As many of you that follow me on Twitter know, I bought the $VXX this morning (an ETF used to buy volatility). Buying volatility has been almost downright stupid the past couple years. While many people have tried to time the top of the market (bottom of the VXX), it is simply not an easy feat.

Every couple weeks people get on the TV and say they are ‘raising cash’ (again) because of a correction that is ‘coming’. While it is true that a correction WILL without a doubt eventually occur, it could very well be next year or two years from that it actually occurs – no one knows, no one. However, what we do know and what does change is the technical price action of stocks within the stock market.

You did not need to know the Jobless Claims this morning or the unfortunate attack on the Malaysian Jet this afternoon to analyze the market and trade accordingly. Beginning yesterday the market started to give some warning signs: Usually I pick up a lot of stocks on my long scan, especially when the market is so close to ATH (all time highs), like it was yesterday. However, this was far from the case. There were actually more stocks coming up on short scan than the long counterpart, which is extremely rare when the market is up as much as it was yesterday.

This morning we came in with a rather large gap down so immediately it felt good sell out of our positions the afternoon before:

As the morning (7/17/14) went on, the market tried to bounce and close the gap. As it did so, I was feverishly searching for new long set-ups that and stocks coming out of nice bases. There were none, at all – which is a rare occurrence for a market consolidating near all time highs.  This is when I Tweeted the following:

The day went on, the market began to fade off the highs and the fear ($VIX) started to set in. My eyes quickly scanned through the charts, and the $VXX popped out at me. What appealed to me was the fact that it was consolidating in a lower-level base, consistently punching on the 21 ema ceiling day after day. Pair this with the overall market health that seemed to be in ‘limbo’ – based on the number of set ups we were finding on our scans. Based on this, I tweeted:

An hour later, I was in the trade:

It took some time, the move was not immediate but as the day went on the fear began to grow:

In the last hour of the day the fear was enormous, the $VIX spiking more intraday than it has in a long time, leaving me with a winning position that needed to be tended to. During the last hour, $IWM and $IBB both were stretched below their lower BB (Bollinger Bands) and $IWM even below it’s 200 ma. Being below the lower standard dev. 2 bollinger band to me a signal I use to gauge oversold conditions. Usually when price is stretched below the BB, a snap-back becomes more likely. So, based on two major momentum leaders ($IWM & $IBB) being below their lower BBs, $SPY tagging trendline support and finally the $VXX trading outside of it’s upper BB – it seemed more likely a snap-back would come relative to the probability of a continued to sell off. Based on this, I sold the other half:

So, that was the end of the trade. I made about and average of $1.50 on each share in a couple hours. The $VXX is a tricky instrument, I did not want to overstay my welcome.

Where does this leave us? Well, with $SPY at trendline support, $IWM and $IBB below their lower BBs and a relatively small number of strong stocks coming up on my scans, I would bet a snap-back will occur in the next day and a half. The most tradeable set up for the active trader (not usually myself), is a large gap down tomorrow into support then a trade back to green or even more throughout the day. Whether this occurs or not, I do not know. I am currently flat and waiting for new bases to form (long or short), for me to trade.

Hope you had a good day, please let me know if you have any other questions (via contact page). Here are the charts I posted at the close today showing what I just outlined above, just click on the StockTwits link within the Tweet to view the chart.

 

 

 

 

A review of The Forbidden $VIX Trade
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