Retest of the lows??

Worse than expected manufacturing data, combined with less than impressive employment numbers in the U.K and residual fears about Greece and the market is spooked yet again. With the large down gaps and the ES potentially opening below the lows (if it stays where it is) will set us up for another gap and go type of day. Psychologically this must be a huge blow to those that thought Monday was the bottom so don't be surprised if we get an avalanche of selling today.

Tuesday 14th June 2011 Recap

Well the gap and go scenario did play out as predicted yesterday. Cumulative ticks trended for almost the entire day except for the last 45 mins when the futures sold off (and on heavier volume might I add) and ultimately finished at +60,000. Internals were very strong the entire day. I would say that we've had a fair bit of short covering yesterday and although some traders established new longs, a lot of them also covered their longs by days end as evident of the futures selling off in the last hour. Most traders are now waiting to see if we can get some more follow through. I would be on the look out for perhaps a retest of Monday's lows if the bears reload again. We do seem to have lost the trendline support of the ES on the 15 min chart timeframe. Gap guides are looking good so long as the futures open anywhere above yesterday's open. Overall, I think we will get some type of a consolidation day so look to fade the extremes of the first hour opening range. I would think that going short may still offer the best risk to reward as it's still a very jittery market out there.

On the trade front, I did manage to sell some RUT put spreads on the open at the 775/765 strike for June expiration and I bought some VXX puts on Monday which are working out well.

Monday 13th June 2011 Trading Session Recap

WOW! Cumulative ticks finished at a whopping -240,000! So despite the major indices finishing flat, underneath the surface the sentiment was extremely bearish as more stocks were getting hit on the bids than the ask. Interestingly though, Rennie Yang of Market Tells (one of my quant subscriptions and where I get my cumulative tick data) points out that when we don't get a major sell off (>1%) on a day where cumulative ticks exceed negative 100,000 that usually points to higher prices one month later. Just in case you were wondering, the average sell off that accompanies a negative 100K plus tick reading is a whopping 4%. From a market auction theory point of view, the fact that we made a sharp and sudden sell off into the 1259 low on the ES followed by an equally sharp bounce represents that the 1259 area is below value as regulated by time. An analogy of this is if your local bike shop had a bicycle on sale that is below value (below cost) than time would regulate that opportunity either through the fact that the sale is for a limited time only or the bicycle is sold completely out of stock. The quick and sharp rebound from the 1259 area indicates that there is an area where buyers think that the market is below value and thus the opportunity to go long at these levels was quickly gobbled up. The stage is set then for further short covering and to see whether there will be initiative buyers coming into the market. Other factors supporting a short term bounce is that a number of key sectors like industrials, technology and energy are at key support levels (previous swing lows) also financials have stabilized over the last 3 days. There has also been a decrease in the number of new 52 week lows on both exchanges so that indicates that the selling pressure is subsiding.

Gap stats also show that it's less than favourable fading the large gaps we already see in the overnight futures so that's another sign that we might see a gap and go type of day.

Monday 13th June 2011 morning update

Although price has held up pretty well thus far, cumulative ticks have steadily trended lower for the first 30mins and we are at -20,000 already.

Almost there..

Well it was another down day on Friday as price action was very weak. Cumulative ticks finished at -90,000 and volume was extremely heavy (SPY volume was about 40% above the 30 day median level). We have failed to make any meaningful bounce and it is likely we will be retesting the 200 day moving average area soon (around 1250 on the ES). Quants are mixed with some calling for a bounce whilst others are suggesting more downside. More later......

Another dismal performance underneath the surface

Cumulative ticks finished at -70,000 on Wednesday and this comes on top of -60,000 on Monday. So under the surface it is evident that the sentiment is quite bearish (bids are being hit more than asks). There's also been an expansion of 52 week lows in SPX components (15) and this is greater than the number we experienced at the March lows (8) when the SPX was a tad lower so one can infer that a fair bit of tape damage has been done if it wasn't obvious already. Still the market remains oversold and most quant data is still calling for some kind of bounce (we should have bounced 2-3 days ago) so we are really entering a space that is outside of historical norms. I suppose the longer we go without a bounce the more people are inclined to buy expecting a bounce. The worrying thing is that the tape action and slow grind down is not in my experience a pattern that has been suggestive of a strong bounce in the past. Bounces on an intraday level have been weak (mostly look like short covering) and if that is the general pattern then expect a daily bounce to be the same.

Date with the longer term trendline?

As an intra day trader it's very useful to zoom out and get a longer term perspective. Sometimes we are so caught up with the intraday action that we fail to see the forest and only the trees. So here is a weekly chart of the ES since the bounce off the March 2009 lows. Trendline support on the chart is around the 1250 area which also corresponds roughly to where the 200 day moving average is. One of the easiest scalp trades for an intra day trader is to pay attention to these particular price levels on a longer term time frame as they are normally very high probability areas for price inflection as other time frame participants come into the market at these levels. Therefore you can easily pick up a nice scalp play and if using multiple contracts setup a few for the scalp and hold one or two for a longer term position.

Tape action still looks decidedly weak and we have not the usual flush out and spike in fear (usually VIX is the most common measure) that we see in a typical bottom. Yes we are selling off but no one seems to be buying insurance?? Is that because big institutions are actually getting out of core long positions (ie no need to hedge?)

Whatever it is, looking for good entries to get short is still the MO on a intra day level. The last few mornings in the S&P 500 futures pit, we have seen that there has been mostly paper selling on the open forcing locals to go long, who after pushing the market higher have been unable to find a lot of paper buying indicating a lack of conviction from the bulls at this stage.

Perfect place to bounce?

ES futures hanging right at the last swing low and holding. If there was ever a good risk to reward, defined risk trade then this would be it. ie Go long here for a multi day trade with a tight stop at just below 1291. Again I do believe that we aren't heading into a bear market (not with ten year bonds returning 3.1% versus the trailing earnings yield on the S&P500 returning 6.2%). Of course they are based on trailing estimates so the forward estimates may begin to come in weaker especially with all the weaker data points coming out. It will be an interesting session today methinks. Gap fade probabilities are somewhat mixed for this zone here so we still have to respect the fact that the short term and intermediate trend is down.

Blood bath yesterday

Needless to say a wrap up of the internals were ugly yesterday. Cumulative ticks finished at -90,000 (the graph looked like a slippery dip), breadth both finished at extremely bearish levels on the NYSE and Nas (sub 2000 and 1800 respectively) and up volume/down volume was 20:1 negative on the NYSE and 10:1 on the Nas. SPY volume finished 40% above the 30 day median average so very heavy.

Last nights price action leaves us back below the down trend line on the daily chart which was broken for a brief moment (a day and a half). Again where does that leave us? Well the tape action would suggest that we are indeed in the early stages of forming a rounded top. The fact that price has struggled to regain the strong bullish trend we've had for the last 2 years is suggestive of that. Note that we had two up gaps that did not fill which is normally a very bullish setup for the intermediate term. However last night we did manage to fill the previous day's gap (this has only happened 25% of the time (unfilled gap filling the next day) according to Scott from masterthegap.com). If the market was undervalued we would have expected the bulls to show up and hold that gap. The fact that we didn't even get a whimper tells you something. In fact this has been my tone of my posts for the last few weeks. Something just isn't the same anymore with the market. Bounces have been weak and that is telling.
In the short to medium term I would expect range trading strategies to work best. Interestingly, one observation from yesterdays action was that the dollar tanked ALONG with equities. This has not been the norm of recent years and would indicate that the market is now pricing in fundamental weakness in U.S. growth and possibly further stimulus from QE3 or similar as the Euro, oil and gold all held steady on the session. Bonds absolutely rocketed which is not a sign of a market that is worried about inflation or growth. Note that the bond market has for the last 6 weeks been trending steadily higher. I always regard the bond market as something of a leading indicator as I regard bond investors to be more astute than the masses that typically trade equities (more retail than institution).

The market remains very news driven at this point so stay nimble.

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.