Primed to bounce once again

The market was unable to push lower past the S3 pivot yesterday after all the pre-market weakness we had and finished up in a very narrow range day indicating convictionless trading on the part of bulls and bears (the bulls did try and push higher throughout the day). Today we see the futures have gapped higher and once again we are primed for another bounce in the next day or two. My gap probabilities show that the current setup is not great at all for fading today's gap so the right play would be to fade the gap fill and go long (eg. 1317 on the ES is a good entry point I think). Either that or some slightly bullish option trades here might be a good play. Bounce we might but we still have the lingering fundamental problems in play so any winning bullish trades should incorporate some fairly tight stops.

Continued weakness and uncertainty

As an intraday trader, I continue to see underlying weakness from the current tape action. Friday's trading session was no exception as the pre-market rally and gap up in the futures was met by strong selling early in the morning followed by a bounce and then another sell off into the close to finish right near the lows. Overall cumulative ticks finished at -20,000.

Early on in today's globex session and the futures are already trading below Friday's lows which typically is not very positive   if we manage to open around these levels when cash opens today. The Euro as seen by the /6E is now very close to breaking it's swing lows at 1.40 level which could attract further selling. As you would expect the dollar is up, bonds are up and other risk assets are coming off so the risk off trade is in full swing right now. I see last weeks swing lows as important levels to hold (SPX 1318 and ES 1316) and I think the market will probably want to test this level early in Monday's session if we open with a large gap down. It will possibly offer a good trading opportunity with a tight stop and a trade offering a good risk to reward ratio (ie 1:2 or 1:3). I expect paper sellers off the open on Monday given the current price action.

The signs aren't great from an market auction theory point of view. The more we auction at these price levels the more the market is accepting value here. Which if we were in a up trending market means that something significant has changed. I think the longer the Greece thing drags on and the uncertainty surrounding that, the more impact it will begin to have on market participants and thus leading to a self fulfilling prophecy of lower prices (if it hasn't happened already).

Pre-market thoughts - Wednesday 18th May

Futures have pulled back steadily since the early morning and now only have small up gaps to show for it. Price levels to watch would be the globex lows which are 1324.75 on the ES and 819 on the TF. I have a very strong feeling that we will fill this mornings gap and probe these levels to see if they hold. At the moment, I'd likely say that they won't hold as I continue to see the USD rise against all the major currencies. Gold and oil are trading near the bottom of the range but aren't doing as badly as you would expect with such a pop in the USD so fundamentally that is an ok sign. I will most likely wait for the open and wait for the market structure to develop before putting on any trades today.

The bulls win!

I am talking about the equity bulls and not the NBA Chicago variety although I do hope they go on and beat the Heat (yes I am a fan!). Anyway the bulls managed to hold the 50 day moving average on the ES after testing it twice yesterday. Coincidentally, yesterday's S1 pivot of 819.50 was exactly where the 50 day moving average was. Quite a powerful level of confluence for both the intra day traders and the longer term traders and this no doubt helped the market to hold this price level. Cumulative ticks also finished flat after dipping as low as -20,000 by 1pm E.T. We are now set up for the market to bounce yet again from this key price level. Another weak bounce in the next few days ie rallies are sold and you know something isn't quite right. 

Well earlier this morning we saw some pretty large gaps up in the e-minis and the odds aren't all that great for fading them as we were above yesterday's highs but now the same MO of selling rallies seems to have kicked in and we are coming in a bit. I guess the economic data that just came out of the UK does not seem all that great. But then the psychology of the current market is to sell off on any bad news and discounting good news. If we are to repeat the same this then we may well get gap fill during the cash open.

Same market MO of late

It used to be buy the dips but the last couple of weeks, it's all about selling the rallies as I get the sense that the smart money is beginning to unwind the risk trade. Anyway for the ES we bounced off the 50 day moving average and now we are testing it yet again. Will we hold?? Hmmm.....we shall see. Interestingly quants are still calling for higher intermediate term prices but we all know that these are based off probabilities and probabilities doesn't mean it's a sure thing. It's like holding a pair of aces in Texas hold'em. Yes you are greatly favoured by the odds of winning the hand but that doesn't mean you don't suck out once in a while.

And then the market gave it all back with -120,000 cumulative tick reading yesterday

So all it takes is the threat of one interest rate rise from the BOE and the markets tank? I guess the spectre of higher interest rates globally combined with lower growth is a real concern at this juncture. Never fear though, I'm sure QE3 is just around the corner. We just need the SPX to tank 10-15% for the Fed to take notice!

It was another +60,000 cumulative tick reading yesterday

Adding to this is the fact that cumulative breadth is now at new highs too which would suggest that price will also be following through in the not too distant future. Other positive signs were that bonds sold off a bit and commodities have recovered. Other risk assets like the AUD also turned up. We also had leadership from the small caps and tech as other confirming indicators.

In the short term we are now overbought so I would expect some bracketed action in terms of day structure in the futures. I would be inclined to trade with the locals in such a scenario as there may not be that much conviction from other timeframe buyers today unlike yesterday when the locals got run over as paper orders steadily came in throughout the day forcing the locals to cover.

On a positive note

Although price action has not been that inspiring, we did get a cumulative tick reading of +60,000 yesterday and ticks are trending higher this morning.

Bounce has been less than impressive

Although markets rallied higher at noon yesterday, the fact that we have spent so much time at these price levels is concerning. I was long since Friday but covered most of my longs yesterday morning and so failed to catch the rally. Most risk assets have come off the highs and have been trading in a range for the last week. I think there are still a lot of concerns out there, mainly to do with the sovereign debt situation in Europe, the debt limit being reached on May 16th in the U.S., the end of QE2 in June, less than impressive data points coming out of the U.S., higher inflation and rising interest rates in China and the other SE Asian economies. Bottom line is that the punchbowl may be coming to an end as governments begin to deal with the debt situation and we get a cut back in spending as fiscal policies tightened up. I think we could be heading for a range bound market in the next month or two unless we get some more clarity from the economy or perhaps more stimulus from the Fed in the form of further easing?? QE3? Weak data could actually trigger a rally as the markets price in more stimulus? Who knows but for now, I would be a buyer at around 1300 on the ES and a seller above 1365.

Markets still looking shaky - Unable to provide posts due to blogger problems

No bounce but signs are there

Well there was no bounce yesterday but the fact that the Nasdaq and Russell are beginning to show relative strength may be a positive sign in that the selling has subsided and we are ready to bounce. Things still look very shaky out there and with commodities getting hammered yesterday so one cannot be sure that the selling is done. At this point in time, I feel it's definitely worth putting a some small speculative long delta trades using options (because of  the limited risk characteristic). I would monitor how long we hang around at this price level as the longer we go sideways from here it will mean that we are accepting value and something fundamentally has changed in the market (ie not so bullish anymore). I would use that as a trigger for any bullish trade.

Short term bounce here

Looking at the market structure from yesterday, I think we should bounce here. Mainly because the bounce did not occur in the usual last hour of trade where day time frame sellers cover their short positions as per Tuesday's session and more importantly because price quickly rebounded from the low made at about 12.30pm E.T. This usually signifies a rejection of value and that price at these levels (around 1340 on the ES) represents under value. It can also signify the presence of other time frame buyers. It was also good to finally find some meaningful paper sellers during yesterday's session as locals had been short for the last 3 days off the open as paper continued to buy however not in such a volume that they were actually able to push the market a lot higher and thus force the locals to cover. The goal of any auction process and price discovery is about finding levels where 2 sided trade can take place. Indeed yesterday's session was the first time that we finally found paper sellers and therefore it bounced well before the normal 3pm E.T. reversal (when locals and others who trade in the day time frame start to cover their positions). It has to be said that on slow moving days (not much activity and volume) that it pays to trade with the locals as they will continually push to try and find paper sellers if they are short and paper buyers if they are long. Only when they get overwhelmed with only buy or only sell orders and are thus holding too much supply (too long or too short) will they be forced to cover (normally these are trending type days which happen straight off the open - think natural disasters and major geo-politicial events etc etc).

I'm am flat and waiting

I liquidated all my positions today at the open. Some for quite a large loss like my short call spread position on the treasuries and others where I gave back a good portion of gains like my RUT call spread. I just don't like the way some of the assets are behaving and all of the tightening talk overseas as well as the continuing rally in treasuries which implies some nastiness ahead. I'd rather wait it out.

Silver update

It seems silver got hammered because the CME increased the margin requirements (and I thought my broker increased margin requirements today due to the increase in volatility but it was actually the other way around!). Just goes to show you how leveraged the markets are right now. It's probably a good reminder about the nature of leveraged markets ie selling will beget more selling just like buying will beget more buying.

Thoughts about Monday's likely day structure

The futures rallied big time over the OBL news and all of them hit R3 pivot. They have come off a bit and are now trading sideways but still very close to R3. Given the size of the gaps and the fact that if we hold here and are thus able to open above Friday's highs, then that will favour the situation where we could see a trend day develop as backed up by historical data. My own thoughts are that we will probably see a mild pull back on the open (maybe to R2) but buyers will once again step in and try and push higher but ultimately we will not found any buyers and then maybe auction all the way back to 1365. My reasons for this is that I think the exuberant buying based off the Osama news a little overdone. Traders are forgetting that China reported weaker than expected PMI manufacturing and the fact that silver took a big hit today could also spill over to other markets. Therefore my best idea would be to fade the opening range high which should be established early in the day (first 30 mins). Of course I will be monitoring internals closely to see whether they hold up or not. If they do then expect something like a double distribution trend day (these definitions are explained in the book "Mind over Markets").  But risk/reward wise, I think a fade of the days high with a tight stop and 2 times the reward is what I'm thinking. If we do get some type of a sharp move lower, then get ready to go long once it looks like we have bottomed (ie smaller and smaller down bars or red candles and a bottoming tail hammer candlestick pattern to form on a 5 min chart).

Osama Bin Laden??

OBL is dead and US futures rallied off the news. We are now seeing huge gaps in the equity indices. Meanwhile silver got taken to the woodshed today and is down about 10%. Gold has also come off. I would not fade these big up gaps now. All bets are off after the Osama news. Wait for the market to respond and trade appropriately. Also Chinese manufacturing PMI came in weaker which was the reason for the early weakness today but OBL seems to have trumped everything. Expect some good volatility today!!

Monday 2nd May - Weekly Recap and Forecast ahead

Another positive week for the equity markets. As I mentioned in my last post, the bulls are back in full control. Last week we had very strong readings from the cumulative ticks even on days the price action seemed neutral to weak (3 days above +60,000 last week). This tells me that the uptrend in equities is intact for now. The quants studies continue to call for higher prices in the intermediate term. Looking at confirmation from other asset classes and we can see that the dollar has broken the previous swing lows and looks to be heading lower. This is driving gold to record highs and oil continues to creep higher as well (more so of a hedge trade then fundamentals I think at this point as inventories continue to come in above forecast). On the monetary policy front, nothing has changed significantly with the Fed due to complete QE2 in June and more importantly there is no signal that they will be shrinking it's balance sheet or raising rates, both of which is keeping a nice floor on all risk assets. If there is a red flag out there for the bulls it is that US treasuries have rallied significantly from the Feb swing lows and is close to threatening the March swing highs made when everyone rushed to safety after the Japanese earthquake. This would seem contradictory to rising equity prices and is probably a sign that the bond market does not believe the rise in equity prices to be reflective of higher economic growth or more specifically the bond market does not believe longer term inflation to be a factor at this point. Of course it could be a case of people reallocating their bond portfolios after continuing downgrades to Japan's credit rating and the uncertainty in Europe. Like I've said before, you could argue that US treasury bonds are the least worst out of  the whole bunch even after S&P downgraded it's outlook. More importantly, so long as Ben Bernanke uses the words "extended period" when referring to how long he will keep rates at record lows and there is no sign of inflation outside of core then the bond bulls have nothing to worry about.

Trade wise I continue to hold my long call spread in the RUT and I am short as of last week some June /ZB call spreads with the thinking that bonds will not rise much more but may go sideways. The higher oil rises, the less inclined people are to put their money in bonds when inflation could become a real concern. This is likely if the dollar continues to sink and equities make another leg higher (which looks likely).

Looking to today, I can see that the futures are all gapping a fair bit higher probably due to first day of the month seasonalities. Gap guides show reasonably good probabilities for fading up gaps today so a reduced position size fade may be in order. If you want to play it safe, I would probably fade the TF but only for partial gap fill. (TF because it has more leverage so you can scalp fewer points for same profit in ES).