One of our favorite patterns playing out; big $VIX call buyer; $ES_F heading for 50MA?

By Brian Shepard

The indices traded modestly lower throughout most of the session after opening right on that 1780 level in the December contract. After briefly trading higher, posting a 1782.70 intraday high, the indice stumbled 10 handles lower to an intraday low of 1772.50 before grinding sideways to higher through the midday. Following yesterday’s drubbing, both buyers and sellers were on the sidelines for the most part as volume was running behind yesterday’s pace. After respecting the resistance in [SPX] at 1805, ES1 (S&P e-minis) broke their 21-day moving average at 1795. Going back to December of last year, when ES1 breaks its 21-day it has usually broken the 50-day moving average. The 50-day comes in at 1758.  Judging from the recent pattern, my view is that there is going to be a test of the big Gann point in SPX at 1745, which could put ES1 near its Nov. 8 low at 1736. In my view, a one-day, 50-handle decline in SPX is not out of the question – Bill Noble. william_blount BINGO / post of the day. That’s fine, but you forgot to tell me when it will trade!!!

Stanley Fischer, favorite for Fed vice chairman under Janet Yellen, was the former head of the Bank of Israel and is probably the most respected figure in central banking circles bar none. And it’s worth remembering that Bernanke, Draghi, and Rogoff all took courses from Professor Fischer at MIT (they were all there at the same time). However, in the recent past Fischer called the Fed’s QE program “dangerous but necessary.” Some are nervous that Fischer may not be a big proponent of forward guidance based on a recent comment he made – “You can’t expect the Fed to spell out what it’s going to do. Why? Because it doesn’t know. We don’t know what we’ll be doing a year from now. It’s a mistake to try and get too precise.”

With more and more positive data, it makes us think … how much of the +25% in SPX is the $85B of monthly asset purchases by the Fed?  richcanlione. Amazed we are still debating tapering and its present effects, as well as those to come? The Fed clearly has enough ammunition to taper – growth is better,financial market conditions are stable, the “macro” world remains quiet, and US political risk has diminished. Whether it comes in Dec, Jan, or Mar doesn’t matter. A world of improved growth and a credible ZIRP is much better than middling economic activity and $85B worth of purchases.

I would like to share an observation regarding the roll/switch: As the December contract comes to a close, we as traders have obviously become accustomed to the prices/levels of the December contract. During the first few days of the roll, many traders still watch the December prices/levels, but trade the new front contract – in this case the March contract. We call it price discovery – as we give ourselves a couple of days to become adjusted to the new pricing/levels.

In Asia, 10 of 11 markets closed lower: Shanghai Comp. -0.06%, Hang Seng -0.51%, Nikkei -1.12%. In Europe 11 of 12 markets were trading lower: DAX -0.56%, FTSE -0.80% / now DAX -0.37%, FTSE -0.61%.  In the U.S. the jobless claims checked in at 368k vs exp of 320k and retail sales topped expectations.. Today’s RTH session opened fractionally lower at 1780.00 -1781.00. News and/or reaction to any of the news seemed to be light, but chatter regarding the government budget deal leaned toward disgust versus market moving. US SENATE REPUBLICAN LEADER MCCONNELL IS EXPECTED TO VOTE AGAINST BIPARTISAN BUDGET DEAL BECAUSE IT EXCEEDS SPENDING LIMITS… The [DJIA] was down triple digits before paring away half of those losses going into the last hour of trade as the markets are trying to find some balance during the rollover, next week’s expiration and the FOMC meeting / Tapering EVENT next week.

(Posted yesterday) Sam_E (09:44) bottom line ES here it is. it has become a wounded pattern even if for some reason she bounces off these lower fibs to make new highs. this is the first wounded pattern we have had in a long long time. in other words the algos smell blood, as i stated last week they will sell at x sell at y sell at x and then press her hard. down. the bulls will try to recapture 1799.75 at some point if they can. but if it fails there then look out for the drop of all drops. and Prector becomes right after years of getting it wrong.

Fred Ruffy (11:02) [VIX] ticks higher, attracts big call buyer. The index is up .12 to 15.54 and hit its best levels in nearly two months this morning after ticking to 15.84. The top options trade in the VIX pit, which is also the biggest print across the entire options market so far Thursday, is a 40000-lot of Apr 22 calls for $1.28. Sources on the floor say the crowd thinks it’s a buyer and the position is opening. [$15.60 +0.18 Fwd, IV=77.4% +3.0] –  Fred Ruffy, Trade Alert LLC.    **Footnote: Seems like a bit of money but to a P.M. of a state pension fund (perhaps a couple of basis points against total return) well worth the risk given 2 day Fed meeting on 12.17.13 and potential “Risk to Growth” language change ….. based on recent slew of  positive data – richcanlione.

At 2:00 the S&P index was trading 1782 area when (14:00) MrTopStep MiM Closing Imbalance was showing a large 65%, $261M to the buy side. At (14:20) the MiM was showing  51%, $22M to buy while the index backed off the opening range retest and FLIPPED to a sell … by (14:40) the MiM showed 57%, $186M to the SELL side and I rubbed my eyes three times and said “tell me it ain’t so”… as the 1780 area was trading… but not for long! By 2:47 the imbalance mushroomed to $1.7 Bil to sell for the second day in a row. On the cash close the December futures traded 1775.30 area, before settling at 1774.90, down 5.9  handles on the day – as we come into one of our favored patterns – the low trade made the Thursday or Friday the week before the expiration.

Traders are not paid to think. They are paid to react. As Vikram says, “Ours is not to question why. Ours is but to sell and buy.” The S&P is pulling back as it should at year end. We lean to selling the early rallies and buying weakness. The Ned Davis stats show Friday as an up 19 / down 10 of the last 29 and that falls right into line with the PitBull’s Thursday-Friday low the week before the expiration.

Coming events: http://www.investing.com/economic-calendar/

December seasonality strong: http://marketsci.wordpress.com/

December liquidity – a different view: http://bit.ly/IAKvtn

Know thy Fed speakers:  http://graphics.thomsonreuters.com/F/10/scale.swf

Posted on Tuesday: After Friday’s employment report, the Dec. 18 FOMC meeting is shaping up as one with two central alternatives — a modest taper or no taper — with no favorite option going in. Based on past experience (most recently in September) that makes the outcome very difficult, if not impossible, to predict. But from a market perspective we question whether tapering matters. The reaction of both the bond and equity markets last Friday did not suggest any particular fear of tapering. It seems to us that markets have internalized the idea that QE will be phased out in the not-too-distant future, and an earlier taper (as in next week) might actually remove one source of uncertainty and allow the markets to focus on what really matters — the improving outlook for the US economy. Tapering would also support the dollar, and thus equity multiples — Source.