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).

The internals don't lie!

Well after commenting that we might roll over in the afternoon from my last post, we did just that and proceeded to bounce off the 50% fibbo retracement level in the ES and the TF from the last swing move (ie low from Japan Earthquake to recent swing high). The fact that tick levels on this day did not make new lows (finished around -30,000 ticks) was a good indication that the selling was slowing.

After again retesting near that 50% fibbo levels on the TF yesterday, we quickly bounced off them and rallied very nicely. There was telling divergence during the retest yesterday when the TF was making new lows but oil, the Euro, gold and the AUD/USD was not. Remember the world is massively net short of the USD and YEN and long oil, gold, AUD/USD and equities so if there is a move to risk aversion we should always see the USD and YEN rally to new highs whilst the other so called "risk assets" are making new lows. Failure to do so and that raises a red flag as to how real the fear is.

I would say that things are again back on track for the bulls after that one day shock. I think the market realized that so what if S&P have downgraded the US outlook as it does not change things materially in the short term. Remember the market does not have to price anything in until it has to because it is not efficient. Only when there is a real chance that the US cannot repay its long term debt and you will see this in terms of yields rising significantly will the market take notice (the majority or ie the lemmings).

Still the fact that treasuries sold off hard and then rebounded reinforces the fact that any risk aversion trade will still see money flowing into treasuries no matter what the long term outlook is. Quite funny really. Just goes to show you that there are really no better alternatives. This is the same for the US dollar as well.

As for today, the large up gaps above yesterdays highs probably indicate that we are likely to finish higher. I don't think we will get a full blown trend day but we could as odds do not favour gap fill. We are already above the highs from yesterday and the day before so that should add some fuel to the fire. Definitely the trade would be to get long from a good location.

As for trades, I've finally gotten comfortable doing more directional or speculative type option trades. Yesterday I bought the 830/840 RUT may call spreads for $4.10 and will be hoping to perhaps turn this into a 3 legged box depending on how we travel.

Midday update

The selling seems to have stopped somewhat and we are getting a rally. For all the selling the cumulative ticks only got to -30,000. However, failure to rally much higher and we could get a late day sell off which I think is still likely. Internals are not at the point we the rally is anything more than a bounce although the up volume to down volume on the NYSE has recovered slightly.

Pre-market thoughts - Monday 18th April

Easiest play of the day is to fade any rally. Big gaps like these are unlikely to fill and expect a lot of stops to be popped if ES 1300 goes. I will be looking to get short and fade any rally today.

Just when you thought it was safe!

Huge reaction to the downgrading by S&P on the US. We are seeing massive down gaps and there will likely be a full blown trend day to the downside today. Buckle up it's going to get nasty! So much for the bullish stance stemming from Friday's action. I think all bets are off now. The likelihood is that failure to hold 1300 on the ES and we will see a sharp decline.

Government shut down fears allayed?

Big turn around in the cumulative ticks yesterday with a big rally from 2pm E.T. onwards to finish at close to +50,000 ticks. This I'm lead to believe coincided with the passing of the spending bill by Congress. Earlier on we also held the 1300 level on the ES. For the time being it would seem, things are back on track. If the sell off over the last week or so was really due to fear of the government shutting down, then the market should rally higher from here as people will perceive it to be below value. Certainly the relatively quick rejection of the 1300 area suggests that there are buyers willing to step in at this level. Quants are still pointing to intermediate bullish studies so I will look for evidence of this on the day time frame ie we should see the dip buyers return. Let's see how it plays out for Friday's session. Look for confirmation of the rally from techs and small caps which have been leading this market lower (relative weakness). It's a statistical fact that the market tends to perform much better when tech and small caps are leading (showing relative strength).

ps - GOOG did miss earnings so that will be a drag on tech.

Pre-market thoughts - Thursday 14th April

Large down gaps already in the futures as more selling on sovereign debt concerns take place in Europe. The risk averse trade is on earnest and I think we are going to see some capitulation selling tonight. I would not be long at this point.

Market Recap - Wednesday 13th April

If you are like me and you mainly watch the futures, then the action from the last few days have been more bearish than what the cash indexes suggest especially last night. Indeed Monday's open was a big clue as we had no buyers with the SPX at 1330


The MO of the market for the last 3 days, has seen the futures sold off right at the open and market internals have trended weaker the whole day. Yesterday the cumulative tick finished at whopping -170,000 which is overwhelmingly bearish given that a normal day's range is somewhere between +/- 40,000. This figure is a summation of the stocks ticking up versus stocks ticking down. Therefore it implies that the large majority of stocks were being sold on the bid. This was the trend for the entire day. 


From a volatility standpoint, it would appear after going through the skew charts on Livevol that term structure has tightened a great deal over the last week, while implied vols have stayed fairly constant. This to me is not the norm as most sell offs of significance of late have been due to some geopolitical event that causes vertical skew to increase and the general level of implied vols to rise as well (as well as a tightening in term structure). I don't want to over analyse but it would appear that the recent 4 days of selling is not the norm and perhaps we are seeing a fundamental shift in the market going forward eg. maybe it is re-adjusting for the view that liquidity is going to be drained sooner rather than later ie ECB raised rates, end of QE2, tightening of fiscal policy etc etc. Either that or it's just a head fake from the professionals and fund managers before they rip the market higher (the selling does seem a bit contrived). After all most market watchers including myself were thinking that a retest of the old highs was a foregone conclusion. (Remember the market does what it can to fool as many people as possible!)


Perhaps I'm making too much of it as the market maybe in the midst of normalizing here. ie I've been too used to the dip buyers showing up and taking the market back up whenever we had a pullback.


It will be interesting to see how it plays out from here. Quant studies seem to strongly suggest a bounce is in order. They've been calling this the last 2 days now and the market hasn't bounced so you have to respect the market when it's not following historical norms. I am long here and could do with a bounce.

Pre-market thoughts - Tuesday 12th April

Another weak day yesterday with all the majors selling off. In terms of market structure it would have to be classified as an example of a double distribution trend day. Cumulative ticks finished well in the red at -85,000 which makes it the second day in a row. Definitely the sentiment has been very bearish. Right now we have large gap downs at the moment and the data does not point to good odds for a gap fill especially when we open below yesterday's lows which is typically a high risk situation and prone to trend in the direction of the down gap. I get the feeling that this market realises that the low interest rate party is about to come to an end soon. As for today, I will likely wait to see what kind of open we get and go from there.

Midday update

Cumulative ticks steadily trending lower. The open was compelling given that buyers were unable to push the market higher (because of a lack of "paper" buyers at the open) with both the TF and the NQ's raising red flags by showing relative weakness early. Interesting to see if we do get the Turnaround Tuesday tomorrow which on a seasonal statistical standpoint has been very bullish in the past. A long at the afternoon lows or towards the end of the day or may be worth a play and holding overnight. I think the market at this juncture doesn't really like the fact that we are going to get higher inflation down the track and thus higher interest rates especially with oil at these levels. No one really wants to hold government debt right now and that is not helping. All of which is pushing yields higher. It's a real battle to see what happens from here. We could be seeing the first signs of a drawn out rounded top in equity markets but it would be quite premature to doubt the bulls just yet.

Pre-market thoughts - Monday 11th April

Today we have the official start of the earnings season. We also had another Earthquake in Japan, oil and gold have come off it's highs. We had a decent sell off last Friday with the term structure tightening on the SPX options. Today is going to be an important day as it reveal a lot about how real last week's sell off was. ie if we spend a lot of time auctioning at these price levels it will mean that the market is accepting value at these levels and the market is less bullish overall. A quick bounce and rally back to higher price levels will invalidate the sell off from last Friday somewhat and make a good case for the market to go higher. Gap stats aren't great for fading today's gaps (and I will pass) even though they are small. Quant studies also seem to suggest a bullish edge early this week so the open today is going to be all important. We shall see.............

To fade or not to fade today's likely up gap??

The stats for fading today's up gap is not great in my opinion and given a large part of yesterdays sell off was caused by the news of another earthquake in Japan. My best guess about the ensuing day structure on the futures is that buyers will immediately come in on the open and bid the market higher and possibly test the recent highs. Whether we see any buyers show up at this level is yet to be seen as we have sold off from the highs for the last 3 or 4 days. A good trade is probably to wait and fade yesterday's highs on the ES at 1335 with a tight stop. Internals weren't really bearish for yesterday given the 30 mins of panic.

Dollar weakness

The dollar index is extremely close to breaking a major swing low here. This is causing a major rally in gold, oil and everything else that is negatively correlated with it. No doubt a major contribution to the sell off has been caused by the rate rise in the Euro which makes up a large component of the dollar index. Next stop is the low that was made back in Dec 2009. Bonds are also selling off and yields are rising (which in the longer term should be supportive of the dollar but of course we all know that Ben and the Fed ain't raising rates till at least the end of the year). To me it's clear that so long as the USD and the Yen remain in bearish trends, the carry trade (ie borrow USD and Yen and buy everything else) will be the norm. This should see a continued rise in all risk assets.

Morning market update

The gap filled pretty easily this morning and we are seeing quite strong tick readings thus far (+16,000). It would appear that the market really liked that ISM number. I still think it will be a two sided day today as the breadth on both the NYSE and Nas is fairly weak. However a look at all other assets has seen everything pop quite strongly. The dollar which was strong heading into the open has sold off pretty hard. The risk trade seems to be back on. One bit of divergence is the Nasdaq which is showing a bit of relative weakness.

Pre-market thoughts 5th April 2011

Looking for a good entry to get short today on a day trade (probably fading the gap fill). Volume has dried up considerably (lowest in 2 months on yesterdays session). Also there is a bit of uncertainty out there with the US debt limit situation and the ECB rate announcement on Thursday.

Confirming indicators or assets are that bonds have stayed strong and other risk assets have come off it's highs. Technically the market is overbought and I see some resistance at these levels on the ES.

Quant studies are also confirming the short term bearish bias. In terms of market structure we had a fairly convictionless trade yesterday and the Open could be classified as a Open-Rejection-Reverse (for more refer to Mind over Markets trading book). Pattern wise, it was an inside day yesterday on the ES so watch for a breakout if we do not hold the extremes from the last couple of days. I'm favoring the downside here.

Market internals also reflected the lack of conviction as A/D lines or breadth (yes that is the correct term I've realised) finishing flat along with up volume versus down volume. Cumulative also finished at +6000 but this is considered a neutral number.

If the ECB does raise rates, then that could make things very interesting! I don't the market will like it is my gut feeling.

Trade safe!