Friday Wrap - Pushing the Envelope

At Friday's close the VIX was down 1.08 or 4.25% for the day. That's a big move relative to the size of the SPY (down .02%), the DIA (up .23%) or the darling of the day, the Qs (up .54%). I suspect a lot of the move had to do with reconciling Thursday's VIX contra move, and the net effect is to leave the VIX on the now adjusted LR30 channel on a day 12 count towards a reversal. Got that? A bit convoluted perhaps but that's just how I see it right now.

And above are the Qs pivot bands and Impulse Indicator looking at weekly bars. Pretty obvious the Qs are in rarefied territory as they made a new high for the year today and finished only 1 thin penny off the daily high. That's very unusual for a Friday and perhaps indicative of things to come. Just because the markets are really overbought doesn't mean they can't get really, really overbought.

So far I've avoided getting short on the intraday charts, as the NYAD has given scant indication after the open that weakness is forthcoming and it's really saved my bacon this week when that little voice in the feeble old right side brain was screaming. "short".

The Qs Impulse Indicator is now at levels not seen since the big October plunge, suggesting that the spring is poised to unwind dramatically.

At the same time it must be noted that as a result of this week's action the Qs are now flashing a brand new LR30 profile (I'll post on Monday) that has the Qs resting dead on an upslope LR30 channel mean......not negative and not positive, but looking technically tired and overbought.

Finally, if you got caught in short positions this week, don't feel too bad. Some of the best and the brightest (no names please) of the technical bloggers had called for the SPX at 850 (it closed at 940) and I was thinking along the same lines going into the week before euphoria hit.

Next week should be interesting. . . .

VIX Exhaustion?

More than a few traders noted the weird behavior of yesterday's VIX, which actually rose 3.5%, the same % gain displayed by many of the major averages DJ30, SPX, NDX and IWM.
I'll leave it to more VIX savvy bloggers than myself to parse the reasons for this oddity, but the fact that it happened at all is a reason to rethink some of the underlying assumptions about the VIX's contrary predictive abilities.
Leaving that statistical anomaly aside for a bit , the upper chart shows the current position of the daily VIX bars relative to the LR30 channel.
I've highlighted with white circles the reversal pattern that has developed each time the VIX has displayed a similar channel kiss since May.
Whether history will repeat itself by the end of the week remains to be seen.
If I were a betting man I'd say VIX 28 (LR30 channel mean) has pretty good odds.
An alternate scenario is a channel kiss-off to new VIX lows for the year and the formation of a new LR30 channel with a channel mean in the low 20s.
The only technical clue I see in support of that possibility is the brevity of the latest VIX support/resistance/support cycle, which has only lasted 10 trading days.
The previous cycle was 15 days; the one before that 15 days.
BTW, with today's gains the Qs weekly Pivot Impulse Indicator is now flashing an overbought 1.5 reading.

Qs Pivot Bands Update

Here's an update of the weekly bars Qs Pivot Bands that I mentioned last week. We've been tracking this view for almost a year now and over that time time it's provided some powerful clues for impending trend reversals.
If you're interested in how the bands are tracked and analyzed, check out my series of previous posts on the bands as linked above.
The Pivot Impulse indicator (PII), which is a derivative of the bands data has also provided a solid momentum model for the Qs.

The bands have clearly been downslope since week 43 and week 42 on the PII saw it coming. That fact that the PII has dithered around the zero line, as opposed to running up to the 1.5 reversal level is reflective of the failure of he Qs to achieve an oversold condition in that time frame.

This situation, in conjunction with Monday's (technical) Outlook, continues to raise red flags in my mind regarding the Monday rally.

Keep in mind that the pivot bands and PII are based on weekly bars and as such display an inherent lag at the same time they filter out the noise of the daily bars. The bands and PII are part of my longer term trading toolbox and I use them primarily to gauge the relative safety of my various premium decay positions.

I developed a simple short side only daily bars version of the PII back in February, with respectable performance results over the 16 month test period.

As time permits I intend to revisit the SD Signal Line coding, add a long side component, and run a performance update.

Going with the Flow

Turns out my negative outlook for yesterday was a wee bit premature.

Hey! I said it could go either way!

And always keep in mind my Bucket List..............

What's interesting now as we progress into the week is that the VIX is clearly knocking against serious oversold levels on the daily chart, whereas, Monday's post saw the VIX daily set at the LR30 channel mean.
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I'd been watching GE closely going into yesterday's open as Friday's 30 minute bars looked like a possible double bottom (Dolly) pattern.

The possibility of entering GE just prior to earnings was definitely a caution to me, but with the firing of a BUY on the NYAD at 10:18 and a GE BUY signal already underway since 10:16, I went long.

That turned out to be a good decision as the entire market surged up and GE made a nice run into the typical noon divergences.

However, always the nervous Nellie and unable to shake my continuing reservations about the validity of the rally, I exited with the parabolic Sell right at 12:00 for a respectable .42 gain and 102 minutes of exposure. Not close to my expectation of .01/minute but, really, the longer you let these things run, the less likely that level of return.

Also worthy of consideration: by noon GE had gained almost 6% off the open, a number achieved only 1% of the time, so the odds were against much of a further push for the day.

When in doubt. . get out.

Monday Outlook

This is a continuation of last week's Time Perspective post.
In today's case I'm looking at the disparity of the daily and weekly bar signals.
Above is the VIX and, depending on whether you believe the daily or weekly signals, the odds favor a bull run (daily) or a really scary bear run (weekly).

This same daily/weekly disparity applies to each component of my little ETF basket.

To add a little spice to the sauce, some big names are reporting earnings this week, and likely to spike volatility.

I typically lighten up longer term positions on expiration week when earnings season is in full bloom, or fully hedge those positions to protect against those gut wrenching implosions that often follow negative earning surprises and guidance lower.

A successful trader and hedge fund manager once offered me a little nugget of insight that has served me well over the years: If you wouldn't buy a stock/ETF/future at its current chart position, why would you continue to hold it long? While this attitude is clearly reflective of an active trading approach to the markets, it's a perspective that works for me.

That being said, after an initial pop at the open momentum going into expiration week remains negative and with earnings season cautions and spiked volatility, I'm looking for the Qs to take a another hit this week with 34 as the first downside target.

Base Building

Today's price action was uber narrow range, and from my daytrading perspective, offered few tempting entries.
Most of the indices showed dojis or spinning tops as the formation of the day and, following my stated bias for the bearish side today, the slight pop at the open quickly faded down to yesterday's closing levels and hugged the VWAP line for the bulk of the day.
What's today's action did change was the look of the lower and midpanel technical indicators.
Although today's price action was essentially neutral the technicals are showing bottoming patterns and an upswing in momentum on the MACD histogram, RSI2 and the 3&7 MAs.
An issue of concern is the brevity of the latest bear cycle and it remains to be seen if we are going to see a rally to the MACD zero line and above.
With the kickoff of earnings season, expect volatility to pick up for the next couple weeks as reality kicks in. For those looking for an excellent prognosticator of the earnings game, here's a link to Zack's, one of the best IMHO.

The Time Perspective

Here are 4 views of the Qs.
Top to bottom: 2 minute, 10 minute, hourly and daily bars.
The same technical settings are applied to each chart and, it should come as no surprise, there's a clear disparity of momentum depending on the time frame.
Negative on 2 minute and daily bars.
Positive on 10 and 60 minute bars.
Those momentum assignments are based on the position of the parabolics, the LR7 and the TSF10+2 indicator on each chart.
In the coming days we'll monitor the performance of the Qs relative to these indicators to see if a particular view offers a more reliable forecast than others.
My gut feeling is that we haven't seen the lows of this swing cycle yet so I'll be particularly interested if a short term rally develops on Thursday and Friday.

VIX Update

Here's a quick look at the current VIX levels on both daily and weekly bars.
I've overlaid the price chart with my usual toolbox of technical indicators to help my feeble old mind put some perspective on what's likely to happen next.
Since last Tuesday's VIX update when the VIX was riding the LR30 channel mean, it has now run back up to the upper channel band.
What's interesting, and a bit confusing, is the relationship of the LR30 channel to price action when comparing last week's chart to the current. Whereas, last week's reading of 25.79 was shown as dead on the LR30 mean, this week's view of 25.79 shows it at the lower LR30 channel band. This is, of course, the result of the changing scale that has developed within the last week. Although the behavior of the VIX relative to the channel is the same week to week, the absolute position on the channel has changed.
This same disparity in views is noted when referencing the MACD histogram, although the RSI2 remains true to form.
These variations in relative position of technical indicators over time have been explored extensively in previous posts when using the VIX or VXN in conjunction with the Qs to gauge momentum and identify high probability trade entries.
Based on this brief snapshot, it's clear that the readings of many technical indicators are both relative and dynamic and need to be carefully considered as such.
Finally, here's a very thoughtful reflection from a trader who's developed his own perspective.
It's fairly lengthy, but it's sincere and insightful for anyone wishing to become a better trader.

Monday Forecast

Here's a snapshot of the market daily bars updated as of 8 am pst.
Last Wednesday and Thursday flashed a negative signal all around as the RSI2 (lower technical panel hit overbought levels and crossed down through critical resistance.
With the mid panel technicals now uniformly downslope but only 2 days off the zero line, I'm expecting more of the same.
While the RSI is quickly reaching oversold levels in all 4 ETFs, a quick glance at the charts shows that we typically seen bottoming and base building behavior prior to a resumption of an upswing, so that has to be factored into any optimistic views for this week's action.
Finally, the bearish channel kiss off shown by all 4 ETFs doesn't bode well with the 3, 7 &14 SMAS 0n the price chart all running downslope in sync.
If we break support from 6/23 (done already in XLE) then the next likely support level is the May lows.
We are seeing some base building as I write this, but those consolidations are at S2 levels, so not a lot to get too excited about. Today's close should be a good tell for the rest of the week, so....
Time to be cautious IMHO.

Market Thumbnail

Here's another little tool that I use to monitor what's leading and what's lagging. Although I could easily expand the Indices watchlist to include some of my favorite ETFs, this abbreviated list tells me at a glance how the markets are moving in relationship to one another.
In conjunction with the 5 indicators in my trading toolbox that I profiled yesterday these 2 dynamic lists that update on a tick by tick basis help me determine likely momentum.
The Indices list includes the NYAD, VIX and TICK and in the blink of a eye I can see the relative strength or weakness of the whole market.
The DJI, SPX NDX, and IWM % Change values tell me if the markets are moving in or out of sync. The % Change is really the only number I'm interested in. . . the other values tell me little of the market component relationships.
When the DJI % change is 2 and the NDX % change is .5 at the open, the odds of a leveling of the 2 indices is extremely high at some point in the day.
I also closely watch the Qs 3 Fingers list as, per the 3 Finger lead and Reverse systems that I've discussed in many previous posts and, as with the Indices list, the % Change values are what really catch my attention, especially AAPL, GOOG and RIMM. It's perhaps surprising how the on-going % Change in these 3 stocks provides a highly reliable indicator for Qs behavior, but from my perspective of watching this list for years, it works.

Great Expectations

This is a screen shot of yesterday's Qs action and I mention it because it clearly shows how the Qs play off the pivots and how the pivot range provides a corral for intraday trades.
Let me just back up a bit and review the major technicals in my daytrading toolbox:
1. NYAD. . . and I have posted on uses of this must-follow indicator.
2. Pivots. . . if I just had the NYAD and the pivots I could trade the Qs intraday just fine.
However, being old and of feeble mind I need all the help I can get. And so I rely on the confirmation of several other technicals to trigger trades. . . these include:
3. The Schwab new daily high count/ lo count rollers. . . which I have also mentioned frequently.
Unique to Schwab, this invaluable gem will never let you enter the wrong side of short term
momentum.
4. Parabolic SAR. . . I adjust the settings depending on the time frame. . .2,10 or 30 minute, but
I seldom trade against their signals and time and time again they have proven their worth in
calling short term momentum turns.
5. A series of moving averages both on the price chart and the NYAD. Typically I use 3, 7
and 14 SMAs for the Qs based on several TS optimization studies that I posted a few months
back.
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That's it in a nutshell and I'll post some interesting (to me) pivot range studies next week to validate my heavy reliance on their behavior.
If, for example, you knew that the Qs would display an R1-S1 range 75% of the time, a R2-S2 range 7% of the time, and a PP-R2 or PP-S2 15% of the time, would that help you tactically approach a day that opened at the PP with the NYAD at R1? It would sure help me.
And, it would also be interesting to monitor how that range behavior varied over time.. that is, are the Qs displaying greater or lesser range activity... which was the point of the pivot band and pivot impulse indicator studies begun some 40 weeks ago and still kicking out directional signals of merit.
For the present time these studies apply only to the Qs although I'll eventually run similar forensics on the rest of my little ETF basket to try and discern any unique patterns there.
As always, this is a work in progress.

VIX Update

Here's the position of the VIX as of 7:20 AM pst today on the daily bar chart. The VIX has made a smooth retracement from the upper LR30 channel band to the mean during the last 5 trading days and now looks poised to revisit those levels again.
The lower technical panel contorted by the irrelevant volume bars includes the RSI2 and the Stochastics 10,2,2 indicators.
In past situations where the VIX retreated from the upper channel band to the mean, the VIX was typically well above the MACD zero line when the drop began.
What's different about the current slide it that it began with the VIX only slightly above the MACD zero line and the VIX is now running into extreme oversold -1 levels as supported by the RSI & Stoch near zero levels.
Today's first hour slide has certainly put a damper on Monday's bullish action and this little review of the VIX suggests that more of the same is the likely short term course.
A little good news could, of course, reverse the slide dramatically, so keep a close eye on the 2 & 10 minute NYAD for possible moves in that direction.

Monday Green

I meant to post this Sunday, but an attempted burglary here at the house caused me to devote all my time to hardening the perimeter and installing some security lighting and motion detectors.
This is an update from this morning's chart as of 7:30 pst. Friday's chart was a carbon copy, the only difference being the bottom technical RSI panel indicators have moved to upper resistance levels.
The mid panel technicals are bullish all around with the Qs showing both the greatest strength and the greatest chance of consolidation or reversal.
Only XLE has avoided a retracement to the lower LR30 channel band, and that's probably due to the nature of the LR30 as XLE is the ETF that's shown the largest surge over the month of June, thereby skewing the slope of the channel to the upside.
Following the pattern of these 4 charts, my short term bias for the week is selectively bullish as I continue to focus on the Qs and its components.
At the end of last week I opened a few longer term buy/writes on INTC, CSCO, MSFT and COST, each returning a potential 2%/month, with minimal downside danger (I say that now).
As of this post the rollers are all green, the Dow is up 80 and the Qs are lagging, pulled down by QCOM and RIMM. Based on past leveling behavior, I expect that lag to disappear shortly.

Fade to Black - III

OK, this is the last post on this setup.
I'm teaching a trading class in the afternoons this week, and this setup has been a focus of our attention, so I thought I'll get double duty from the post and link it to the blog.
Right out of the gate the Qs drop and look like the PP is coming up fast.
But then, by 9:34 we've got a little bullish soggy bottom formation (discussed last week) and the parabolics fire a BUY at 9:35.
Now this is pretty early in our 9:38 - 9:48 magic circle, so I've got some hesitation about jumping in at this point.
But then I look at the Qs technicals and the MACDs and MAs are all upslope and the NYAD is upslope along with its MAs and MACDs.
The NYAD parabolics are divergent but, as has been noted in the previous 2 posts, we disregard the NYAD parabolics for the first 30 minutes so the total net signal is strongly bullish.
We enter at 9:35 at 36.17 and I'm ready to cover at the first sign of a head fake.
That's exactly what looks like might be happening as a 9:39 - 9:40 dip develops.
But the NAYD is still chugging upstream and the Qs parabolics are still bullish. This type of 2 or 3 bar liquidity building fade is always a challenge for me, as one never knows if this is a start of a reversal or just a pause. I have a stop in place at 36.15 so I'm ready for whatever happens here.
As luck would have it, it turns out to be just a one bar fade and the Qs surge on up for the next 5 minutes before fading off again. I'm expecting this surge to run to R1 (36.67), which would make one great trade, but I'm also thinking "today is Friday and Friday's tend to be neutral to negative over 70% of the time", so I not wildly optimistic.
At 9:48 the Qs parabolics flash a SELL (cover).
The NYAD has started to flatten out and the Qs technicals are neutral to negative so, with a bit of hesitation again, I cover the trade.
Net time in trade: 9:35 - 9:48 = 13 minutes
Net trade gain: 36.17 - 36.35 = $ .18
Better than .01 a minute but a REALLY short term trade. Nevertheless, the signals were there and I followed my plan so I've no regrets.

Fade to Black - II

Today's early drop was the inverse of Wednesday's pop. The subsequent 9:38-9:48 magic circle, however played out pretty much the same.
The difference, of course, was the sudden bullish reversal off of the S1 pivot back up to the PP pivot by 9:45, causing me to miss a nice little potential gain.
The Qs parabolics actually fired a BUY at 9:44, while the NYAD parabolics, as discussed yesterday, were still in a SELL mode and were in a divergence signal with the 3/7 MA cross. In these cases, during the first 30 minutes of day, the smart course of action is to ignore the NYAD parabolics and focus on the NYAD's MAs and the underlying Qs parabolics and MAs.
Following this trading plan, we enter the Qs at 9:46 at 35.60.
With the NYAD now upslope at 45 degrees and my rollers running all green, the first target is R1, which is reached in only ten minutes. At this point there are no signals indicating a reversal and after a 4 minute pause the Qs chew up to my next target - R2 - and by 10:18 that target is only 1 cent short.
The Qs then form an extended squat bar below the R2 and at 10:28 the parabolics fire a SELL. The NYAD has already fired a SELL at 10:24, so I follow the convergent signals and close the trade.
Net time in trade: 9:44 - 10:28 = 44 minutes
Net trade gain: 35.60 - 36.05 = $ .45
The trade managed to eke out my target of .01 per minute and once again I'm done early for the day.

Fade to Black

This morning's early pop sure looked like a possible fade candidate as the 9:38-9:48 magic circle played out. What was different about today, and what should have waved you off a fade was the sudden upsurge at 9:49 accompanied by a parabolic BUY on the Qs.
At this point the NYAD parabolics were on a solid BUY, but as I've mentioned before, the first 30 minutes of the NYAD parabolics are often essentially useless due to the skewed carryover from the previous day's momentum.
At 9:50 the NYAD 3/7 MAs execute a bullish cross and at 9:51 the Qs execute a 7/14 MA bullish cross, so we now have 4 signals bullish. The fact that R2 is only .15 above supports the odds for a quick trip to that resistance level and within 7 minutes R2 has been hit. We get a little reversal in the parabolics at 10:00 but the MAs have NOT crossed on either the NYAD or the Qs so odds favor holding at this point.
Sure enough, at 10:07 the Qs break through R2 with gusto and the NYAD flashes a large bar UP.
next target R3.
As the VXN and the Qs continue to diverge the odds of hitting that R3 target (35.75) look more and more reasonable.
With the market in a continuing upward momentum, R3 gets hit at 10:20. . .a very fast move.
And, while I'd like to stick around to see how far this thing will run, I've got some clients to meet in an hour and decide to cover the trade.
Net time in trade: 9:52 - 10:21 = 29 minutes
Net trade gain: 35.45 - 35.74 = $ .29
So, a penny a minute. . . my typical goal for these types of trades but seldom executed as cleanly as this trade.

Monday, Monday

At midday the markets are, uh, DOWN.
A look at my litle 4 ETF basket displays the relative performance of the major sector and shows the Qs are holding up the best, while XLE, which enjoyed a significant pre summer surge, is now settling back to that magic 47 number that's was a consistent butterfly money maker for many months.
The technicals are all in oversold or uber-oversold sold territory, so the likely expectation is for some degree of a bounce. The big concern, however, is that MoneyStream (dotted white line) is also trending down and we need to see some reversal or divergence here before putting on our longer term bullish hat again.
If selling does take hold at these levels and all the LR30 lower channels get the "goodbye kiss" we could easily see a retreat to the May support levels which could drag the Qs to 33, the IWM to 47, the XLE to 45 and the XLF to 10.50.
Today's relatively low volume may reflect the indecision in the markets, but the bearish .13 NYAD reading and consistently red rollers don't encourage buying at these levels.
As of this post (10:30 am pst) we are hitting an intraday low at the typical cycle low point of the day so the next few hours should be critical.

When Not to Trade - Part 2

Just in case Tuesday's post didn't make an impression on you, here's another clear example of when to stand back from an otherwise enticing trade.
Once again, we're using the NYAD as the dominant signal and the line in the sand for entry signals. While some traders favor using the TICK and/or TICK volume, I tend to downplay its usefulness other than looking at the slope of the 2 minute TICK bars for really short term trades and to confirm entry triggers. Just my impression after watching the TICK and the NYAD for years, but I really believe the NYAD will almost never give a false signal whereas the TICK will kick em out on a regular basis.
This morning's open did look bullish for the Qs. . .perhaps exaggerated by the wildly optimistic upgrade to MSFT by GS.
The NYAD, on the other hand, was anything but bullish right out of the gate.
While the Qs were able to rally to R2 early on, strength quickly faded on declining volume.
At 11:15 there was a truly odd print on the Qs as the low of the bar dropped to 35.98. . . perhaps a harbinger of things to come as the parabolics fired a SELL dead on the bar.
The NYAD had been on a SELL since 10:40, but past chart analysis should have warned against entering until the signals were in sync.
The Qs fired a parabolic BUY (or cover) at 11:40. . . and frankly, I'm hard pressed to see how that signal got issued, but there it is. With the Qs mid pivot at this point, the odds are for a further decline to R1.
This is reinforced by the NYAD which, at 11:40, is till solidly negative with the parabolics downslope 45 degrees, so the plan is to stay short and not bail.
At 12:25 the parabolics fir another SELL on the Qs, supporting the short existing position.
Finally around 12:30 - 13:00 an extended squat bar forms right on R1 and, exhausted from the
previous 2 hours, I exit the position.
In hindsight, a definitely sloppy trade that netted $ .29 for 105 minutes exposure.

Soggy Bottom

Here's a variation of my hairy bottom formation. . .something I'll call the Soggy Bottom in honor of the immortal Soggy Bottom Boys bluegrass band as portrayed in the movie O Brother Where Art Thou? The pattern sets up like the hairy bottom, the difference is the relative position next to the support pivot. In the hairy bottom, the pattern sits right on the pivot and tends to form a kind of squat bar for 4-8 2 minute bars.
In the example shown The Qs flash 4 bars in an ascending pattern, followed by a simultaneous parabolic BUY on both the NYAD and the Qs. The MA bull cross on the Qs is a confirmation that the odds are now favoring a run up.
Then, at 10:24 the Qs and the NYAD fire simultaneous SELL (or cover) signals as the Qs MAs roll over and the NYAD MACDs go downslope. These confirming signals reinforce the new short stance.
Finally, at 11:00, The Qs and NYAD parabolics again fire simultaneously BUY (or cover) signals as the NYAD MACDs turn upslope and the Qs start a run back up to the PP pivot. . . although I don't like the divergence of the MAs and MACDs on the Qs and decide to stay flat at this point.
A nice little cycle trade of 90 minutes duration with a .27 gain on the first leg and .11 on the second for a net gain of .38.

When Signals Align

This is a screenshot of one of my trading screens. In this case my target equity is the Qs but I'm using a variety of other charts to gauge relative direction and momentum.
At the lower left, under the Qs chart is the 2 minute NYAD, my #1 tattletale for being on the right side of the trade. I have frequently posted on the NYAD before, so I won't waste space being reduntant here.
Upper right is the IWM, with the same string of technical indicators as the Qs. When the IWM and the Qs get out of sync relative to hitting pivot points the odds for a pivot hit are great. In this case the IWM has already penetrated S1 to the downside so I know that the odds of the Qs getting down to the same level are about 100%.
Below the IWM chart are the "rollers" a great feature of the Schwab platform that I've not encountered on another platform and which is (so far) impossible to reproduce on TS. I use 3 of them, one for the NAZ, NYSE and the major indices and what they display is the daily high (green) or low (red) count on a tick by tick basis. The whole display scrolls as the counts change and, depending on the momentum of the market, can get rolling like a slot machine face in momo times. . hence "rollers". In this case everything is red except the VXD, which is the Dow VIX, which you would expect to react inverse to the market. This is bearish.
In the lower right is the TICK on 2 minute bars with an abbreviated stable of technical overlays. What I'm looking for here is the slope of the TICK and where it is relative to the zero line and the pivots. . .yes, the pivots.
As of this screenshot all signals were bearish and the trade was to short the Qs. And, although it took a little bit to get there, the Qs performed exactly as scripted and, in fact, closed at S1 for the day.

When Not to Trade

Here's a little vignette from this morning's action that shows a classic divergence between the Qs and the NYAD. . .and the low risk approach to these setups. . . stand aside.
Several points to note here:
The Qs open higher, retreat to the PP and then surge up quickly. The fact that the Qs bounce back up thru the PP at 9:40 negates our open fade and we are net flat.
At this point the NYAD shows a little strength, but this quickly dissipates and by 9:54 the NYAD downtrend has begun as signalled by the double MACD downslope.
The Qs continue to waffle and aggressive traders could have entered short at 10:12 with a parabolics signal trigger following a NYAD parabolics short signal at 10:00.
The Qs then run upslope again until 11:16, in clear contradiction to the NYAD slope.
Finally, at 11:18 the NYAD parabolics fire a Sell, the Qs MAs roll over and the Qs parabolics fire a Sell. With everything now in sync (finally, we enter short with the Qs PP as out first line of support and a likely cover target.

VIX Update

Here's an update to last Monday's VIX post. The possibility of a channel kiss-off was quickly extinguished on Monday followed by a decline down to the LR30 mean at 27.50 that I was looking for as a mean reversion move and the VIX spent the later part of the week oscillating around that level as the major indices consolidated in tight trading ranges.
The mid panel technicals are now in alignment and are suggesting a bullish move in the VIX, with the upper LR30 channel once again providing the first line of resistance.
With expiration upon us this week, the tendency is for continued consolidation, so the net expectation for the majors is neutral to bearish.
I'm on the road for a few days meeting with a few trader buddies in Las Vegas so posting may be light but, as always, watch the pivots and the NYAD on 2 minute bars to confirm your daytrading trigger signals. You'll seldom be disappointed.

2% COST

Brett had an interesting post the other day on capitalization and realistic rates of return. One paragraph, in particular resonated with me: Look at it this way: if you can produce consistent 20% annual returns on capital with modest downside risk, you will always have a job as a portfolio manager for a top hedge fund. If you, as a beginning trader, rely on a business plan that calls for more than that, you are probably unrealistic in your assumptions and overly aggressive in your risk.
Having been at this for almost 25 years (and still kicking) Brett's spin on managing your money and your risk is something I adopted many years ago in order to help me sleep at night and avoid the emotional roller coaster that many traders new to the business experience. I prefer it slow and easy and, because trading is how I pay the bills, my prime directive is capital preservation.
I hate drawdowns and have crafted my trading plan over the years to reflect this goal. While I don't have many days where I blow the doors off with gains, I also have almost no days with unpleasant surprises. . .and that's the way I like it.
Maybe not your style (or reflective of your trading goals), but it works for me.
Also, with today's money market rates and 1 year CDs yielding almost nothing, it makes sense (to me) to deploy the bulk of the account into a program that can generate a low risk 2% per month.
It that spirit today's post takes a look at a chance to pick up 2% for 36 days exposure using a simple buy/write of the Costco July 45s.
COST has been consolidating for a few months now and looks to be near bouncing off medium term support at 45. A current buy/write will get you a break even of $ 43.96 and will yield a solid 2% if COST closes above 45 in July.
The 47.50s are for the more risk tolerant, and offer the potential of a 4% return over the same period.
A 47.50 butterfly is another setup that has possibilities. I mean to profile that in a future post.

GE - Still Kicking

In the spirit of yesterday's post on UNG, here's a little update on one of my favorite daytrading and swing trading equities. . .GE.
Thanks to Dave for suggesting that yesterday's post was responsible for today's huge pop in UNG, although there are no doubt some naysayers who would disagree.
Currently on a swing trade BUY signal via the majority of my Dirty Dozen system components, GE also offers some nice low risk exposure plays including a simple Jul 13s buy/write that will yield .53 or 4% for 37 days of exposure.
Your break even on this play is 12.48, so you've got over a buck's worth of insurance to the downside. Pretty good odds IMHO.
On the other side of the coin, for the more risk tolerant, selling the Jul 12 puts will yield .33. Worst case scenario, GE craters and you get the stock put to you at 11.67, which would reflect mid-April price levels.

Want Gas?

Here a snapshot of the US Natural Gas ETF, UNG, option string for July.

If you're just interested in picking up some premium, this might be a candidate.

A buy/write on the 13s will drop your net exposure down to $ 12.30 and based on a current price (as of this posting) of $14.00, the 13 call will pay out .75 or 5.7% fro 38 days exposure.

The options have a robust open interest while UNG itself trades about 50M shares a day recently.

The options trade in nickel,dime spreads, but my experience is that limit orders placed at the mid Bid/Ask point will get filled and save you a few bucks.

10 M Template Update

This is a little update to my FreeStockCharts 10 minute bar chart (also applicable to other time frames, especially 5 and 30 minute bars).
I've put the actual Detrend Oscillator (30) in shadow mode (same as the MACD histogram) to minimize clutter on the lower technical panel.
The MA 3 and 7s sit on top of the MACD histogram.
The Time Series Forecast (10,2), which is actually a forward looking linear regression and the Lin Reg (7) sit on top of the Detrend Oscillator.
Note how the Lin Reg (7) applied to the price displays differently than the Lin Reg (7) applied to the Detrend (upper and lower orange ellipses). I find it's handy to use this setup to detect early turns in price and momentum that might otherwise not be apparent.
I'm continuing to explore for a moderately reliable overnight tell, and recent tests using this template as a core component reinforce its usefulness for a soon to be announced Overnight Open Predictor Signal (OOPS).

VIX - Down But Not Out

I haven't examined the VIX for a while, but here's my standard Telechart template applied to that rascal. In contrast to the normal weekly update Telechart display which uses the VIX as the comparison chart, I've overlaid the VIX with the SPY (S&P500) line chart to show relative price action.
I mentioned this phenomenon months ago, but the VIX/SPY and VXN/Qs and RVX/IWM crosses have consistently provided great entries, both on daily bars and, more appropriately for day traders, on 1 and 2 minute bars. Exits are based on other signals and I've explored several in previous posts, including the parabolics, MA crosses, the Detrend and others.....
The orange channel is the 30 bar linear regression channel (LR30), which I have found to be extremely useful is gauging momentum and support/resistance levels.
At this point the mean reversion side of my brain looking at this chart sees probabilities favoring a VIX decline down to the channel mean (27.50) and possibly further. Over the past 3 months, each of the upper channel "kisses" has followed this pattern and there is scant evidence to suggest an impending change (disregarding fundamentals which, of course, are dismal at best).
If there is a change is trend, we'll likely see it coming with a break off the LR30 channel and a VIX pattern of "kissing the channel goodbye" as we saw in March will be a true sign of a new bear phase.
Just something to keep an eye on to help minimize exposure to the wrong side of the trend.

Qs Open Fade

This setup was eerily similar to last Friday's gap fade.

Although it wasn't that impressive as a gap, the first 10 minutes (1 minute bars shown)showed some clear facilitation about any more strength coming it. The fact that this hesitation occurred right at the R2 pivot was a further hint that a fade might be in order.

But the real kicker was the action of the NYAD, which showed weakness after the first 2 minutes.

The Schwab chart fired a parabolics SELL on the Qs at 9:43, right in line with the window of opportunity that I described last Friday and the NYAD signal was right in sync.

The fade down the followed transpired quickly and within 6 minutes the Qs were down to PP. I took of half the position as the Qs bounced up, noting that the NYAD was still clearly downslope.

At 10:16 I re-entered the half position Qs short as the parabolics fired again and the NYAD was still on a SELL.

This turned out to be a good call as the Qs quickly dropped to S1 at 10:14, the parabolics fired a COVER on the Qs and the NYAD and I was out of the full position.

Net results: a nice little run down from 36.96 to 36.48 = .48 in 32 minutes.

Surfing the Qs Wave

Here's the FreeStockCharts (FSC) template I use for monitoring hourly bars on the Qs and a few other equities. All the settings are clearly visible if you click and enlarge the file.
In contrast to the Detrend studies I've posted over the previous 2 days this Detrend indicator is set to 30 and the Time Series Forecast (yellow line) is actually on top of the Detrend, not the underlying price.
As an aside, using this same template with 10 minute bars produces a very nice tell for forecasting close to open probability. This has been an onging project study and this template provides a quick visual barometer for + - or neutral overnight action.
Unfortunately, I can't replicate this template in Schwab and FSC has no backtesting capabilities so I'm left to try and formulate the template in TradeStation. . . just something more to add to my "to do" list.

Detrend Redux

While continuing my review of the Qs Detrend system posted yesterday, I noticed a fundamental mistake in my testing of the original system back in March. That mistake was in not allowing a larger window for the fixed bar exits when I optimized the inputs. Had I expanded the potential range to 20 instead of 10, as I had done, the results would be as shown above. . . reflecting twice as many trades and twice as much equity gain.
And, perhaps surprisingly, given the recent market runup for the past 3 months, the original optimized inputs are identical to the current ones: (2, .75, -1.25, 14, 14).
As per yesterday's post pyramiding is NOT turned on, as reflected in the maximum position sizing in the performance summary.
I've received several emails from readers reporting a respectable performance daytrading the Detrend on 3 and/or 5 minute bars with somewhat different settings for the ES and ER, so I'm encouraged to learn that the system seems relatively robust and applicable to a variety of trading vehicles.

Detrend Revisited

This is an update of my March posting on the Qs Detrend system.

In the wake of the recent market meltup I'm reviewing components of the Qs Dirty Dozen systems to see how the bullish bias of the past 3 months has effected the equity curve and optimized settings of the various systems.

As per my usual methodology I'm using a floating 16 month study period which results in a new set of optimized settings (2, .75, -1.25, 14, 14), reflecting a narrower detrend range and a longer target holding period than the original post.

This study is run without pyramiding turned on. With pyramiding, the system equity curve is boosted by another $1000 with little impact of net drawdown, but requiring an ultimate position size of 300 shares in lieu of 100 to achieve net results.

In the process of running this update I've noticed some parameters of the system that may bear further refinement and I'll (hopefully) explore those in more detail by the end of the week.

The Detrend system continues to churn out a decent return IMHO while maintaining a low max consecutive loser # for both the longs and shorts. The equal balance between the frequency of long and short trades is also an appealing feature.

30 Minute Overnight Tell

This is a continuation of my previous studies of possible tells for forecasting the Open based on the trend of the previous day's closing bars . . . either the 10, 30 or 65 minute.
In this case I'm looking at the 30 minute bars for the Qs.
On the chart itself the 7 and 14 SMAs are shown, the optimized values for the Q that I've discussed previously.
In the lower technical panel the 3,7 and 12 SMAs are displayed along with the Schwab signals lines of 5,16,4 and 3,14,3, again values I've discussed before in the context of my ongoing refinement of the Qs Dirty Dozen systems.
The classic values for the MACD histogram 12,26,9 are also displayed.
For this post I'm most interested in the slope of the 7,14 on the chart and the 3,7,12 on the lower technical panel in conjunction with the signal line and the MACD.
Sometimes the simplest approach is the most robust and what I've noticed from looking at this little snapshot is that when the 7 and 14 MAs are both upslope into the close, the following opening hour is positive. If the 7 and 14 MAs are both downslope into the close, the following opening hour is negative.
The same results are achieved using the lower technical panel of the 3,7,12 MAs. The effect of the MACD and signal lines may add confirmation to the closing signals, but require additional testing before deploying.
On a side note, I've been working on a pairs trade idea using the overnight % change in the Qs and the SPX or DIA (higher to lower beta) to gauge likley price behavior for the day. My intuition told me that I should expect a mean reversion. . .that is, if the overnight change in the Qs was + 2% and the overnight change in the SPX was 1%, then I should Sell the Qs and Buy the SPX. Surprise! It doesn't work that way. . at least going back the 300 days of data that I looked at. The best results are achieved by Buying the larger % gainer and Selling the lesser gainer if the differential overnight returns are greater than .9% and positions are held to the end of the day. Obviously these results can be improved considerably by adding some basic stop losses and/or trailing stops. This study is in very rudimentary stages and requires considerable more work, but the initial data runs are encouraging, to say the least.

Weekly Update

Even after the run up from March the current chart patterns still look bullish.
Virtually all the technicals remain in a upslope with only minimal evidence of overbought conditions.
A continued advance towards the LR30 channel means could easily tack another 10% to current levels.

IMHO not a time to get aggressively short and I'm also inclined to minimize the butterfly exposure that I was enthusiastic about earlier in the week.

On the other hand, a rather conservative buy/write on the June GE 13s will still return 3% over the 21 days till expiration, which seems like a pretty good R/R at these levels.

Quick Gap Fade

Here's an example from Thursday's open of a gap fade trade setup that I posted a year ago. You never know when these setups are going to occur and with the recent bullish trend for the past few months, these have for the most part, not had a great performance record.
Nevertheless, on the heels of Wednesday's slide into the close, the relative odds favored continued weakness into the Thursday open, so the gap was a bit of a surprise.
I've found that the best risk/reward for these trades typically plays out between 9:32 and 9:45, and while I can't precisely define what's going on during this time period, after watching these things for 30,000 hours or so I kinda got a feeling about them.
This chart is showing 1 minute bars, although I watch 2 minute bars simultaneously on another chart.
The opening bar is quickly faded down, initially suggesting weakness, but I'm not ready to go yet. The ensuing litle hairy top (white circle) followed by the parabolics SELL at 9:46 is my cue to enter and is confirmed by the 1 minute NYAD which has fired a parabolic SELL at 9:43 (not shown).
I'm short at 34.84
My first downside target is the PP pivot, which isn't much of a trade, but the Qs indulge me and quickly blow right through PP, with only a a short pause before cascading down to hit S1 by 10:10.
The Qs then flash a little hairy bottom before the parabolics fire a Cover, and with the NYAD now flat, I decide to cut an run at 34.32 at 10:13 as the Qs pop up off S1.
That little run was only 27 minutes but yielded a nice .52 cents or almost 2 cents a minute, which was better than I'd hoped for. Those who've followed me for a while know that 1 penny/minute is my normal expectation for a return on these types of trades so this was a pleasant surprise.

INTC Butterfly

Here's another example of the butterfly setup I posted on Tuesday. In this case we're looking at INTC and a July expiration.
The reason I chose INTC for the study is reflected in the stock's conformance to the LR30 channel, which has shown a slight upslope bias over the past 2 months, but which is now riding the lower band of the channel.
The butterfly scenarios for the June expiration are pretty dismal risk/reward situations (and are not shown), but looking out another month to July presents some possibilities.
The 2 setups posted below (3 and 4) have posited 16 and 15 as possible settlement prices for July expiration, depending on your perspective on market momentum. Other higher and lower settlement targets involve a greater initial debit and proportionately less potential returns.
Playing both scenarios 3 and 4 yields the risk/reward displayed in the final lower matrix.
These are just some ideas to ponder. The goal, of course, is to find setups where the net debit is extremely low and the breath of positive payout strikes is wide.

Qs MACD SIgnal Line Revisited

Here's an update of the MACD signal line system originally posted back on March 4th. The study uses my typical 16 month floating lookback period to gauge consistency of the equity curve.
Back in March the optimized MACD settings were 4,16,5. The current optimized settings are 3,14,3, a reversion to the MACD settings of approximately 2.5 years ago when I developed a fairly consistent daily bars trading system using the 5,20,3 and the 3,14,3 MACD crosses.
As far as the Qs go this recent study confirms the applicability of a the 3,14,3 timing model (for daily bars).
There was actually an error in the March 4th study results due to the way I optimized the BarsSince Entry functions. That error resulted in the Short cover exits optimized at 9 days, when in fact 4 days produced equal results with 5 days less risk exposure. As a result the current optimized values for len1 and len2 are 4 and 3 respectively.
Final optimized inputs for the system are 3,14,3,4,3.
The max consecutive losers for both longs and shorts is 3, the upper limit of my comfort level and the max intraday drawdown is respectable (IMHO) for both sides of the trade.
With the revised settings limiting position hold time to only 3-4 days this is a time frame that appeals to my short term risk exposure comfort level.