Directional volatility will diminish: it's two-way affair now

Sat Oct11 (NY) - by Anatoly Veltman - Chief Global Analyst - The 3-day latency wrecks havoc for those who try and use Commitment Of Traders report for forecast, rather than just for objective description of preceding market composition. SP slide 1169->1006 (down 13%), included in 5-session move ending 10/7: uncovered Bearish C.O.T. divergence of unprecedented degree! To sum up regular+miniSP: Commercial Net Short rose 64,000 regular SP contracts; while Funds Net Long rose 30,000 and Small Spec Net Long 34,000! Also unprecedented was Small Spec desertion of commitment over-all: their "Net Long hike" resulted from halving of their entire futures Short interest! All this certainly explains subsequent past-10/7 rout, which brought SP further down 1006->891 (another 11%), since the period of report capture. Who knows how commitments might have changed over the past 3 days... SP ideal downside target of the entire Elliott Flat Correction from 2007 record of 1587 lies near 2002 low of 768. My feeling is that lack of clear technical indications and overall regulatory uncertainty will combine to reduce trader activity and directional movement. Subsequent chart action will likely become more grinding, thus eating into implied volatility. In the interim, one should take count of the entire crashing wave as it developed since the "mother of all short-squeezes" on Sep18-19. Intraday chart of E-mini dissects the waves of the ensuing three-week fall: we have entered wave 4 consolidation, which should retrace toward 966 or max.1006 rally objective. Note previous four rally attempts: each squashed by size offers in Globex order books at precise 38.2% retracement levels. By the way, most of those "timely size orders" came in similar suspicious pattern: "insider" short-covering commenced off of 9/24, 9/29, 10/6, 10/8 lows; followed by bullish announcements of unprecedented government actions - and then stone-walled by the 38.2%-retracement size offer! Following tremendous short-term oversold, the pattern was tellingly modified this Friday: to offer only 50% bounce after US pit open, and then a 61.8% bounce near pit close! Throughout the panicky activity of the past month, there was un-paralleled number of attempts and methods to account for past and predict future. One can't hold oracle status in all areas of fundamental, technical, historical, philosophical, social and political analysis. What piqued my curiosity - and I must admit, it was not for the first time in my 22 years of 24-hour vigil (i.e. some 200,000 hours of real-time markets): the Commitment of Traders, heavily flawed and latent by definition - did filter out Stock crash, Currency crash and Gold/Treasury "non safe-haven". And profitability of automatic Fib-Node orders once again un-explicably manifested . . . (to read the remainder of this article, please log in below.)