You Have Been Reading FedWatch Wrong. Here Is What It Actually Says.

The NASDAQ was already in trouble before the first missile fired.

That is the thing nobody wants to say out loud right now. Everyone is pointing at the war as the reason for the selloff. 

But go back and look. 

The NASDAQ had stagnated. It was not making new highs. It had already rolled over. The geopolitical risk did not create the problem. It accelerated one that was already there.

Now you have a vicious bounce. And this is where most traders are going to get it wrong.

The open this morning was not a place to be doing anything heroic. When you are averaging seven S&P points a minute, I don't give two craps what you see on the screen — it don't matter. 

Hands and feet inside the vehicle at all times. You let the slop clear. You watch the tape. And then you look at what the expected move is telling you.

The expected move is the dollar range the options market prices in for a given session or week. It is not a prediction. It is what the market thinks is possible based on what traders are actually paying for options right now. This week that number is $167. That is your map.

If the S&Ps rally to the upper edge of that move, the bias shifts. If they fade back to the lower edge, you are right back in the middle of a downtrend. The expected move does not care about ceasefire headlines or Powell press conferences. 

It tells you the structure before the news lands.

This bounce is real. I am not dismissing it. Last week the NASDAQ hit the upper edge of its expected move. That is a genuine move. 

But the volatility futures are still inverted — meaning near-term fear is priced higher than long-term fear. A normal market prices more uncertainty into the future than the present. An inverted market is coiled. 

The VVIX, which measures the volatility of volatility itself, is still sitting at 115. 

That does not happen in a market that has found its footing.

And here is what most people miss about that. When institutions start unwinding their hedges — giving up their protection — that process alone can create massive volatility. It has nothing to do with any headline. The market creates its own turbulence on the way out.

So what do you do with a bounce in a market that is still coiled?

You fade it. Not after the news. Into the bounce. Before the news gives you a reason. Because by the time the news gives you a reason, the move is already over.

I have already stepped in with positions. Not all at once. Slowly. My big boy butterflies would love nothing more than for this market to just pick a direction.

The war accelerated a problem that was already there. A bounce does not fix that. You fade it, define your risk, and let the expected move tell you if you are wrong.

Don't think. Just go look at the expected move.

To your success,

Don Kaufman