Weekly Market Regimes August 12 2020

Last week we discussed how we have moved (generally) into a bull volatile market regime in equities indices, metals, and a number of the S&P 500 sectors.

Rather quickly there after we experienced the volatility that the bull volatile regime is known for. 

To review, here are the most notable characteristics of the bull volatile regime

Bull Volatile

• This is a requirement for a long term market top (but doesn't indicate a major top). Major market tops don't happen outside a Bull Volatile regime!
• If I've been riding a long term uptrend I look to take profits in this regime or lighten my exposure
• If I'm trading more tactically I'm trading FVBO and lighter position sizes, usually max 1% risk
• Price is highly volatile up here, moves up and down are bigger
• Fear and greed is on full force!

To no ones surprise who subscribes to these emails or follows our work at Pollinate, the market reacted appropriately. We moved immediately into a more volatile environment with Gold causing some real pain

December Gold hit an all time high of 2089 only to drop immediately to 1874, a more than 10% drop in 4 trading days

The lower indicator is the SQN indicator which is what tells us, quantitatively what regime we are in. Almost immediately as the SQN printed bull volatile, the fireworks began. 

In the Trading Lab we were prepared for this with some members lightening their long exposure, some raising their stops and officially the labs real time portfolio bought puts on December Gold. The hedge did it's job, kicking in when gold was down about 5% yesterday giving a nice 8% return. If the move does continue lower the hedge will offset the gains lost giving us basically a market neutral gold position. 

However our trade is Gold long and after this bull volatile, volatility levels out, we do expect higher prices to continue. Ideally we lose money on the hedged position, or find a suitable location to take profits and flip net long. 

In the Nasdaq, we had far less of a reaction to the downside (so far). We also hedged by buying December puts, which nominally made money, since the index didn't fall all that much. This chart though busy, shows a number of things. 

Notice the SQN at the beginning of 2020 was in bull volatile (indicated by the blue histogram). Literally on Jan 1, 2020 NQ flipped into the bull volatile regime, but importantly it took almost two full months to actually put in a major market top. 

This is important to note, Indicators are NOT the be all end all, they are there to aid us in our trading, not to lead us. 

Price is truth, price is reality, price is what leads us. 

Indicators are derivatives of price, they are attempting to interpret what price is doing and hopefully help guide us to what they will do (or continue to do) in the near future. 

Back to NQ, with a bull volatile regime in place, that doesn't tell us that the market has topped and we should start shorting, we can look back at multiple times in the last 15 years or so where the market has been in a bull volatile regime and over time continues to power higher

Bull volatile is a requirement for a major market top, but it does not mean that a major market top is imminent. 

One of our rules in the lab is the we don't short against a bull quiet regime, no matter how good the short setup looks. 

Once we enter the bull volatile regime, we can again start shorting. And we printed a FVBO short, except the midline target was less than 1.5R which means we wouldn't have taken this short. 

Back to where indicators are less important than price. While the SQN was in a neutral regime since April, it had been trading as if it is in a bull quiet regime. This is where knowing the characteristics of a market regime are more important than the indicator actually calling the market regime.

A key characteristics of a bull quiet market regime is that the best short setups in the world fail. 

And that brings us to today, the SQN is printing a bull volatile regime and we had a beautiful sell setup on NQ. If that sell setup fails, then we are more than likely still in a bull quiet regime (despite what the indicator tells us). If that's the case we will continue to trade only the long side.

We will also be keeping an eye out for decreased or low daily trading ranges, which indicates low volatility. The ATR is a great tool to represent the volatility. 

If on the other hand, we are in fact reaching a market top, then we will be looking at other approaches to this market. 

Next up, let's look at the Euro/Yen, bull quiet in a wonderfully trending market

You can tell it's trending because it's going higher. Of course slapping on a couple of indicators might help you understand the context of it better, like the SQN printing a bull quiet (buy dips, buy breakouts, buy because the day of the week ends in a Y), and the two moving averages are pointing up nicely. 

And we look at the VBO2.0 setup from July, with declining volatility, via the ATR the same conclusion. Bull quiet, rising in low volatility, the best short setups fail.

This is one we've been long in the lab for nearly a month now and will continue to add to this long position as it continues to go in our favor. 

Bitcoin broke above the 10k level and as I've mentioned many times before, any time 10k is in play with BTC the average range after is about $6500, meaning if $9000 was the most common price, it could go up to $15,500 or down to $3500 or any mixture in between. 

The SQN tells us we are in a bull quiet market regime, just as quickly as it popped up to bull volatile it just banged around sideways, consolidating after the breakout. 

This is still a very bullish setup, mostly because it's bull quiet. Buy any dip, buy any rip, buy because today ends in a Y. 

For a bit more context, this is the monthly chart of BTCUSD. 

Notice how high the ATR was (all time highs), while BTC got pummeled back in March, going below the $4k level. 

Markets bottom (and top) on high volatility, not low volatility. This tells me that March's bottom was the bottom, a major market bottom. 

This is a very long term position for me and I will continue to buy it all the way up to the 100k levels. 

ETHUSD on the other hand is another story all together. 

ETHUSD as a tradable asset has far more potential that BTCUSD and is in a bull volatile regime. 

These two are not correlated as much as everyone tends to believe, but you have to step back a bit to see that. 

While BTCUSD is about 40% off it's all time highs, ETHUSD is about 400% below it's all time highs. 

When (not if) we return to the crypto bull market, ETHUSD due to a number of factors that I won't get into here, will hit it's all time highs again and even higher. 

If you want to join us in the lab, we will be raising prices by the end of the month. You can lock in your lifetime price by joining before we do if you sign up before then. Here's the link again