights July call sellers in the VIX futures and an absent of what they call the "call stupid buyer" that has been buying premium in VIX not show up on that particular weakness from the 25th.  Jamie Tyrell explains how VIX can turn higher toward the end of the video.  Thursday saw VIX press against highs of 1251, nearing that 1289 June high, before backing away. Shorts in Vol should be concerned as a squeeze through the June highs forces shorts to cover as the June lows setup a failed breakdown, giving way for a move to retest the April range of 16-18.  

This was our projection of VIX just a little over a month ago: http://stks.co/p0M9e

 

 

 

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What Tuesday's Reversal Means

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On Tuesday, the SP500 put in whats called an "outside reversal bar". What this means is the market took out its prior high, however failed to hold and reversed to close below the lows.  This comes after seeing last week the contract rollover from June into September, see the market sell off down to 191750 after the June contract reached its 76.4% fib extension and 1955 target with its 1954.75 high.  The market recovered after the rollover lows of 191750 last week and ended the week with the market taking out the continuous 195475 high up to 195675. This allowed the September contract to meet its 76.4% fib. Monday saw a continuation of this squeeze overnight with the Sunday globex trading seeing a squeeze up to 195975 and Monday's cash open lower. Tuesday saw the market retest this globex high, take it out by a tick at 1960.00, and fail to hold, falling down to take out the cash open to reverse the market, falling into major support at 1941.  Going forward, this reversal not only caught longs off guard, but has also left some shorts on the sidelines with Tuesday's retest of Sunday night's short squeeze.  The close below 1950 has turned the level into new resistance with pressure against 1941 based off the 1917 low made last week. The reversal down to 1941 allows buyers a retest of major support to defend and prevent the 1917 lows from failing.  Bulls must now get through 1950 resistance and recover the failed 1960 high to regain momentum.  Failure to hold 1941 support gives way to target last week's 191750 low to squeeze longs and confirm the daily new high as a failed breakout. This would be a front run ahead of next week's NFP report with the downside chase to squeeze longs and lure in shorts below 1917.  Failure to hold 1917 gives way to break the June 191375 low and put in a reversal for the month, giving room down to retest major support within 1890-1880 based off the May breakout. 

 

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