Trade update

The ZB iron condor is going well. The call side got taken off last week for a debit of "05 debit and the put side is worth around "6 (I have a order to buy it back for "05 as well). At this point in time, although I'm still long term bearish on the long bond, it would appear that bonds are now a proxy for the strength of the US economy and not so much the risk on/ risk off trade that we saw for much of the last 2 years. Thus a strong economy U.S relative to other countries is driving demand for the bonds and other U.S. assets whilst weakness sees selling. Relative to other economies the US looks the strongest which is why you are also seeing the USD holding firm.

The AAPL is also doing ok with the trade up around 6%. Here is the snapshot of the trade as it stands.

Overall I will hold onto this trade as I'm thinking any pullback in the general market in Feb will be good for this trade.

Tuesday morning pre-market thoughts

Quant studies imply strength heading into the end of Jan, that combined with the bullish bias leading up to the FOMC announcement combined with the good odds of gap fill today even with these relatively large gaps, has me a buyer on any weakness off the open. I've got an order to go long on the ES at 1281.25. In the intermediate term, some quant studies are leaning towards Feb weakness so perhaps selling some out of the money call spreads on the RUT or the SPX is not such a bad idea also.

If I didn't think the market was going up then why didn't I go short today??

I still struggle with this one. Methinks I will need to do some deliberate practice on a paper trade account to get accustomed to switching sides when the market tells me to like all great traders.

Modern Market Misconceptions

I was doing some thinking over the weekend after reading a few forum and blog posts and here are some thoughts stemming from that.

1. Markets are not always efficient. In fact I would posit that they never were/are. 
2. Markets are not free. (Especially these days with so much central bank intervention).
3. From point (1), the market will never price something in unless it has to. This is because the market is made up of people and people are not rational all of the time. 
4. From point (3). Therefore one only needs to be one step ahead of the market to profit, and not 30 steps as you will be waiting a long time to get paid. (This is the reason why I don't listen to all the doom-sayers and perma-bears because I know while they may be right eventually that doesn't mean the market will price in all these things until it has to. Think subprime ie it was known well before the crash of 2008 but yet the market kept going up).
5. Traders should stop thinking of cheap or expensive but in terms of if I buy here, can I sell it for more later or if I sell here, can I buy it back for cheaper.

Anyway I will probably have more thoughts but at least I've got these ones on paper.

Heads up....

Internals are weak and getting weaker. Risk assets are selling off like the AUD, EURO, and Oil while the USD is up as well as bonds. Cumulative ticks have trended straight down (@-5000 after 25mins) and other internals are pretty weak. Could this be the first 1% down day for a long time?? Geez...that would be something!!

Condor Ping Pong

It's been a while since I last posted but in that time, I've been playing the iron condor ping pong on the ZB again. I sold some call spreads when the ZB was at 122 and then sold some put spreads when the ZB was at 120. My trade currently looks like this.

The trade is up a decent amount even only after 5 days. Again I'm long term bearish on bonds so any chance they pop up I will go short deltas. The reason why I'm also adding the put side at this juncture is because I do believe that the equity markets will correct soon which will encourage the risk off trade (ie money moving to UST's) and that bond yields will remain attractive to buyers with the bonds at lower levels (bond prices and yields move inversely). The latest TIC long term purchases data showed that foreigners bought  85.1 billion of long term treasuries which was a large increase from the previous month which seems to support this theory.

Apart from this trade, I managed to get into a AAPL earnings BWB yesterday at the open. I bought the 325/315/295 Feb Put BWB for $0.20 credit. The plan on this trade is just to hold and see if markets do correct then it might be worth something at expiration. If not I will keep the credit on this trade.

The last trade I did was I went short the ES at an average of 1295 yesterday. I covered all of the position at 1292.5 before the market opened based on my gap guide subscription that showed that fading down gaps on Opex Wednesday was historically a very good trade. Thus my plan was to cover the position and then fade today's gap. Unfortunately I'm already out of that trade having went long at the open on the ES at 1290 and then moving my stop because the early morning market tape action was not all that positive. Therefore I moved my stop and covered at 1288.50 taking a small loss (as I type this I can see internals are getting weaker and so is the price action which vindicates my decision to cut into my trading plan and take the small loss rather than waiting for the market to hit it).

Overall quant studies are showing weakness this week and it's interesting to note that if the markets have not had 9 positive consecutive weeks since the 2009 bottom as Bill Luby of Vix and More blog points out. If markets finish positive this week, that will be the 8th positive week so some caution for longs is warranted.

Thursday morning thoughts

Interesting that cumulative ticks finished at -50,000 on yesterdays session in contrast to the other internals which finished up. As I look around today, I see that all risk assets are solidly up. Possibly the small down gap in the futures looks like a good fade, particularly after we've had 2 days in a row where it hasn't filled (higher probability of filling when this occurs).

Trade update and Wednesday thoughts

I am totally flat again. I did not go long the ES at 1268.25 because with the early morning tick action I decided to be conservative and target a fill around the pivot area which was closer to 1263.75. My condor trade on the ZB has also been closed out. The put spread was closed for a "5 debit and the call spread was bought back for "6 debit. This yielded a total of 8 x 4 + 10 x 6 ticks for a total of 92 ticks with each tick worth $15.625 giving a total return of $1437.50 on span margin of $4000. This is a 36% return in about 9 days (when I first opened the short call spread side). Overall a very good trade and it puts the account up about 5.5% for the calendar year. At this rate I will be quitting my day job very soon! (joking). Jokes aside, I think the pledge by the various governments to support the Euro area as being very positive. Still the markets are in my opinion overbought and there remains a good dose of cautiousness on the behalf of most investors. Earnings season has started so it will be interesting to see what the reaction will be. I think we may be seeing a return to more normalized market conditions ie term structure flattening and realized volatility begin to shrink from the craziness of previous years. It's clear that all governments are enticing or forcing people to get into the leveraged risk taking behaviour of previous bull markets. Will it end badly?? Of course it will. It always does. However, it will be a while before that happens so as long as the general conditions are favourable for risk taking then ride for all you can. That means buying the dips, corrections etc etc. Not a bad idea to set up bullish collars for most of your long trades (ie go long underlying but buy an out of the money put and sell a call when the market seems heavy ie like now).

Today's action might be a repeat of yesterdays. The locals are short and will try to fill this gap but the market is holding up well. Cumulative ticks are trending down at the moment but the risk assets across the board although off the premarket highs are holding up well. I may have another shot at a long here on the ES at around 1271. I have a feeling that the locals will once again try to push lower and trigger the sell stops before afternoon buyers buy the market once again. I'm conservative with my fills because I don't have the luxury of staying up the whole day to watch the market as being down under I need my sleep. I'm mindful of the big flush move that you can get once the downside momentum starts and I don't want to get stopped out.

Hmmm

Seems to be a reversal of risk after the open today. USD is up, Euro is down along with gold and the AUD right after the open. Could be some people booking profits. Cumulative ticks are also down. Perhaps we could see some afternoon buyers stepping in again. I'm looking to go long ES at 1268.25.

Tuesday morning thoughts

The market rallied off the morning gap down and never looked back. Cumulative ticks although sharply negative in the first 15 mins bottomed at -10,000 and trended higher the rest of the day to finish at +40,000. All other internals managed to turn around the bad start as well and finish positive apart from NYSE breadth and A/D lines which finished flat. Small caps and tech did better than the majors so that is a positive sign for risk and the markets overall. Quant studies are showing a bullish to flat bias here and with the current relatively large gap in the ES and other futures, the odds favour a gap and go (or at least a no gap fill situation) which means that the market should finish positive for today. More importantly however is the news that China and Japan will support the purchase of European sovereign bonds. That is a positive for the PIIGS s there is a lot of new issuance out this week. Overall this has calmed the markets somewhat and I will expect another retest of the the last swing highs before the week is out.

Inverted Chinese yield curve

Did a bit of sleuthing after reading an article on Bloomberg about Chinese corporate bond yields and it seems that the inverted yield curve shows up in the Chinese government bond market as well. Given the well documented relationship between inverted yield curves and their predictive powers to forecast recessions, does this mean that a Chinese recession is looming??

Tip - use this link here to find the symbology on Bloomberg (you can get all the same tickers as used in the professional service ie upwards of $10,000 a year Bloomberg terminals). You will need to do a bit of homework to get the ticker to work though ie Indexes have the :IND after the ticker for example:

 CHBIGB1Y:IND is the symbol for the 1 year bond


Chart is courtesy of Bloomberg.

Here's a free tip

If you are like me and like to be in the know on all things going on in the financial world then you can't ignore the free market commentary and intraday alerts from the happenings of the credit markets especially in Europe. The best tool for this is to subscribe to a RSS feed from Markit here. Use a reader like google reader and you won't miss the important financial news from the credit markets each day. Remember what happens in the credit markets almost always lead the equity markets. Notable story of late is that there is quite a consternation in Europe still with the news that senior bank bondholders may have to take haircuts on any sovereign debt restructure. Some bank credits are now trading at record wides. Check out the latest alert here.

Worth another shot??

Still seeing weakness here on the ticks (trending lower and @-7000) so another short right here at ES @ 1273 might be worth a shot.........................still you can't discount the bulls can you?? Oh we do have lots of POMO this week too!

Short TF @ 794.50

I went short on the TF @ 794.50 premarket and I have just covered at 791.60 for 2.90 points. Not a bad trade yet I couldn't stomach holding the short position yet again as my target would be 788 which would be where the pivot is. I think I have a case of bullphobia which can only be described as a psychological disease that causes me to cover short positions at the first sign of a bullish candle on a 1600 tick chart whenever I trade the e-minis!! I think it's a case of having bad experiences from 2009 when I completely misjudged the market and got run over because I was too bearish. In any case I feel more comfortable trading this market from the long side (it is the easiest side to trade of course - going with the trend) so until I work on it then I know I won't be a complete trader.

Self destruction Tuesday!

Yes I shot myself in the foot on Tuesday when I shorted the ES at 1269.25 and let my fear overcome my plan as I bailed at 1268.00 for a 1.25 pt winner and not the 4-5 point target I had planned. Why did this happen? How did I let my fear ruin a perfectly good trade setup and plan? Well for one, sitting in front of the screen and watching every single tick movement go by has in the past not helped me as it has put doubts into my day trades. This also goes for listening to Trader's Audio on the TOS platform and hearing that there was some "paper" buying around. Secondly I was taking a counter trend trade and the thoughts of the bulls stepping in on weakness and ripping the bears a new one was at the forefront on my mind even though market internals started out weak and weren't bouncing. Early on I was watching the price action movement and there seemed to be some buying by bulls on the early weakness. However, once the "locals" were able to push lower, stops were hit and people started to bail which took the market lower. Alas it all came too late as I was already out within the first 20 mins of trading. One of those times where I should have set and forget on the trade and just let my plan make all the decisions as I have a loss and profit stop set up on all these futures trades.

Well enough of the self critical analysis. As a recap, market internals still finished +10,000 on Tuesday whilst the other indicators finished mildly weaker. As for yesterday's session, cumulative ticks finished at +27,000 and other internals finished quite positive. On the quant front though, studies are now pointing to some short term weakness so taking another stab at a short here with the ES at 1271 is not a bad idea from a risk to reward point of view. Volatility has certainly picked up across a whole range of asset classes and that is the first sign that we might get a correction of some sort here. Other good measures of risk assets like the AUD/USD have also come well off it's highs so that might be another red flag.

On the trade front I have condored my ZB short call spread somewhat, by selling 4 x of the 113/110 Feb Put spreads for "13. I say somewhat because I am short 6 of the 128/131 call spreads which have now trading around 9". I have a nice little profit on this trade and so by selling the put spreads I have locked some of it in the short term if we do get some sort of rally here in treasuries if the risk off trade does come to fruition.

Tuesday morning notes

Futures are all up slightly this morning and the odds are good for a gap fade (gap fill). Some of the quant studies that appeared suggest some consolidation and possible weakness in a couple of weeks. I may look at taking a short on the ES at around 1270 and hold for a 4-5 point profit target.

Market internals as you would expect yesterday all finished squarely positive. Cumulative ticks finished at +50,000 while breadth and A/D lines were also very strong. I'm also looking to play some condor ping pong with my short call spread on the ZB. At this stage I'm looking to condor it off by selling some put spreads as I think there will be some support coming in and if we do see some equity weakness in the next couple of weeks then that should keep treasuries afloat (risk off trade). 

Trade update

It's looking very much like a gap and go situation here. All the futures are up around 0.7% so don't be surprised if this turns out to be a nice trending day for the bulls. Personally I would be a buyer at 1260 on the ES here which corresponds to the R1 persons pivot. Earlier today I also sold the 128/131 Feb call spread on the ZB for 16" credit. Again, I'm looking to take this off for around 6" debit with the adjustment point at around 125. A nice little move since I put the trade on has me up nicely on the trade today.

The only thing to fear is fear itself!!

Well I'm using that title for today's post because it would appear that the only thing standing in the way of traders this week is the psychological aspect that the bullish sentiment is overdone and we are due for some sort of correction. In the quant space I'm seeing OVERWHELMING evidence that this first week will close POSITIVE and that the REST OF THE YEAR will be a another DOUBLE DIGIT GAIN for the US equity markets (I thought I'd use caps just to emphasize those points). Right now we see quite large gaps in the futures which from a statistical and seasonality standpoint will favour a gap and go type (no gap fill) situation if we are still around here at the open (1260 on the ES) of the cash session. The highest probability trade I see is to buy ANY weakness (and I mean any weakness) today and hold long for the rest of the week. Lots of POMO activity this week which should be supportive of the markets and also I predict improving fundamentals in terms of the data coming out too.