on January 8, 2025

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Why the Volatility Cycle Isn’t Over Yet

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Our View

It wasn’t just the short option that killed the LJM fund in 2018, it was complacency. LJM advertised the fund as a low-risk/high-return fund and named it the “Preservation and Growth” fund. The fund had posted positive returns every year except one since its launch in 2006. However, the fund was heavily loaded with short puts and calls, which led to an 82% loss during the volatility spike.

On February 5, 2018, the Bureau of Labor Statistics reported 200,000 new jobs added in January, exceeding expectations. Average hourly wages also rose, marking a 2.9% annual increase, the largest since 2008-2009. This data spooked the bond market, causing yields to spike. Ten-year Treasury yields hit their highest level in four years. The resulting volatility rocked the S&P 500, contributing to one of the most significant market selloffs in recent history, and the “PitBull” lost $25 million that week.

Yesterday, bonds closed below 112, and Nvidia (NVDA) hit a new high on the open near 153 and then fell 6.3% to close on the lows. The market action brought back memories of the swirling volatility from mid-January to the end of February 2018. Maybe there will be a Trump sugar high after he takes office but the Democrats will be blocking his agenda as well as some in his own party. The current environment suggests that the “volatility party” is far from over. In fact, the conditions for increased volatility appear to be strengthening, with inflation, yields, and political tensions serving as catalysts.

Our Lean

I like being a bull but the overall price action of rally and dump has been going on for too long. These are by no means our father’s markets or charts and if you just look at your ES and NQ charts compared with the 30 yr and 10 yr notes you are missing bond moves that are affecting the equities. Everything revolves around inflation and yields.

I’m not saying there won’t be times when I say I’m a buyer but I’m concerned about a global credit crisis, for real. Longs have been too easy as the US and others keep cranking up their debt.

Our lean, I can’t rule out a bounce, I just don’t think it will hold.

MiM and Daily Recap

The ES traded mostly sideways overnight, moving from 6031.75 down to 6007 before pushing back up and through its overnight high to print a new high of 6042 just before the regular session open. After an early high of 6045.50, selling began in earnest, trapping longs as price fell below the open, hovered, and attempted to retest the open but failed at 6041 at 9:50 AM. This triggered a sharp drop to 5988 by 10:14 AM.

A quick 10-minute rally to 6013.50 brought in another wave of selling, which triggered downside stops and drove the ES down to 5969.50 on heavy morning volume by 10:46 AM. From here, the ES bounced back to 6004.50 after only about 10-15 minutes, but it was not enough to get much interest from the bulls. The market settled into a range for about 45 minutes before resuming its downward move, printing a new low of 5962.75 at 12:50 PM.

The bulls made another attempt, pushing prices back up into the range, but again failed, at a lower high of 5991 at 1:26 PM. A 15-minute move down from 5991 to 5974 paused for a sideways trap as the selling came in hard again moving price down from 5983 to the session low of 5935 at 3:34 PM.

Some short-covering followed as we headed into the 3:50 PM MIM printing 5952.50 just before the release. While the MIM showed -1.88 million to sell, the market absorbed most of the imbalance, nudging the price slightly higher to a cash close settlement of 5954.25. Post-market action saw the ES drift marginally higher before retreating to an exchange closing price of 5954.75, ending the day down 73.50 points (-1.22%). The NQ closed at 21,375.50, down 405 points (-1.86%).

In the end, the ISM number showed sticker inflation and the index market yields exploded. In terms of the ES’s and NQ’s overall tone, they bore most of the weakness. In terms of the ES’s overall trade, volume was a little heavier as the ES traded 1.68 million contracts while the NQ traded 632 thousand.

How to read the MIM

Technical Edge

MrTopStep Levels:

How to read MTS Levels

Fair Values for January 8, 2025:

SP: 43.42
NQ: 178.38
Dow: 263.21

Daily Market Recap 📊

NYSE Breadth: 45% Upside Volume
Nasdaq Breadth: 64% Upside Volume
Total Breadth: 63% Upside Volume
NYSE Advance/Decline: 33% Advances
Nasdaq Advance/Decline: 32% Advances
Total Advance/Decline: 32% Advances
NYSE New Highs/New Lows: 45 / 65
Nasdaq New Highs/New Lows: 95 / 88
NYSE TRIN: 0.50
Nasdaq TRIN: 0.25

Weekly Market 📈

NYSE Breadth: 53% Upside Volume
Nasdaq Breadth: 64% Upside Volume
Total Breadth: 61% Upside Volume
NYSE Advance/Decline: 62% Advances
Nasdaq Advance/Decline: 59% Advances
Total Advance/Decline: 60% Advances
NYSE New Highs/New Lows: 77 / 247
Nasdaq New Highs/New Lows: 236 / 266
NYSE TRIN: 0.83
Nasdaq TRIN: 0.66

Guest Posts

PTG David: Polaris Trading Group

Prior Session: Cycle Day 2 Recap
Early attempts by the bulls to push higher faltered as they failed to sustain adequate bids during the opening range. Negative economic releases triggered aggressive selling, which persisted throughout the session, closing in the lower quartile of the day’s range. The session saw a range of 110 handles with 1.684M contracts exchanged.

FREE TRIAL to PTG/Taylor Three Day Cycle
For a detailed recap of the trading session, check out: Trading Room RECAP 1.7.25

Transition from Cycle Day 2 to Cycle Day 3

Cycle Day 3 Outlook
Price is currently below the Cycle Day 1 Low (5980.75) with a strong likelihood (90%) of at least recovering this level.

The market remains in a multi-day trading range between 5880 and 6100 (FOMC). The dominant rhythm is “buy the dips and sell the rips.”

This environment is classified as a “trader’s market,” offering manageable volatility and intraday swings—perfect for the nimble trader seeking numerous profit opportunities. Embrace the market rhythms and bring your A-game by focusing on the best structural setups.

PTG’s Primary Directive (PD): Always Stay in Alignment with the Dominant Force.

Scenarios for Today’s Trading

Bull Scenario: If price sustains a bid above 5945±, the initial target zone is 5960–5965.
Bear Scenario: If price sustains an offer below 5945±, the initial target zone is 5930–5925.

Key Levels:

PVA High Edge: 6027
PVA Low Edge: 5965
Prior POC: 5977

Stay focused, follow your plan, and remain aligned with the market’s dominant force.

ES (Profile)

Thanks for reading,
PTGDavid

Thanks for reading, PTGDavid

Trading Room Summaries

Polaris Trading Group Summary – Tuesday, January 7, 2025

Market Context and Pre-Market Analysis:

David highlighted a Cycle Day 2 scenario, expecting rotational range rhythms, which played out with a test of the 6005 support level and subsequent buy responses.
Key reference levels included 6030 (LIS), derived from the prior session’s mid-zone, and lower targets of 6005–5995 for a bearish scenario.
Overnight trading provided opportunities for longs around 6005, reflecting pre-RTH strength.

Morning Session:

Early price action successfully tested the lower target levels (6005), with bears maintaining control under 6030.
David noted that prices were probing highs but were contained within expected rotational behaviors.
At 10:12 AM, the 5995 target was achieved, validating the morning’s bearish outlook.

Midday and Lunch Period:

Price settled into a balancing/consolidation rhythm, aligning with expectations for Cycle Day 2.
David stepped out during the lunch period, noting that bulls faced hurdles to reclaim key levels like 5995 and 6004 (prior day low).

Afternoon and Late-Day Action:

Sellers dominated the late afternoon session, pressing prices lower and capitalizing on any brief upward bounces (“bounces sold like whack-a-mole”).
At 3:46 PM, David indicated that Bulls are hosed, solidifying the bearish tone.
The 10-year auction results and a MOC sell imbalance of $2.138B added momentum to the selloff.
Despite external narratives like the bond market dynamics, David emphasized focusing solely on price direction and actionable trades.

Key Lessons and Highlights:

Plan Validation: The pre-market scenario of bearish action below 6030 played out precisely, with key targets like 6005 and 5995 being achieved.
Patience in Entries: Traders were advised to wait for confirmatory signals, such as ATR flips, before jumping into potential long trades in a bearish environment.
Focus on Execution: David reiterated the importance of focusing on the tradeable direction, leaving external analysis to pundits.
Cycle Awareness: Understanding Cycle Day rhythms helped frame expectations and manage trades within predictable consolidation and range dynamics.

Positive Takeaways:

The group demonstrated strong adherence to the strategy, successfully navigating the bearish environment.
Traders reinforced the importance of maintaining discipline, especially during volatile, late-day sessions.
Key levels like 6005 and 5995 provided excellent benchmarks for both educational insights and trading opportunities.

Overall, the day highlighted the value of preparation, strategic execution, and focus on actionable price behavior rather than external narratives.

Discovery Trading Group Room Preview – January 8, 2025

Nvidia’s Drag on Markets
- Nvidia’s stock dropped 6% after Monday’s record close, despite a positive AI outlook and the unveiling of a new AI superchip.
- Dow Jones remained resilient, dipping just 0.4%, while Nasdaq and S&P 500 fell 1.9% and 1.1%, respectively.
Economic Data Insights
- ISM Manufacturing PMI hit a 2-year high of 64.4, signaling strong activity but raising inflation concerns for the Fed.
- JOLTS job openings exceeded expectations, with a lower quit rate at 1.9%, reflecting worker confidence.
- December Fed Meeting Minutes to be released at 2:00 PM ET.
Bond Market Activity
- The 10-year Treasury yield surged to 4.7%, nearing the psychologically significant 5% mark, drawing investor interest.
- Global bond issuance reached $184.5 billion in 2025, with corporations leveraging low spreads to lock in funding amidst potential rate cuts and tariff uncertainties.
Key Economic Calendar Events
- Pre-market focus on ADP Non-Farm Employment Change (8:15 AM ET) and Unemployment Claims (8:30 AM ET).
- Additional data: Wholesale Inventories (10:00 AM ET), Crude Oil Inventories (10:30 AM ET), Consumer Credit (3:00 PM ET).
- Fed Governor Christopher Waller speaks at 8:30 AM ET.
Market Technicals & Volatility
- Volatility remains elevated, with ES’s 5-day average daily range at 94 points.
- ES is trading within a short-term downtrend channel, with key levels:
  - Support: 5901/04, 5810/07
  - Resistance: 6059/62, 6303/08
- Bullish sentiment prevails ahead of ADP data, with high overnight trader volume influencing whale bias.

No significant corporate earnings are expected today.

ES -Week to Week

The top ES chart and the same for the NQ charts below is actually 3 weeks ago and we haven’t published a Wednesday version of the OP since then. That day was the day of the pre-Christmas sell-off. Since then we have been teasing lower bust mostly trading on the ES in the shadow of Dec. 18.

For levels today, the bulls need to hold 5934 and there is much support there. If that were to break, it should move fast down to the 5835 area, perhaps water falling into a needed 9:1 down day.

For higher levels, staying above 5968 would be moderately bullish and clearing 5994 should regain the 6000 level and put pressure to close up and over 6040. The bulls could use a 9:1 up-day, but there is no indication that a gap-up will happen today.

NQ – Week to Week

Same comments as ES about shadowboxing here the last 3 weeks but the NQ has certainly teased more about the downside potential. For today, bulls want to play above 21,431. Watch for breaks to the downside for the bears to 21,332 and then to 21,114. A close below that would be bearish.