Saturday, March 7, 2015

[UVXY] update

The current model from the backlink (scroll all the way down) is reprinted below.



Today's action apparently reinforced that count.  However, today's wave did not look like a-b-c and so this has to be watched carefully.   Thus instead of assuming that DJIA would rise next week, I am not holding any trading position over the weekend.
  • Note: I am not trading my puts so I still have the ability to profit from any unexpected collapse/flash crash/10% down overnight event whose probability is something like 5% right now.  That, by the way, is pretty high even though it sounds like a low number.  If I were playing Russian roulette with a 20 round chamber I would perceive it as quite dangerous.
In any case, here is what I am watching for and the profit potential of this will be huge if it plays out like I think it will.  We get 5 UVXY waves down the red slope over the next week as people assume that buy the dip is playing out again, just like it always seems to.  But even though the DJIA doesn't put in a new high, UVXY puts in a new extreme low because the people always get the most complacent right before the big turns.  So I could see this going down to $10-$12 range and then putting in a strong vee bottom.  When it begins to come up next time there will be panic buying of stock protection because people will get taken by surprise at the strength of the DJIA selloff.  They will realize just how badly they under priced the risk.

IFF this bottoms at $10, the next motive wave will be very near the old peak of $57.  It will be a very rare opportunity indeed.

But I do want to remind that if we don't see a rapid breakdown of that top rail on Monday that this could possibly just turn higher from here.  A small break below the top rail and then a break back out the top would be a buy signal.  Those waves would be 2 and 3 respectively with red 4 marked below really being 1 of a new motive sequence.

Again, these are just the likely things to occur based on past movements of the herd.  Nobody knows the futures but EWers (at least reasonably good ones) do know the odds.


2 comments:

Anonymous said...

Alas, we saw a large move in bonds and equities in the same direction. I talked about this day in my response to one of your reader's question regarding yield vs equities correlation. As you always say, no one knows the future (except maybe good EWers) but I hope my thesis regarding this flip in correlation revealing lack of confidence is correct and more importantly able to capitalize on it.

I read your post on DJIA and UVXY. Although I don't have any basis to disagree on the direction of the EW moves, I disagree with you on the size of the move in UVXY relative to DJIA. If the DJIA owl ears blue path plays out, the bearishness in UVXY to $10 is relatively extreme. From a structural point of view, the front to second month VIX futures term structure is at 10% contango. This implies a roll yield of -0.5% per day assuming 20 trading days in a month. For UVXY, it means a 1% decay in price per day until expiration, all else equal. Assuming owl ears take 5-7 days to play out, I expect UVXY to drop, 7% from contango alone. Additionally, the spot VIX should drop back to 12.50-13 range (strong support). This would cause contango to widen, so add another 3-6%. The other effect is that the VIX futures will fall along with spot VIX. If spot VIX drop to 12.50 (I.e about a 17% move), futures should drop 7-10% based on past experience, implying an additional 14-20% for UVXY. All summed up, I expect a down move of 24-33% (to $13-$14) in UVXY IFF DJIA develops owl ears in 7 days. Any longer and UVXY keeps going down due to very large contango headwind.

I didn't want to get all technical on you, but trying to reconcile with your expectations as given the current term structure with potential for large down moves in equities, it can become costly in terms of missed gain opportunity or outright losses from bad timing into UVXY entry.

Thoughts?

-TJ

The Captain said...

Hi TJ,
You might turn out to be right but I have seen it faaaar too many times in the past where things that one would think are tightly correlated get way out of whack over the very short term. I mean, we are talking about seeing this dip play out in the next 2-4 days. IFF my count is right then we just finished a 4th wave that appears to be coupled with wave 1 down that occurred first week of Feb. The EW guideline when 3 was extended (and it was) is for 5 to be roughly the size of 1.

Again, you could end up being right but if so I think it will be as much due to luck as from influence by exogenous factors. I don't doubt that you know your technical stuff but I do doubt that you know (or anyone knows) all of the factors involved, especially in the short term. If such evaluations actually produced repeatable reliable results over time then nobody would rely on TA. For all I know the federal reserve is buying puts on VIX in order to try to bend the herd to its will. A little bit of money buys a lot of leverage for a big player like the fed. I did not see this factored into your analysis.

This is the difference between TA and fundamental analysis. When there is no chart data, fundamentals are all you have to go on.

Having said that, The important thing to look for in my analysis is NOT the absolute price level. My post was intended to show what was possible (a kiss of the lower rail). In fact, I will know that the decline is done when 5 waves down transpire. That, and only that, is my top indicator. Maybe that takes us down to $14 mid channel this time and maybe someone who loaded up on UVXY missed the deep vee second of the DJIA and thus panic sells to make it fall rapidly to the lower rail. These things are all possible.

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