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    Volatility Reports 9/13/21

    September 12, 2021

September 12, 2021

Volatility Reports 9/13/21

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The Rule of Alternation Tells Us to “Expect Something Different” That is one of the many first principles advisors, managers, and traders know but it does not tell us “when.”

But this ebb and flow, this process from motion to rest and back is demarcated. The when is after natural or human-made divisions in time, as the calendar week-month-quarter or the accounting period when the books close, or anniversary dates when cycles begin and end.

So, after the lowest year in volatility -according to the media – 2017 was it; and what proceeded was a change, with a 13% correction in nine trading days from January 26 to February 9, 2018. Followed by a near 20% correction in the fourth quarter of the same year. Something different indeed.

Today, nearly the last quarter of 2021 we have a similar background. Our social media friend Charlie Bilello posted the following stats:

“The S&P 500’s maximum drawdown this year is only 4.2% (closing basis). Going back to 1928 only 3 years have had a smoother ride than 2021: 1964 (-3.5%), 1995 (-2.5%), and 2017 (-2.8%).”

Based on the Rule of Alternation – after 300 days (10 months) without a 5% correction – investors and traders should expect something different after a financially repressed stock market.  But I will throw another factor into the equation. While 2021 thus far has been a low drawdown year, it does not compare to 2017, which was a true low volatility bull market, because 2021 has an undertow of spiking volatility as the first featured chart points out.

The chart is the trailing P&L of our affiliate TMT long-only VX futures scalping system. When the underlying index VIX advances it reflects perceived concern and fear of changeability – normally the changed that is feared is of a decline. However, while the chart reveals the long volatility profit runs when the S&P witnessed corrections and a bear market, it also shows a trend of profits in 2021 with only minor declines with the majority of profits coming from the fear of missing out in the bull market driving spikes higher in the VIX.

This understanding is in gear with Contrary Thinker’s observation that over the last 5 months the advance has been marred by fear buying as measured by the Technical Event Model (TEM) on the month bar. Charts are shown previously on all the majors including the Macro sector Fang Index.

This is also in agreement with the Google Alerts following keywords like “FOMO” and “Stock Market” among others that have spiked to extremes over the same period as seen in this chart from Global Market Perspectives.

Lastly, in recent issues, I have displayed charts of the Skew index reaching historical highs. This index is based on perceived tail risk by big money players. In other words, with their “ear to the ground” they hear a known – unknown coming at the markets and possibly a black swan event, an unknown – unknown.

Staying with the underlying context of the markets the next four window chart tells the story of the current readings of the historical volatility of perceived volatility for each market on a short term (S-T) basis. That jumps off all the charts is the Technical Event Model reaching an extreme rule #2. These signals – setups – as a rule, precede breakouts with carry-over or trends. And here I am talking about breakouts in volatility, in other words, “fear is about to go into a trending mode since that is what the CBOE data measures.

Based on the above, for traders and hedgers that have scalping Algos with Turtle Style contract sizing – esp if filtered by TEM – now is the time to be engaged.

The bottom line in the Volatility Report dated 8/23/21 stated: “The rally into today’s COT is expected to fail and the downtrend that began on the 16th will be capped off on the 23rd and 24th going to an “out of the blue” bear market. iCahn Hedge is engaged, more on that in the last two hours of trading.

DatesNet $26rt per contractNo of tradesWin Rate
Account Size$7,980.00

The Dow is always our focus as it is a household name and most widely followed. Plus we have data going back to 1889.  What is important to see on the daily Dow chart is the peak came in on the 16th of August, the exact date in the COT table; and the secondary high hit on September 2, the day before a high tide event was expected and early in the week of high COTs. The chart shows this market just not failing to keep up with the S&P but being rejected but intermediate-term resistance followed by the breakdown of its wedge pattern and its lower channel line.

Another daily bar chart of the Dow shows a truncated fifth wave high. It’s more than another way of saying it failed to confirm ATHs with the S&P and Nasdaq, it broke an EWT rule, as such – if it is a failed fifth wave – the old school EWT boys will be jumping on this with massive selling this coming week.

The chart also uses Gann angles to point out target areas for this first phase of decline. Each zone is highlighted in blue and the price levels are cross-checked with CT’s Gann’s excel sheet that projects targets, where the focus is only on the 360-degree target nothing in between. Contrary Thinker likes to see the 360-degree projections nest with the angle crosses seen on the chart. 32,000 should be a walk in the park by Friday.

If you recall how bear markets are structured, if the market does has a long bar day of greater than 5% – a place where banks and funds have their trend following bands that kick in – shortly after the ATH, it is only a correction. If it is a bear (by definition greater than 20%) it will unfold with longer bars following a geomatical expansion.

Historically, the market does not go into any form of panic – aka long bar days greater than 5% until a month after the peak. The Dow is there now, so the pace of the decline is expected to pick up this week. The next meaningful COT is Monday the 20th, but that series of COTs works it way out to the end of the month, September 27. What is key – assuming the above scenario is correct – at the end of this week or over next weekend, CT needs to see where TEM is along with its Panic Index and on all time frames along with an EWT count, with the expectation of an S-T bounce

Trade-Ideas are the same.

Any of the positions that were stopped out does not mean the position is wrong it means the goal is to keep losses small. All of the positions will be reentered. Last week as noted I doubled up on long USD/JPY and short EUR/USD.  More on positions and new entries and re-entries to follow.

Don’t get caught looking the wrong way.  Don’t think all the social media contacts are friends providing solid advice for free. Wouldn’t you rather have four quarters than one hundred pennies? Value who you work with.

The new you is going to cost you. For starters giving up the old you. Join our group without question. 

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