Can We Bust This Range Already?!

  • Posted by
  • on December 14th, 2011

So we have an $SPX range of 1215-1265 built on top of a range of 1190-1265 built on top of a range of 1100-1300.  The volatility of daily emotions may be high, but the market response has grown gradually less volatile.  As noted by Rennie at MarketTells, actual $SPX volatility has fallen to the lowest levels since the big break occurred in early August.  I mean, look at today…it feels like death yet we’ve barely traded 2/3 of an average day’s range in $SPY and $IWM.

We’ve become so exhausted of the European news flow and overnight gaps that we’re confusing(me, at least) volatility with randomness.  I thought this post titled The Mean is Sensitive to the Outliers nailed the oddly opposed speeds with which we’re experiencing the movements of the past few months; incredibly fast headline reactions but an incredibly sloth-like progress.

Breadth is now so deep in the hole that outcomes are likely to get flipped.  The comfort I’ve taken in holding calls on $XLP and $XLV is about to turn to disappointment.  I should have better stats for this, but let’s just say that when readings fall below 10% of stocks above their 10 day average(or conversely, above 90%) the baby gets thrown out with the bathwater as the mentality becomes “close positions” instead of open…that reading is now 5%.  This is where $XLF and $XLB take turns bouncing intraday because they’re down the most, even though the charts are a total train wreck.

An assertive trader would have been short $GLD and $FXE in recent days; I haven’t been assertive on trending shorts since the Fall 08 period when government intervention seemed to bring the most wicked of short squeezes every other week along the way to the bottom.  Knowing that I don’t trade with my full arsenal on the short side keeps me mostly in cash or waiting on my favorite buy setups.  With ADX for $SPX running at a low reading of 13, there is no indication yet of trend taking over for this nauseating range.

There has been a slew of studies this week showing the likelihood of a positive outcome by week’s end, from December Opex bullishness to pre-Fed selloffs to Down VIX/Down SPX.  I factor those into my preparation but only act on price-based evidence.  In a year full of “firsts”, it shouldn’t surprise any of us when historical patterns fail, or at least take an odd path to “success”.  The fact that $SPX is at the same level(1215) as November 18, yet the % of stocks above their 50 day average has dropped from 60% to 30% as shown above, tells me “Risk Off” is running the show no matter what this trading range indicates.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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