Thursday, December 30, 2010

Heads up for Thursday's session

Big divergence between price, breadth, A/D lines and the ticks. Whilst the first 3 all finished positive, ticks trended down the whole session with cumulative ticks finishing at -50,000. Definitely shows that the bids were getting hit more than the ask. Perhaps a sign that some of the smart money is locking in their gains for the year or taking some profits at this point? The futures are trading in a tight range right now so it will be interesting to see where price breaks to in the new year.

Wednesday, December 29, 2010

Totally flat!

I have no positions on at the moment. I covered my ES long at 1252.50 on Monday's afternoon session as I wasn't feeling all that bullish after the pre-market sell off on the weekend on the news China had raised its interest rates. A bit of emotions probably got to me especially after I had held my long as the ES got to a low of 1245. I was also away from my trading computer and did not see that cumulative ticks trended up the entire day to finish at +70,000 or else I would have moved my profit stop at 1256 (retest of the highs).

My profit stop on the short 125/128 call spread on the long bond was hit yesterday as treasuries tanked (they've been pretty volatile of late). I sold it for 16 and bought it back for 6 so that makes 10 ticks on $15.625 per tick per contract. That's a pretty good trade considering an ROI of 18% ($625/$3400) on a 8 day trade.

FYI, quant studies still point to more bullish action ahead but sentiment is nearing bullish extremes which I don't really feel comfortable with. Under the hood, the tape action has been strong all week with another +30,000 finish last session on the ticks. Volume as you would expect is extremely light so I'm not sure you can look into it too much. I do see the VIX has bottomed and small caps and tech have slightly underperformed the last 2 days so perhaps that is good reason to wait things out and see where this market wants to go. Remember volatility has typically picked up early in Jan so that might be good reason for those that have sold some option premium to start taking some profits.

Enjoy the rest of the holiday folks and have a great new year if I don't post again.

Friday, December 24, 2010

Using the pivots to setup my trades

As promised here are some screenshots (TOS platform) of my entries for my futures trades yesterday.

As you can see I like to view all 4 different time frames with this tool and I also have the Persons Proprietary indicator on (the yellow and blue arrows). I use a weekly time frame pivot for the daily chart and a daily time frame for the other 3 (hourly, 15min and 5min). This wasn't a perfect entry as the low of the day was 1249.25 but it's good enough as the ES found support and rallied off it. If you had use the regular floor trader pivots (see screen shot below), you may have gotten a better entry as the ES bounced off that support perfectly.


The last screen shot shows the TF and you can see how I missed the entry because I placed my order at S2 and not at S1 (was more conservative as the TF moves more and is more highly leveraged).

Patience pays off!

I am long ES at 1250. All day I had 2 orders in, one on the ES and one on the TF (@784.30). I got these price levels by using Person's (of John Person fame) pivots which is my favourite type of pivot to use. So now I will probably set a tight stop and sit tight with this trade and let the seasonal factors take me through to the New Year. I hoping for a monster first couple of trading days in January (historically realized vols on the first 2 days is almost double the average trading day realised vol - last year was no exception and it was to the upside). A repeat of that performance from last year and I will be looking to close. Either way I will sit tight. I was a bit more conservative with the TF trade on the entry and that was why I set the entry price at S2 instead of S1 like I did with the ES. Reasons are that the TF is more leveraged than the ES (1 point move on 1 contract equals $100 whereas the ES is $50). Both futures bounced off the pivots perfectly which is why I use pivots to trade the futures. (I will post screenshots later). 

January 2011 thoughts

I see continued quantitative evidence for the rally to continue in the intermediate term. However, the further we rally the higher the probabilities of a correction before we continue to go higher. This will be my prediction going forward. We may get further upside early January but I'd be looking for some sort of correction (catalyst unknown but I'm thinking Europe sovereign or China rate concerns) before we set off again. I'm absolutely positive that any sell off will present another buying opportunity just based on how strong the tape readings have been. I can't see a change in the overall nature of the market from a bull to a bear (this normally takes time anyways as all the research shows that markets don't suddenly reverse from a bull to a bear but tops take time to form). We still have ultra low interest rates in the advanced economies (ie a very steep yield curve), accommodative government and central bank policies, equities are still cheap relative to bonds, economic data improving and the market is trending up (so you have to give it the benefit of the doubt).

I just wish at this point that we actually get a nice down day so I can get long again!

Wednesday, December 22, 2010

Oops I lied

Forgot I had a short Jan 125/128 call spread order working on the 30 year UST or the ZB. I just got filled at "16 credit. I am very bearish on treasuries in the longer term and bonds in general because of:

1) Higher risk premiums to hold debt due to sovereign concerns, municipality concerns etc etc
2) Excessive money printing by the Fed ie feeding inflation fears as economic data improves
3) Money rotating out of bonds and into equities which are still cheap in comparison

I am looking to be a seller of every UST rally going forward but will swing trade it over the longer term timeframe. ie I will be looking to cover my short call spreads when we hit levels where I think price will bottom temporarily. For this trade that will be at 119'10.

The only thing I fear for this trade is the "flight to safety" trade if we get some repeat of the flash crash and everyone runs to buy the safest and most liquid assets out there which is still USTs but even that will diminish over time as the US deficit grows and it's credit rating may subjected to a downgraded.

Tuesday morning update

It's a real chop fest out there today and odds are we are probably going to stay that way. Ticks are now trending sideways and so are other intenals. Great market if you've sold some premium, otherwise you are better off playing online poker or something if you want some action. It's times like this where you have to stay disciplined and not force a trade. Seasonals and other stats still favour end of year strength but the market is now quite overbought. Perhaps it's the POMO effect kicking in??

Tuesday, December 21, 2010

Monday wrap up

I got long yesterday on the TF at 777.1 as the market was showing some slight weakness. Unfortunately I couldn't stomach holding the trade as ticks were still trending negative at 10.30am so I exited at 778.3 for $120 per contract. No real edge in trading here today as the market holds the early morning gap. Ticks are trending lower though and other internals have come off the highs. Still any weakness is likely to be bought as that remains the layup trade for the last week so any short would basically be a 2-3 point trade with a great entry close to the high of the day. No real option trades either on the indexes as most of the holiday premium has been priced out.

Friday, December 17, 2010

Thursday session recap

All market internal indicators finished positive yesterday. A/D lines closed at close to 1000 on both the NYSE and Naz while breadth finished close to 70% positive for both exchanges. Cumulative ticks also finished positive at around 25,000 which is something it hasn't done for a while. Actually the divergence between the early morning tick action which started to turn before the price on the indexes, lead me to take a long trade on the TF (Russell 2000 e-mini futures). I chose the TF because Rob Hanna from quantifiable edges (of which I'm a subscriber) research has shown that the Russell shows a high level of bullishness at this time of the year relative to the other majors. Whatever the case, I got long at 768.9 and closed out at 773.7 for a nice gain of $480 per contract. It would have been more but such is one of my bad habits and character weaknesses in trading these highly leverage instruments I have not been able to control my fear/greed and moved my profit stop down from 775 so that I could go to sleep with the a profit in the bag. As always one should master the discipline that comes from trading the plan.

This morning when I woke up, I saw the news that MA and V had both lost 10% because of proposed legislation to cut credit card fees. I thought that this might be an opportunity to throw on my favourite BWB trades which are contrarian in nature and benefit from selling high skew. Alas when I went to check if I could construct any trades for Jan expiration I found that I couldn't which means that skew is low implying that this sell off is perhaps a once off and the market is not expecting much further downside. Perhaps a calendar might be worth investigating especially for those that understand the concept of weighted vega (see my mentor Mark Sebastian's many informative posts about this over at Option Pit).

Anyway the outlook for Option Ex today is bullish according to seasonal factors and other statistical factors. Note that strength on OpEx Friday may also induce weakness on the Monday as well. If you like to know what the probabilities are and are into this quant type of information then it pays to subscribe to Wayne Whaley's emails by emailing wayne@witterlester.com with subject ‘Add to Daily Email’, or vice versa for deletions.


My own feelings is that this market still looks a bit heavy and if it were not for all the bullish factors in play we would probably have already come back down and tested the 20 day moving average at 1214 on the ES. So I'm still hesistant to hold longs for longer than a day. Bonds continue to come under pressure as more stimulus and improving economic numbers as well as other factors lead the market to pricing in higher interest rates. A good blog on that by Surly trader is posted here. Again this is a natural part of the fundamental structural shift in the market where the market is no longer pricing in recovery but growth. In my opinion, I believe the equity bear won't be coming back until we start to see an inverted yield curve and that will only happen when the Fed begins to raise rates. Expect that to happen end of 2011 or early 2012, till then it's higher we go with the occasional 10% correction thrown in.


Posting will probably be light heading into Christmas and the New Year so with that I would like to wish all of you a Christmas filled with lots of love, laughter and food and a happy and prosperous new year!

Wednesday, December 15, 2010

Different day but same divergences

Well another remarkable day in that market internals all finished in the red with negative breadth and A/D lines and cumulative ticks finishing in at -40,000 but price actually finished positive on the day. Go figure. This is a very rare set of circumstances indeed. On another front bonds are getting smashed and yields are rising very quickly. Again it would appear that we are about to enter a new phase in the markets. I still think we will go higher from here but the fundamentals are definitely shifting. This may be the last leg up in this bull market before the bear returns.

Tuesday, December 14, 2010

Rally is running on fumes!

Well another day and another massive divergence between NYSE tick action and price. Whilst we managed a pretty flat session, under the hood cumulative ticks finished at a whopping -120,000. Quite a rare setup in historical terms. CBOE put to call ratios continue to come in extremely low (sub 0.50) which has bearish implications looking out a couple of months. The feeling I get is that when this abnormal resiliency of the market ends, get ready for a very sharp and quick move down. In fact I wouldn't be surprised if we get some sort of a contrived down day (ie sell off 3% on really heavy volume and breadth) soon. I bet you all the retail traders are long right now and we are right at the 61.8% fibbo retracement level on the weekly charts from the 2007 highs so expect some resistance here.

Monday, December 13, 2010

Monday morning update

Internals are flat but quite a divergence with the ticks as it is trending negatively. Historically Dec Op Ex week is one of the strongest of the year. It would appear that all of the seasonal tendencies are playing out. I wonder what happens when the smart money starts taking money off in the New Year. Anyway from the tape action, it's clear that this market will just not go down. Blame it on the Fed's POMO but whatever it is, it just isn't providing a good opportunity to get long again as I'm still waiting for a half decent dip.

Thursday, December 9, 2010

Morning update

Cumulative ticks are trending solidly negative right now. Other internals are all weakening suggesting lower prices. Probably will be a range trading day today. I'm not expecting a breakout but you never know. With end of year window dressing I still think this market will be bought at lower levels. Volatility is coming in a bit too. Exited the ES trade earlier today at 1235 for 15 point winner. (Now if only everyday was like that!!). Still holding onto the GOOG and OEX trade.

Trade update & quick recap

I went long on the ESZ0 at 1220 yesterday. I have a trailing stop on this at 1228 and am going to ride this for as long as I can (It's at 1233.50 right now). This trade is made because as explained in my previous post, the stats all point to higher prices next week and I do expect some sort of Xmas rally. What's concerning though is that the last session showed a large amount of divergence. Cumulative ticks finished at -50,000 which is quite bearish and A/D lines were -600 on the NYSE and flat on the Nasdaq. Breadth was the only thing that was positive but even that was quite weak on the NYSE especially. What this tells me is that the rally is narrowing greatly. The only plausible explanation is that all the money right now is flowing into the heavily weighted large cap names which is why the A/D lines can finish negative but the major indexes still finished positive last night with the exception of the RUT (small cap index) which only confirms my hunch. This would also explain the cumulative tick behavior of late. I would be surprised if we had a major sell off so close to Christmas and with the Fed's POMO operation in full swing but you never know......

The OEX BWB trade has made all the money that it can ($0.60 credit), whilst GOOG has rebounded nicely to 590. The original BWB is now trading for around a credit of ($0.40) to take off as the options expire next week. I may think of doing an adjustment soon. Perhaps something like a "Reverse Harvey" (buying back the cheap short put spread) to lock in the profit and reduce risk.

Wednesday, December 8, 2010

End of year thoughts

Well the market has made a nice move higher since my last post which was not that long ago. What a difference a week makes hey? We managed to get above 1200 and then moved very quickly back to the old swing highs where we now roughly sit. Whilst the ECB did not announce any new measures they did hint that they would do what was necessary and showed this to the market by buying Irish and Portuguese bonds through their Securities Market Program on the day of the announcement. However, the European sovereign debt saga is definitely not over (will it ever be??) and personally I would expect future shocks to come as there is still no agreement on how to deal with the situation. At the end of the day some form of restructuring is going to have to take place. Expect in the interim for the ECB to start expanding it's bond buying program in the meantime. If and when Axel Weber gets in then that could all change. In other news the U.S. unemployment rate ticked up to 9.8% but this news was offset by a big spike in pending home sales. Overall the data coming out of the U.S. is improving but unemployment is not which is going to give the Fed another mandate to add even more liquidity to the system with QE3 probably sometime in the middle of next year.

As for predictions going forward, most of the historical data and statistics suggest high probabilities for further intermediate term strength (which is where I'm leaning). Seasonally we get the usual Xmas rally around this time of the year and I expect nothing different to happen this year (most traders will be on holidays so expect any big moves to come in the new year). I can see the SPX moving towards the next target of 1300 early in the new year. However in saying that there are signs that of divergences building up with internal market indicators. This last upswing since the November highs has occurred with narrowing breadth, decreasing volume, lesser number of net highs and lower cumulative ticks. All course this could all change but you would have to remain cautious without this confirmation of the current price action. Indeed this type of a divergence was prevalent towards the latter part of 2007 and culminated with the massive bear market the following year so one needs to be careful. We have had a large amount of market intervention by the Fed (POMO for instance) and other central banks and this could be what's holding the market up.

I suspect that major structural flaws in the financial system (that of over indebtedness) will only become a huge problem when all the quick fixes and solutions don't appear to work anymore. Right now we are seeing bonds selling off across the board (especially in sovereigns) and longer term interest rates rising. This will become a limiting factor as to how much more easing the central banks can do. For 2011, inflation and rising bond yields will become the big theme. Whilst right now this isn't so much of a concern as it suggests an improving global economy, it could ultimately prove to be a negative on stocks especially if unemployment remains high and we get some kind of sharp spike caused by sovereign default for example. The Chinese inflation story is also a worry as the path that they are on is clearly not sustainable. Of course I expect the stock market to discount these fundamental problems and overvalue itself just as it did with the U.S. housing market back when problems first surfaced in 2006. This is because I believe markets and their behavior are largely built on riding the trend for as long as possible, herd behavior and short-term-ism approach (especially true in today's high frequency, algorithm and robot dominated trading).

Thursday, December 2, 2010

Wednesday thoughts

It's all about Europe right now. CDS for the Sovereigns in trouble this week hit all time highs and we are by no means out of the woods. Not sure if today is some sort of oversold bounce and traders pre-empting that the ECB which meet tomorrow are going to something supportive of the credit markets. Hard to see any action being more than just another short term solution as the current crisis has more to do with confidence of whether governments will be able to reign in spending enough to meaningfully reduce deficits before a bailout is required. You can bet that anymore bailouts is going to see more anger from the taxpayers of countries supplying the moolah (ie Germany) and greater demands on bondholders to take haircuts. Anyway my GOOG position got runover yesterday with a fairly nice drop but it is popping nicely today. I took the opportunity to reduce some risk by buying one of the BWB's but also I think we will hold the 550 level so I added another BWB but with the strikes one strike down. ie 570/560/540. The OEX is holding up well. The levels to watch right now are 1200 and 1170 on the ES. Bullish if we can close above 1200 and bearish if we break below.