The Danger in a Low-Risk Reading

Today the formula shows very low risk. On the dry reading, everything looks safe and calm.

If you know how to analyze open interest and option curves, you may come to the same picture as my system today: in principle, nothing dangerous is happening. But several things worry me.

First, Bitcoin has an open path down all the way to $61,000. It can happen suddenly, as a cascade.

Second, the long sideways period of the last week has started to change into sharper movement. In my experience, when volatility contracts, at some point it begins to expand. This expansion happens much faster than the preceding contraction.

ETF inflows continued for five consecutive days, then the flow reversed today. The most unpleasant signal for me is something else: those five days of inflows did almost nothing to price. Price stayed almost in place and rose only slightly, leaving open cascade potential below. The liquidity zones remained untouched and now look like potential traps.

As a result, the formula, and possibly similar systems at funds, see calm today. I see buying exhaustion, low expected volatility and an open path down.

The divergence between the system's calm assessment, the options market's calm pricing and this market picture creates a risk of a sharp move. It may be unexpected for most participants. If a move is unexpected for the majority, it can benefit a narrow group of participants.

This is why I do not like today's picture. I added a large number of points to the risk assessment, but kept signal confidence low. Several parts of the picture remain disputed, and I account for them.