Volatility Reports 12.13.21
December 12, 2021
December 12, 2021
Trading Fact of life #22: an optimist is more successful at trading.
They make opportunities out of difficulties. Pessimists will pay attention only to information that fits their point of view. They will see nothing else. Optimists will look for opportunities no matter which way the wind is blowing, long or short.
Keep MarketMap-2022 in mind and reference to the new two-year cycle, it will come into play over the coming eight years maybe longer. Be that as it may, one of my “fear” oscillators has proven insightful when the regime changed to a more volatile market starting with the mini-crash in early 2018. You can go back to late 2015 for a similar setup but what is key here is the extreme “no fear” of risk seen at the peaks and slowly diverging into the primary decline.
Like all “divergence” signals, it all comes down to which one is the final one that tips the market over the ledge. The featured chart shows the similarity of the patterns and the recovery of the “bravado” into last Friday’s close. Given that the market has rallied onto a change of trend time window, that points down into the 19th +/- 2 days, the next phase of decline is expected.
Here is another view of a similar idea, showing the effectiveness of the fear index divergence leading to a meaningful decline by the averages. In fact, one can see how “smart” money has been trading a bull market in fear since the peak in late January 2018, with CT’s VX fear indicator diverging for four years. What is more important here is the divergence from the June/July to date, providing a clear, “off risk” signal.
At this point, the main focus is on the timing of and the implementation of a sound bear strategy, and the daily bars are providing TE#4 signals as discussed below.
All of the daily bars on the major and offshore stock averages are on new TE#4. A setup that prepares the traders to expect and trade volatility breakouts, which is another way of saying range expansion. Traders should expect range days where the open is near the high and the close is near the low and supports are triggered. In inverse is true if resistance is taken out.
Based on that part of CT’s volatility model outlined above, the expectation is for the breaks to come lower, for the lower side of breakout bands and support levels to be taken out.
From a sentiment point of view, the rankings done by a handful of different services and organizations provide a widely disparate mixed bag. Unlike the VX data cited above, providing a much clearer picture of market psychology. The stream of information providers has strayed off the bullish path in many cases and are referencing some of the commodity markets, a rare event, reflecting doubt I reckon, on their insights into the stock markets.
I had to feature the SPT daily bar here as the exception to the other daily bars because the SPY reveals its panic low – the first vertical red dashed line, followed by a one-day rally, which is typical after a “V” panic low. However, that one day rally cycled TEM to a new extreme TE#4 – yellow dash vertical line – a pre-condition that called for a range expansion.
Please note the effectiveness of the TE#4 being followed by two long bar day declines, a textbook example of what TEM provides for the trader. There is a lot to see on this chart, but the focus is the way TEM cycled back to a panic low on 12/3/21, producing the “V” low as it is known for. There is more to say about 12/3-that I will come back to in a minute, but to finish this thought the market’s advance on Friday, which a few of the content providers on Twitter area calling a new buy signal on the 5-day A/D oscillator, is negated by the “emotional” panic buying that put it there. TE#1 has a 90% chance or higher of being a reversal, in this case, an inverted “V.”
Now here is a fact, the low on 12/3/21 happened on a solar/lunar eclipse. I know these kinds of factors have no cause-and-effect proof and are only of interest to a few. Be that as it may, it’s a fact that it by accident happened at the low. That’s not to say that all solar or lunar eclipses catch highs and low turning points or to give them a probability rating, but the fact is there and by the way, the peak on the peak on 11/19/21 was a lunar eclipse, but I digress.
What is rare about the solar eclipse at the recent low happening for the astrology crowd with a southern lunar node. Here is a straightforward explanation of the meaning of the lunar nodes from an astrological point of view.
The north node is “your true north or your North Star.” In this case, it would be the market’s constructive behavior that it should follow, like a destiny, if you will. But the eclipse happened conjunct the south node. It represents ineffective actions, qualities that should be left behind if the market is going to fulfill its destiny. The inference would be the action of the market was not in line with its “destiny.”
Bottom line, a high is expected in the very near term. If not early this week, then on the 20th of December. Contrary Thinker will be looking for clues from the previous leadership and elsewhere to provide motivation for new trade ideas including but not limited to leveraged ETFs, high beta single-leg Puts, and Calls on FAANG stocks, segments, and the averages including the offshore markets.
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Great and Many Thanks,
Jack F. Cahn, CMT
Contrary Thinker since 1989,
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