VIX and implied volatility in general is a measure of the expected market move. If VIX is trading at 50, the option market expects that the market will stay within 50% up or down within the next year. Continue reading
I don’t know what the future will bring, but there is one thing I know for sure. The bubble has burst and the party is over.
Read your charts
Having a look at my charts and combining their interpretation with the news I get from our political leaders I see the markets drop another 30 to 60% within a short period of time. Let me repeat so you do not think this is a typo: -30% to -60%
First let’s have a look at the German DAX.
The long term support line running via the lows of 2003 and 2008 is about to be broken. This break would happen at about the same levels as the highs in 2000 and 2007. From this break the next significant resistance might be the low of 2011 (positive scenario) or the low of 2008. Both levels would just take out the gains which have been achieved due to central bank money printing. And bursting bubbles usually tend to overshoot resistance levels…
Looking at the Dow Jones Industrial Index shows an even worse picture. The long term trendline coming from 2008 has already been broken, and the next support might be 30% lower at the highs of 2007. Take the next resistance after this very positive scenario, the lows of 2008 and you will see that this is exactly the point where the long term trendline form the 1930’s is heading. This would be -60%.
The next chart for this article is the NASDAQ Composite Index. And it shows the same picture as the other two markets. Long term support is broken, next resistance levels are -30% and -60% below today’s market levels.
It will not be a one way street to hell, expect some radical rallys in between, but these are the price targets I see on my charts.
You think that I have gone crazy or that I am in panic mode? Myportfolio is down but fine, so business as usual..
Currently we are not in “normal” market mode. That’s what you should have noticed over the past couple of weeks. Don’t expect a V-bottom and a bull market. We are witnessing a bursting bubble. Markets are efficient and always right. VIX is priced for a 50% move. Do you really think it will be 50% up?
The bubble has been driven by cheap money and our greed, but the bull run has not been founded by real advances in society. Since Alan Greenspan the Markets have lost their sense for risk. Markets down –> chep money –> markets up. This has been the logic for the last 20 years. But this is not the way free markets behave. You have forgotten about risk, the market has not. It is a beast just waiting to get you.
The last significant new technology has been IT and the internet, but these technologies now have been around for more than 20 years. Nothing new. Facebook and making money with advertisements in my opinion hardly qualifies as a game changer. It made some people rich, but left the other 98% with crappy jobs and a feeling of being hinged. If we get japanified markets I would call this an optimistic scenario for the future.
In case you do not believe in chart reading or my political propaganda then have a look at the fundamental data:
Looks like plenty of space to the downside…
What the future will (need to) bring
The Covid_19 virus is not a killer like the spanish flu has been and I don’t think there is any cause for panicking. But nevertheless it is the pin which burst the bubble. China did a wonderful job in putting complete cities under quarantine. And even the Italians, always known for having a special talent for getting around given rules, are finally doing the right thing. A complete shut down.
USA? A clueless government which tends to pray and hope, but is not taking the needed actions to stop the spreading. Same in the UK.
A complete shut down seems to be the only solution. Stay home, or, unless you have an allowance paper, get shot by police or go to jail. Our grandfathers had to go out and kill in order to survive, would it be asked too much for our generation to stay home for some months?
Do your maths. The virus spreads according to an exponential function. And if you slow down the spreading at the beginning for just a little bit, you will see tremendous changes at the end of the function. Better to be blamed for overreacting at the beginning than having to pay unforeseeable costs at the end.
We just do not have the needed medical capabilities to treat all infected people. We do not have the needed amount of lung ventilators, we do not have the needed hospital capacities. What if nurses go on strike as they have not got the needed protection gear? (nursing is a hard and shitty paid job!)
Italy set an age limit for treatment. If you are too old or have other medical conditions then stay home and die. Cruel? Yes, but it is the only possible solution to safe the ones which have a chance to survive. Shut down now! Stay at home! Stay alive!
Monetary action and more
I am quite sure that in the end the markets will force a strong and worldwide monetary intervention. Not just a few basis points now and then, but helicopter money, food rations and when the shit is over a globally coordinated approach to rebuild the planet. Pick up the shovels and fix the infrastructure, redistribute the planets wealth to the people and say goodby to liberal “survival of the fittest and no limit to individual growth” societies.
But until then, get prepared and stay home. At least that’s what I will do. Stay home, read a book, use the time to learn some new skills and trade my options, staying mostly delta neutral and following the mechanical rules which served me fine over the last years.
Warning: Chart reading is a very subjective art (you always see what you wish for), that’s why I try to keep my portfolio mostly delta neutral and delta hedged.
Good luck, stay alive and well!
Thanks to TradeSignal for the charting software, thanks to Refinitiv for the data. Thanks to TheClash for the great song.
Whenever the market shows an exceptional day ranges it is time to take bite. See how you can profit from large daily market moves.
When looking at any chart, you will surely notice that the large candles tend to close near the high or low. This is due to herding. Once the market is moving significantly, everyone hops on and the large move becomes even larger. This is true for daily, weekly and intraday candles.
The chart shows an indicator which plots the daily move. Every opening is set to zero and the absolute move of the day is drawn. Around these normalised candles a long term 2 standard deviation volatility band is drawn. Right now the 2 standard deviation volatility for SPX is about +/- 46 points.
Take a bite before the market closes
As you can see this +/-46 point barrier above/below the opening of the day is a wonderful entry point. If you enter long 46 points above the opening and go short 46 points below the opening nearly all entries would have lead to a profitable trade. To get an even higher probability of success you can volume as a confirmation. Large moves must also show high volume. The exit is done at the end of the session. This analysis does not give any indication for the next days move. So be fast, take your bite and go home with a small profit and no overnight position.
No free lunch
On the chart it looks easy, but be careful. As an example the last bar shown on the chart first crossed the band to the downside, reversed and crossed above the upper band. So you will need to use a trailing stop to lock in profits and avoid to take the full -46 to +46 points trade as a loss!
German Power prices can be explained by supply and demand, but also by causal correlations to underlying energy future prices. A properly weighted basket of gas, coal and emissions should therefore be able to resemble the moves of the power price. This article will introduce multivariate regression analysis to calculate the influence of the underlying markets on a given benchmark. It is an example of a machine learning algorithm used in analysis and trading.
Multivariate regression analysis
Chart analysis is all about visualizing data. The RSI hellfire indicator uses a heat-map to visualizes how overbought or oversold the market is on a broad scale. This helps to get a broad picture of the current market setup.
Multiple Time-frame Relative Strength Index
Wells Wilder’s RSI is an old timer of technical indicators. It tries to find out if markets are overbought or oversold. Usually it is calculated using a 14 bar setting. But a 14 bars RSI on a daily chart will give a different reading than 14 bars on an hourly or weekly chart. As it is always nice to see what traders on a different time-frame see on their charts, you could simply display several RSI settings on your chart. Continue reading
VIX futures are usually in contango, meaning that the next month future is quoting at a higher price than the current month VIX future. But this spread in not constant, and at the end of the expiry cycle an interesting VIX future spread trading idea comes to my mind…
End of cycle VIX futures spread trading
Having a look at the chart below you hopefully see the spread trading idea by yourself: Continue reading
Whenever you develop an algorithmic trading strategy, unwanted curve fitting is one of the most dangerous hazards. It will lead to substantial losses in real time trading. This article will show you some ways to detect if the performance of your algorithmic trading strategy is based on curve fitting.
Curve fitting – what is it?
Every algorithmic trading strategy will have some parameters. There is no way around it. You will have to decide what length your indicators have, you will have to specify a specific amount for your stop loss or profit target. Beside the actual rules of your strategy the chosen parameters will usually significantly influence the back-test performance of your strategy. And with any parameter you add the danger of curve fitting rises significantly. Continue reading
When developing a new trading strategy you are usually confronted with multiple tasks: Design the entry, design the exit and design position sizing and overall risk control. This article is about how you can test the edge of your entry signal before thinking about your exit strategy. The results of these tests will guide you to the perfect exit for the tested entry signal (entry-exit combination)
Quality of an Entry Signal
When you develop a new idea for an entry signal there are two things you would like to see after the entry: no risk and fast profits. This would be the perfect entry with the highest possible edge. In reality the market response to your entry will be risk and chance. With a good entry the upside would outnumber the downside. Continue reading
Finding complex chart patterns has never been an easy task. This article will give you a simple algorithm and a ready to use indicator for complex chart pattern recognition. You will have the freedom to detect any pattern with any pattern length. It has been described as Fréchet distance in literature. This article shows a simple adaptation for chart pattern analysis.
Defining a chart pattern
When selling implied volatility you want the market to stay within the expected range. But what is the historic probability that markets behave as expected? And what other analysis could be done to enhance your chances and find the periods when it is wise to sell an at the money straddle? This article will try to give some answers to this question.
The normal distribution cone
Classical technical indicators like RSI and Stochastic are commonly used to build algorithmic trading strategies. But do these indicators really give you an edge in your market? Are they able to define the times when you want to be invested? This article will show you a way to quantify and compare the edge of technical indicators. Knowing the edge of the indicator makes it an easy task to select the right indicator for your market.
The edge of an indicator
Any technical indicator, let it be RSI, moving averages or jobless claims, has got a primary goal. It should signal if it is a wise idea to be invested or not. If this indicator signal has any value, on the next day the market should have a higher return than it has on average. Otherwise the usage of no indicator and a buy and hold investing approach would be the best solution.
The edge of an indicator in investing consists of two legs.
- the quality of the signal
- the number of occurrences
Analyzing at which time daily market extremes are established shows the significance of the first and last hours of market action. See how different markets show different behavior and see what can be learned from this analysis.
Probability of Extremes
A day of trading usually starts with a lot of fantasies for the future, then we try to survive the day and end it with a lot of hope for tomorrow. This psychological pattern can also be shown when analyzing intraday market data. A high level of fantasies usually leads to a strong market movement, and thus market extremes can often be seen near the beginning or the end of the trading session. Continue reading
The stock market shows some astonishingly stable date based patterns. Using a performance heat map of the S&P500 index, these patterns are easily found.
Date based performance
The chart below shows the profit factor of a long only strategy investing in the S&P500. Green is good, red is bad. The strategy is strictly date based. It always buys and sells on specific days of the month. Continue reading
Adding some random noise to historic market data can be a great way to test the stability of your trading strategy. A stable strategy will show similar profits with noisy and original data. If the noise has a great impact on your results, the strategy might be over fitted to the actual historic data.
Synthetic market data?
Generating completely synthetic market data to test algorithmic trading strategies is a dangerous endeavour. You easily lose significant properties like classic chart patterns or the trend properties of your market. Continue reading
Monte Carlo Simulation uses the historic returns of your trading strategy to generate scenarios for future strategy returns. It provides a visual approach to volatility and can overcome limitations of other statistical methods.
Monte Carlo Simulation
Monte Carlo is the synonymous for a random process like the numbers picked by a roulette wheel. Continue reading
Factor investing has been around in portfolio management for some years. Based on algorithmic rules it became the big thing in trading and the ETF industry. But is there still some money to be made? Is small beta still smart or just beta? This article will give you a Tradesignal framework to test the factor investing ideas by your own.
Buy and hold has been a profitable approach in investing. But customers ask for more. So technical analysis came around and held up the promise that market timing is possible. As the returns did not match this promise, algorithmic trading was invented. Clearly defined rules made it possible to backtest any given strategy, and if done properly, the returns equal the ones promised during the backtest. But this requires a lot of intellectual power and relies on cheap execution, so these returns are usually not available to the public. Continue reading
This article is about the dollar cost averaging investment strategy and the influence of luck in it.
The Dollar Cost Averaging Investment Strategy
To invest parts of your income into financial markets has been a profitable approach, especially in times when bond yields are low. One approach to do so is the dollar cost averaging investment strategy. Continue reading
Since S&P500 has lost 20% from its top in 2018 and everybody is talking about bear markets. See what has happened in history.
We all have been spoiled by artificially low volatility over the last years.
Now people blame the gone-wild president or algorithmic trading for the market correction, but let us have a look into history to see how common market corrections have been over the last century. Continue reading
Analysing the market performance of the day session vs. the overnight movement reveals some interesting facts.
Daytime vs. Overnight Performance
The chart below gives a visual impression on where the performance of the SPY ETF is coming from.
The grey line represents a simple buy and hold approach. The green line shows the performance if you would have held SPY only during daytime, closing out in the evening and re-opening the position in the morning. Continue reading