As all of you know I am probably the least bearish trader around. I am a trend following pattern trader. However, to all things a season, and it is the exact time for the bears to finally do some technical damage to the tape.
Why do I say this? Because as pullbacks have gotten shallower and shallower over the last few months volatility (real volatility in price right now, not the market take on implied future volatility in the VIX) has fallen to a historical extreme and then painted an uptick. I posted these two charts on Sunday and I think they are well worth a revisit.
Very strong price action late in a trend is a classic sign of capitulation of one side and typically marks the terminal stage of any move. Objectively price action could not have been stronger over the last few months.
Volatility, in this instance measured by a normalized (expressed as a percentage) ATR (14) with a 100 period 1 standard deviation bollinger on it is a good objective measure of volatility (though it must be said it is slightly lagging). Objectively, when ATR is below its 1 standard deviation bollinger it is historically low. When you get an uptick from extreme low volatility it is a time for extreme caution for trend following traders, and counter trend trades become a positive expectancy again.
We are somewhere near the terminal phase of a low volatility melt up. In low volatility moves on all timeframes from 15min to monthly counter trend setups have a very pronounced negative edge UNTIL you have extreme low volatility and then an uptick from that low base. This is a remarkable and repeatable concept I suggest you all take to heart.
Anyhow, I’m digressing. I told you to avoid long setups this week as best case for the bears we are in a trading range and there is not sufficient distance to the upper boundary to justify getting long on a risk/reward basis.
Now let’s take a closer look at what happened today, and see how that affects the overall picture. As you can see today’s price action represents extreme failure by the bulls. Perhaps they were waiting for the Fed garbage to play out but still this is very bearish price action.
Which brings us to the setup. This is technically a retest variation sell and a gap open sell. Mark my words this is a very good bearish setup.
Careful of the potential fed whipsaw 🙂
ConvictScott
