Watch Volatility

So, what is technically going on here as the US Federal Reserve finally eases its heavy, over grown foot from the most unprecedented, bond-energized, economic accelerator in the history of the world? Here are a few observation after Friday (one month after QE was eased from $70B to $60B).

• The bond yields have continued to pull back (indicating deflation).
• $TYX (30 yr yield) is at critical 3.6% support (see this Chart).
• Bonds have bounced off of lows. All of them (TIP, TLT, IEF, LQD).
• The Euro has eased back below 1.35 USD as German data showed economic slowing.
• The US Dollar has firmed (pushing gold back down on Th/Fri).
• Equities are finally pulling back for the first time in months. The Asian and European markets have closely followed with some specific emerging markets showing global drama.
• While Fed cash flow supports the US markets, many foreign markets are suddenly experiencing individual turmoil (see Argentina, Turkey), which is reflected in their currency trade.

I readily admit that the Fed’s intervention process is still actively working, but I would hold forth that it is clearly NOT influencing the markets as in the past. Also, technically the equity markets needed a break from their over extension, and as of this last week many trend lines are now broken.  So, to keep things a bit simple, I am focusing on ONE aspect of the markets today – volatility.

The VIX (see the Chart above here) and other volatility measures are currently basing. They have remained elevated for 5 to 6 days now (which is unusual). In fact, on Friday they moved higher despite over $4 billion in POMO. Large POMO days usually arrive with a severe crush on volatility. I suspect that we could easily see the VIX near 23 to 25, and the RVX near 27 to 30 during February. I am not predicting here, but I am warning other traders. I mention the latter volatility index (RVX), because I have personally been heavily trading the IWM (small cap’s). If you are a day trader, take a look at it – action has been juicy.
Despite many upward intra-day equity market thrusts throughout the last two weeks, volatility has slowly but surely crept upwards (RVX, VXN, VIX). It is this slow crawl (with any absence of prior topping spikes) that should concern bulls here.  Each day the equity markets sell into the final minutes (while volatility cannot find a top yet). We are also seeing accompanying MM (market maker) tactics such as market futures being extremely manipulated outside of trading hours. And on Friday, there was a 30 point spread between the NQ and NDX all day. The MM’s cannot maintain these illusions forever, so I personally still favor the downside here with sporadic POMO bounces.
In closing, I have been away from trading and blogging for several months. I will disclose that 2013 was a year when many close to me suddenly transitioned over to the other side – including my father, an uncle, a long time mentor, two family friends (who I grew up with), and four of my personal friends. It was a lot to process, so I took time off from the markets. However, now in the new year, I am becoming more focused on trading again, so you may see a sporadic blog post by me here on Trading With Zen. And in the tradition of this blog’s name, with my bearish paws together and a slight bow of my head, I bid you “Namaste!”
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