Trading Note on the Strategic Beauty of a Wild Megaphone

The strategic beauty of a wild megaphone lies in the fact that it will convince traders to step aside and wait to clear the range to go long. I’m already seeing tweets advising traders to wait for a breakout.

But right after the price clears the range, there’s another megaphone top.

In the smackdown to that megaphone VWAP, another round of stops will be eaten.

And so it goes.

Why Today’s SPY Chart May Mean Taper Off

Today's Price Action on SPY Creates an Inverse Head and Shoulders

Today’s Price Action on SPY Makes Entire Correction an Inverse Head and Shoulders

SPY did everything it was supposed to do today and a lot more.

After yesterday’s probe through the top of SPY’s leading diagonal, a pullback (B wave) was required. Obama delivered it to us, courtesy of his poker game with Putin (in which Obama has totally fucked up his hand). But the pullback we got was a lot deeper than it should have been (based on the E-mini’s price channel action). This kind of anomaly usually means a change in the broader picture.

With today’s price action, SPY has now set up its entire correction from the August high as an inverse head and shoulders formation, which is exactly what it would do if Bernanke were putting out the word that the Fed had been kidding about a September taper (or something else equally bullish were happening).

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What They Taught Me at the CBOE

My father was a market maker in the early years of the Chicago Board Options Exchange, and I worked there for a summer.

The first thing a trader there taught me was that the percentage of the public that wins on options trades was so small that it was for all practical purposes indistinguishable from zero.

We went into today with a relatively high put-call ratio on QQQ and a middling ambiguous ratio on SPY. You can’t be sure what that means exactly, because maybe a lot of people bought puts yesterday that don’t expire until next month. The simple ratio doesn’t give us that kind of data.

But it’s likely that there are now a relatively large number of SPY puts that have to be closed out this week. Owners of calls have given up on a breakout to a new high before expiration, and bears are getting emboldened.

A perfect next move for SPY during opex would be to take the price up to a new high in a rising wedge (or ending diagonal) formation, then dip back to retest the 50-, 40- and 20-day moving averages massed below. Not sure on the exact timing of the retest. The price action suggests something like this—I’ll post a chart after the close.

Note: Earlier stupid typos corrected.

Oil vs Gasoline Shows The State of Mind of the Little Guy

3% Rally in WTI

Cushing Oil, Traded by Little Guys Through USO, etc., Rallies Over 3%

Comparing gasoline futures to WTI oil futures often clarifies the views of smart money vs. dumb money.  August WTI (West Texas Intermediate) oil rallied over 3.25% today in a classic Sornette bubble wave. You can find these waves on all time scales. Their signature is the chunk of big chop followed by a tear up interrupted by smaller and smaller dips.

August gasoline, which is still dominated by industry traders, rallied less than half that percentage (roughly 1.5%) in a conventional corrective wave. And if you look at Brent and heating oil, you’ll find the rallies about the same.

Gasoline Rallies Only 1.5%

Gasoline Rallies Only 1.5%

Little guys are still frantically buying the dip, but not the smart money.