volatility breakout strategies
October 15, 2018
The 8.85-year Cycle
Just like any relationship, anniversaries are important to the market, and many traders know it may cost them if they do not recognize these occasions. As a nation, there are days we will not forget, like 9/11. Just like a rock thrown into a still pond, the effects repeat over time.
The same big splash effects happen in the market, and it does not forget. Since 1885, some ten major DJIA AOD falls (≥ -3.60%) occurred between September 10 and October 31. These are sizable price events.
There are many more than ten referred to above when you consider declines in the one-day class that are less than the 3.6% but happen with a negative geopolitical news or media event.
MarketMap draws many parallels to the 1972- 1974 period based on the events from 1973 (9-year cycle x 5) this week is the anniversary of the “Arab oil embargo” among others in the 9-year repetition.
While MarketMap came into the year headlining “Geopolitical Security threats will precipitate financial distress” it is noteworthy that the real-life headlines read “Saudis threaten retaliation after Trump warns of ‘severe punishment’” for the suspected killing of a self-exiled Journo, Jamal Khashoggi, one of Saudi Arabia’s most prominent journalists.
However, what has become the new normal in the last 18 months is nothing ever happens, the problems simple pill one on top of the other.
However, cathartic market action in the current timeframe may lead to a clearer vision of what the future has in store.
One of the “among others” referred to above is the weekly long bar low in the 3rd week of October, highlighted in this chart. That big splash in the 2nd and 3rd week of October 2000 was a 12.% decline to the intra-week low. The week of October 20, 2000, declined 6.2% before putting in a mini panic low to recover.
The dates that come up for an AOD fall are today, the16th or the 17th. They set up as panic days from open to close. The longest bar of a move tends to be the last bar of that trend. The long weekly bar that ended the move in 2000 was 6.2% the one that precedes it was 5.8%, for example.
Thus far, since the October 3 peak, the biggest decline is only 3.2%. Exceeding that daily range will suggest a low is nearby, and MarketMap will look for cross-checks to confirm a low. Also of note here, the AOD decline in February was 6.9% and in a period of great extremes, in this era of the “tremendous” where anything is the “probably the greatest ever done,” and after 2017 a year of the lowest volatility on record, expecting an AOD decline exceeding the 6.9% this week would not be a surprise.
The scenario has not changed: risk/reward favors selling with selective long V hedges. A low here in the latter half of October followed by a failed rally into the election with another decline into the COT dates mid-November. There is the potential of an alternate or second AOD decline hitting on or about November 23.
October 14, 2018
Momentum Surge in Volatility
Looking at the CBOE perceived risk data as well as the long volatility futures ETFs (bearish investment vehicles) across the four major indices there is a momentum surge. Our chart on the left of the 3Xbull S&P ETF gives a clear picture of two failed tops at all-time historical highs followed by breakdowns. Following January peak, the February/April low pivoted when %BB-Oscillator was a divergent overbought long volatility ETF “SPXU”– right-hand Our Bollinger band oscillator is not yet at an extreme suggesting more decline to come.
What else is clear is %BB SPXU never moved above .382 during bullish trends. Looking back over the complete history of this bear ETF %BB-Osc only moved above .382 when the market moved into consolidation at least or a meaningful correction. With that being the context of the market now on an I-T basis, expect more decline.
Bottom line is our measures on V have surged past a point that implies follow through or lower prices for the major averages.