Canadian VIX: TSX to have their own volatility index

I don’t know if anyone noticed, but in my previous post discussing the TSX, I included a chart of VIX (S&P500 volatility index) versus S&P 500. VIX is one of the market indicators that I can’t live without. However, as much as the Canadian and the American equity markets are correlated, they are still separate markets. So using the VIX vs. S&P500 on an analysis of the TSX is like borrowing salt from thy neighbour. But there’s no more need for that soon as TSX is finally getting its own volatility index starting Monday (October 18)!

This is to replace the MX Implied Volatility Index (MVX) from the Montreal Exchange, which I didn’t have access to previously (aside from data published on their website).

One question I have is that the TSX VIX will be based on TSX 60 index options activity according on their press release, but the TSX 60 index options isn’t that active. So would the TSX VIX be as efficient as the S&P500 VIX?

An opportunity with the introduction of TSX VIX on the Toronto Exchange is that I can now place bets on market volatility in my self-directed RRSP trading account. Which is arguably more predictable than the underlying index these days… In any case, this will be a vital market indicator for Canadian market traders.

For more information on TSX VIX, see the product information page on Standard & Poor’s. And a hat tip to Option Matters (Montreal Exchange’s blog on options) for this news.

Three obvious reasons to watch 13,000 on the TSX

Talks of QE2 (WSJ: QE2 or Titanic and Econbrowser: Why is the Fed doing this?) and earnings season are pushing the market higher and higher. Gold is still pushing to new all time high and the dollar is breaking to new lows. The TSX, in particular, is testing 12,700 today. 13,000 is just around the corner.

13,000 price level is the line in the sand for the commodity-heavy TSX for three obvious reasons.

1. It marks the breakdown support level back in the 2008 crash.
2. It is the bottom of a prolonged congestion zone in much of 2007 and 2008 before that crash.
3. And most importantly, #1 and #2 are very easy to spot on the chart (potentially self-fulfilling).

It is likely that the TSX will be reaching 13,000 shortly in this earnings season. However, what happens afterward is anyone’s guess.

At this point, I am neither long or short for the long term. The reward/risk isn’t good for going long at this point with that much uncertainty. And the threat of QE2 and earnings release isn’t good for going short either.

I am watching the forex market closely for signs of a direction as that is a driver of the equity market these days.

S&P TSX

CBOE Market Volatility Index (VIX) vs. inverse S&P500

To hell and back? A review of TSX after a V-day

As every trader knows already, the Dow tanked 1,000 points (about 9%) in like 15 minutes today. But what’s more amazing is that all the indices made their way back just as quickly. Figure 1 below is today’s chart of TSX Composite (blue) and S&P 500 (red). So what does this mean for TSX?

Let’s zoom out to take a look at the big picture. Figure 2 is a weekly chart of TSX. The top indicator is the percentage of TSX traded issues above their 200 day moving average. The overlay indicator is the percentage of TSX traded issues above their 50 day moving average. The lower indicator is the percentage of issues above 200 MA divided by the percentage above their 50 MA.

TSX Composite

The TSX index is an aggregate of prices from a handful of companies. But there are over three thousand issues trading on the TSX. This view of Figure 2 provides another perspective of where the market stands.

The question to be answered is this, how much technical damage did today’s sell-off produce?

Not much apparently.

Coincidentally, both the 200 and 50 numbers are at their respective support after the close. This is as low as we have been in the past 9 months or so. However, they are still hanging high above according to the 200 percentage. There are still 56.5% of companies above their 200 day moving average.

On the shorter term though, the 50 number is pretty low at 30%. Only 30% of companies are above their 50 day moving average.

Referring to the historical pattern as shown on Figure 2. Typically numbers 30 or below means that the down move is exhausting. Since most (70%) companies are trading low already, so there’s not much room for big dives until the market can reload. It is interesting that we touched 30% this week yet the TSX index is still not down that much in the big picture.

Don’t get me wrong, I am still bearish on the market in the long run. But I don’t think today’s move is the beginning of the dive. Since volatility has contracted to a recent record low, this move is just a shake-out of the bulls. Is this the end of this down move? I don’t know. But I expect to see at least an opposite shake-out of the bears soon before any real move can materialize. Control your risks in expectation of big ups and downs in the near future.

It’s just too good to be true for the bears that the market makes a U-turn and head straight down after congesting below a support level for weeks.

In terms of my trading, I’m all cash today. So it was fun to watch the move with no strings attached. I covered my CVE.TO shorts yesterday at a decent price. CVE.TO broke down further today during the panic but ended up closing slightly higher. So my exit was good as I couldn’t have covered during that rapid breakdown.

P.S. Mish offers a good brief on today’s extraordinary move.

Lucky exit for CAD/JPY long yesterday, downtrend resumes now?

I booked my profit on my CAD/JPY long last night mere pips away from the top. It was a lucky move, that’s all. Now it looks as though CAD/JPY will do one of the following:

On reactive trading and why I don’t make market forecasts anymore

It seems to me that the popular trading blogs have one thing in common. They all make some form of forecasts about the market, or even better, calling out to a particular stock or currency pair. My guess is that there’s a lot more people looking for trading ideas for quick profits than actually interested in the mundane mechanics of trading. Well, that and because of the fact that some of these blogs are written by respectable professionals that do provide good insights (my recommendations are linked to in my blogroll, near bottom of the sidebar to the right).

I used to publish my predictions on the market on a frequent basis. It was my way of taking notes and keeping record for the week or month. Ever since my embarrassing, and costly, attempt to call for the bottom in October 2008, I have learned to keep my views to myself for the following reasons.

1. I suck at forecasting, terribly.
2. I wouldn’t want anyone to trade on my guesses.
3. There are plenty of other, much wiser, traders posting their views online.
4. I changed my strategy by trading on reactions and not predictions.

Point #4 is what I’d like to discuss in this post.

The main problem I have with making forecasts is that I get stuck to one perspective. Say if after a weekend analyzing session, I conclude that the market is up for next week. I would keep looking for opportunities to go long in the market the following week. That works well if I am right. Yet, as I always say, I am wrong just as often as anyone. So the chance of success is at best 50-50.

On an equal chance that if I am wrong. I lose not once but twice. First from being in the wrong side of the price move. Second from missing that opposite and correct move. As such, I have since adapted to a reactive trading strategy rather than a predictive one.

Essentially, I analyze the markets to come up with conditions for different scenarios (usually just three cases: up, down, and no idea) that will play out. For example, if GBP/JPY is above 144.50, I go long.

One of the trading skills I am still struggling to execute consistently is to be deliberately one step slower than most people on entering a trade. Being reactive is simplistically being a step slower than everyone to ride an obvious setup. It goes like this ideally.

When the writings are on the wall and more aggressive traders have taken their position, I wait even more. Then once those trades are still left standing (i.e. not stopped out), that’s when I would strike.

On the other hand, if the signs are not clear as crystal, I need to have the discipline to step to the sideline.

This strategy has been very useful to me as I have recorded some good trades because of it.

My ideal strategy certainly is less glamourous than a buy low, sell high motto. Yet, having been through a few too many ups and downs in my account over the years, I have learned to appreciate the art of not gunning for every penny out there but aiming to keep every penny in my pocket.

Much like how you would survive in a battle, the secret is to not be the first one out the line and then only go for the easy kills. Cowardly, yes. But unlike war, being brave in trading does not earn you any medal.