Furthermore.....

Expecting a slow day (consolidation) today but risk reward will favor shorts I think given that we are now short term overbought and buying power looks exhausted after yesterdays extremely positive tick readings. Also good odds for fading any gap given we did not fill yesterday. To summarise a good sized pr-market up gap looks like a good trade to me. After that I'd be inclined to fade the range in the first hour........

Going to test 1250 methinks

We have finally cleared 1200 and it now appears that we are very likely to test the 1250 area on the ES corresponding to the backside of the long term trendline and the 200 day MA. From looking at the various asset classes it would now appear that some sort of stimulus action is being priced into the Sept FOMC meeting (as risk appetite is back) and thus if you were short, you just don't want to hold going into it. Could be another buy the rumour sell the fact play coming up. The announcement will occur on the 22nd of September for those wondering. Over in Europe things have quietened down and there has been a rally in the credit markets so the fear has definitely subsided.

Under the hood, market internals were very strong yesterday with cumulative ticks finishing at +140,000, however volume was extremely low when compared to the 30 day median (running about 35% lower).

Pinning their hopes on the Fed?

Even though the major indices finished flat yesterday, the price action and cumulative ticks indicated bearish sentiment still prevails. After a monster gap up, stocks were sold into the strength with the gap eventually filling. Cumulative ticks trended lower the whole day and finished at a very bearish -90,000. There has been lots of news about investors buying this market because the Fed will come and save the day with QE3. I would think that the probability of such an event is low as the Fed's mandate is not to support equity prices but economic growth. From a political standpoint, there doesn't seem to be much support either for another round of debasing the US currency. All in all, if traders were that positive about more QE3 then the shorts would have covered and this market would be bid much higher. I can't help but think that if we don't see some kind of surprise supportive announcement from the Fed (other than a repeat of it's last statement) then markets could head lower. Certainly the longer we hang around at these price levels, the higher the chance we break through them.

Another chance??

Another chance to get long on a retest of 1100 is coming up I think. Failure to hold 1100 or slightly below and then we start looking at 1019 as next support.

Failure again above 1200 is not good for the bulls

Futures trying to hold 1177 currently. Failure to hold the 1180 and we should trade back down to 1147.

Next target 1220

1220 looks like much stronger resistance to me as it corresponds to trendline resistance and fibbonacci level. I was going to comment that the ability to hold the 1180 level yesterday was quite bullish and it would appear that the shorts at 1200 are now covering today as we have cleared that hurdle after the 3rd go.

First target hit at ES 1200

Interesting juncture here. The bounce has hit my first target of the 1200 area and we should expect some resistance here. Odds are relatively good for fading the current down gaps (especially as yesterday's gaps did not fill) as long as we hold yesterday's open.

Looks like the bottom is in......

Waiting for a daily close higher now and we should head towards 1200-1220 as the first target with the second at 1240-1250. Don't think the FOMC statement does all that much other than tell us all what we were thinking anyways ie that very low interest rates are going to be here for a while". It will be telling to see how strong the bounce is as if it fails within a few days then a retest of the lows would be imminent.

Forced liquidation time......

Doesn't matter that we are oversold. We need to see all the buyers washed out here before even attempting to make a bottom. Going to get a bit more ugly before it gets better I think.

Was that the bottom??

In a market without significant fundamental news driving it, then I would say from a technical standpoint, that the low of 1163 in the ES yesterday has a high chance of marking an intermediate term bottom. However, with all this sovereign debt news (ie rumour that ECB was buying Spanish and Italian bonds that supposedly caused the reversal yesterday) flying around and credit markets in a spin, then it's really hard to say as the S&P decision to downgrade the US credit rating may have an impact on Monday morning. At the moment all bets are off for longer term trades and the markets are really a day by day proposition. I would imagine that given the precipitous sell off in the last week, that margin calls are being felt and we are already in the stage where any multi-day bounces will be met with more selling. So for now I'd stick to that MO until the market character changes (VIX below 25 would be an indication of that).

Total unwinding of leverage here......

Now that the Central Bank and government punchbowl is being taken away (thank you Mr Trichet for making that clear), we are seeing a total unwinding of leverage here. Watching the ES futures price action and it's clear that the selling is relentless. So it's true then, you can't spend your way out of debt!? The Austrians were right after all......

Where to now???

I'd be on the lookout for another final capitulation type move, followed by a vicious bounce similar to what occurred on Wednesday. I think we are not far off from a bottom here but as always I would wait for a confirmation ie follow through day before going long. I expect the bounce to be just as wicked as the sell off and we should test 1250 on the ES before sellers again come in and we retest the lows. From there we either double bottom or all hell breaks loose. I'm hoping for the former as I'd hate to see people losing their jobs and livelihoods etc etc. A bad NFP this morning and we may get that capitulation.

Pretty bearish price action yesterday

Pretty bearish price action yesterday as the monster up gaps filled and then some. Economic numbers continue to surprise to the downside in a sign that things are slowing down again.

Technically we are testing the 200 day moving average again and also the monthly trendline from the March 2009 lows. I would bet that we will bounce somewhat for a few days off these levels (cumulative ticks did come back and finish positive in the second part of yesterday's session) but overall I'm not that optimistic about the longer term, although a fair few of my quant subscriptions are still presenting research that favours the long side in the intermediate term. 

Unemployment reports could be quite a trigger coming up this Friday.

Busy busy busy

Hi all,

I've been pretty busy this last week and I will be going on vacation next week so posting will be very light. Anyway, all the quant studies are overwhelmingly pointing to further intermediate strength. In the short term we are overbought but as you can see from the last couple of days action. Any weakness has been a good opportunity for bulls to get long. Until that pattern changes on an intraday level, the path of least resistance is up.

Friday pre-market thoughts

ES hanging right around the 50 day moving average this morning. Frankly I expect a range bound consolidation type of day. Market is overbought but we have reasonably strong seasonals today. PMI at 10 could be a bit of a mover but I will wait to see what the internals are and how the tape action is going before deciding on what my bias is going to be.

RUT position

I have now spreaded this position off so it looks like this.

I'm still bullish on the markets especially given that we were able to take out last weeks highs (ie pattern of higher lows, and higher highs) and the very strong tape readings for the last 4 days including today (currently cumulative ticks at +40,000 and trending straight up!). I just think we might consolidate here a bit given that we are very short term overbought now. So with that I had to weigh up the theta decay in my position if I didn't spread it off versus how much more the market may move in the next 2 weeks. Of course given the speed of the market in the last 2 years, I could be made to look silly. Hopefully I will gain a bit with the theta to come out for the Independence day long weekend.

I have also adjusted the OIH trade as well. I bought 2 x the 152/154 call spread to give myself a bit more upside profit. The trigger was that OIH has broken resistance on the daily down trendline. Again I'd like to see markets move a bit slower here but who knows. We've moved a whopping 10 points in just 3 days!

Current trades

The other day I mentioned that I started to dip my toe to the bullish side by establishing some long option positions. Here is how they look today.

This OEX position consists of two BWB's at different strikes (565/560/550 & 560/555/545). It can also be thought of as an unbalanced condor by being long the 565/560 put spread and then short the 555/550 and 555/545 put spreads. This is a weekly position and both BWB's were initiated for $0.50 and $0.30 credits respectively. Here's hoping for some fireworks today with the Greek votes as this spread is likely to finish well out of the money.

 This position again was originally 2 BWB's at different strikes (780/770/750 & 770/760/740). Since then I took some risk off by buying the 750/740 put spread for $0.65 debit. I have also bought the 835/845 call spread for July for $2.35 with the intention of spreading this off by selling an out of the money call spread eg. perhaps the 2 x 855/870 call spread for at least $1.25 such that I have a quasi unbalanced condor again and the call spread is totally financed by the short call spreads.

Again this OIH position began as a BWB. Since then I've spreaded that position off with an unbalanced condor. The strikes chosen coincide with previous swing highs at 155. This position is for July expiration. 

The only other trade I have on are some VXX puts at the 24 strike for Sep expiration. This trade is working out nicely having bought them for $3.25 (now trading at $3.75).

Thoughts for this morning are that this gap will probably fill given the buy the rumour sell the news play is likely (institutions love doing this!)

Huge turnaround

Quite a prescient call at about 11.30am ET when I called out that we were likely to have a large move up or down just by the amount of business that we were doing at the 1260 level on the ES. Fortunately for me, going long was the right call. The reasons why I went long was because:

1. Market internals were improving (cumulative ticks finished at +35,000 on the session).
2. ES was holding the 1260 trendline
3. Divergence between small caps & technology (relative strength) versus the Dow and SPX

On the trade front, I ended up buying broken wing butterflies on the OEX, RUT and OIH. I had wanted to get more long by buying RUT call spreads but my fear or prudence held me back. This is something I need to work on as it's kinda of holding me back to transition to the next level (ie even though I could see that going long was the right play in terms of probability for the reasons above I managed to wuss out). Anyway something else to note down in my trading diary!

Holding the daily trendline support on the ES @ 1260

Big fight going on at this area. SPY volume is running extremely high (80% above 30 day median) whilst cumulative ticks have been oscillating up and down. Whatever the next move is, it will be either a very sharp move up or down. I've decided to take a dip to the long side by establishing some longer term positions using BWBs on the OEX, OIH and RUT. Stay tuned.....

Tuesday and Wednesday recap

Cumulative ticks finished up at +80,000 and +50,000 respectively on both Tuesday and Wednesday. We  had the pre FOMC bias up till 2pm and then we sold off after there was no QE3 mentioned by Bernanke. Nothing like buying the rumour and selling the fact as always on FOMC day. This morning we have had weak unemployment claim numbers and are see monster gap downs below yesterday and the day before. Not a pretty situation and it could get ugly as these types of days usually turn into gap and crap (ie go with the gap trend days). I wonder if Goldman knew this was going to happen (they had a big sell order in the pit yesterday at the 1291 level - sold well over 1000 cars (just poking fun here)). Anyway they took away my blogging rights at work so expect later posts than normal.

Powering ahead

Anyone that was still short today is getting squeezed! Cumulative ticks are trending straight up, internals are strong. Classic trend day. The moves up in the futures has been nothing short of breath taking since the open.

Short covering rally?

Pre-market weakness was bought yesterday and the down gap we had was filled within the hour. It looks to me that that was a retest of sorts for Thursdays lows. We did manage to break the 30min trend line and hold the 1260 area which I was thinking was a good spot to get long. We'll have to see whether we get continued follow through as I suspect the buying was also due to a bit of short covering and some new longs taking a stab before the Greek Confidence Vote later tonight and the FOMC announcement on Wednesday (positive seasonality heading into it). Certainly no one wants to be on the wrong side of either of these potentially market moving events (especially if Bernanke mentions or implies that QE3 might be on the cards).

Cumulative ticks finished at a very respectable +50,000 yesterday and breadth indicators were ok. SPY volume was a little bit below the 30 day median average so make of that what you will. It really is a wait and see kind of market now and I don't really expect a major move early in today's session until the Greek Vote goes through (I'm expecting and the market is expecting that the confidence vote will be ok and Greece will get access to further funds). As for FOMC Wednesday, I'm not sure if Bernanke will talk about more stimulus but we shall see. At this stage, I would think the bias has to be to the long side for now but expect things to be choppy. One noticeable thing is that yesterday was the first day in a while, where we did not get some type of afternoon sell off and we held into the close (which is a good sign for the bulls). More days like that and you might say the tide is beginning to turn.

Important levels on the ES are 1277, 1284 (resistance), trend line and pivot support at 1270. Further downside support is at 1260 with S1 at 1264. I'm expecting a pre-market pull back to the 1270 area which should set up a good long trade. Gap fade looks ok as long as we don't open below the open from yesterday.

Pre-market thoughts for Monday 20th June 2011

As I write this (2am E.T.) U.S. index futures are already showing large gaps down below Friday's lows (on ES). This is a situation that usually does not favour gap fill and certainly the data I have seems to support this.
With no clear resolution on the Greece situation all eyes will be on the unfolding situation in the Greek parliament where we have a debate and no confidence vote later in the week. The EU has put off any further discussion of payment for loans until early July. This leaves the market in a tough spot as it hates uncertainty thus it will likely be a very news driven and volatile market until such time things are sorted out.

More support for some bearish action today is the fact that there has been a tendency for mean reversion post OpEx. Thus given the slightly positive action on Thursday and Friday then we would expect weakness today. Therefore my bias today is to look to sell any rallies. 1260 shapes as an important level on the ES and if we can hold and break above the short term down trend line, then I would likely go long. Weakness below 1260 and I will think we will retest last weeks lows. At this stage it seems quite clear that we are going to retest the 200 day moving average again (on the SPX cash). Best bet is that we undercut the 200 day and perhaps close below it, going for the March lows of 1243 on the ES (this would also shake out a lot of the weak hands and reset us for perhaps the next leg up). Remember we have still to tag the weekly trend line on the ES yet. Interestingly most gurus and sentiment quants are advising that this is a good area to start building longer term bullish positions (1-3 months) with the caveat on watching how weak the price action gets (bail if it looks like cascading down lower). Myself personally I would probably want to see some follow through before establishing significant longs though but then again I'm an intraday trader so I don't really take longer term positions (I may put on some speculative bullish spreads using options though).

Noon update

Cumulative ticks somewhat choppy but the overall trend is up. It would appear that Merkel's earlier statement has managed to calm the markets for now. Still things are on a knife's edge and Greece's fundamental problems regarding it's inability to pay off it's debt is not a short term fix but a long term one. There are definitely more spanners in the works here. For more on this read this link here.

Forgot to add....

Yes I forgot to add that yesterdays price action in the ES (and indeed most of the index futures) is bullish. This is the same pattern at Monday and the theory is exactly the same as stated in Monday's post. However the caveat remains that we have external events (namely Greece) that is casting a dark shadow over normal technical patterns (there is a saying that technicals rule in the absence of significant fundamental news). From a gap guide probability, so long as we don't open below yesterday's low in the ES, the win rates are neutral (coin flip setup) but profit expectancy is pretty good. Ok but not really great to be fading in my opinion. I'd rather wait and see what happens today.

We have tagged the 200 day MA, now what??

It was more of the same price yesterday as Wednesdays as the initial pre-market weakness and sell off after the Philly Fed numbers (which was much worse than expected) was met with buyers right in front of globex lows . There was also a fair bit of program trading accompanying this buying as again most intraday traders would have been thinking to get in on the short side after the Philly numbers. The futures got to a point where they came up against the hourly down trendlines (for the ES anyway) and a good battle went on at these levels. The false breakup/false breakdown algos were also at it and chopped it up for about an hour at these levels making it very hard going for the day traders looking to get long about the trendline and short if it failed. Overall, the market held up pretty well until about 11.30am and then the rotational trade back down started to occur as it did the previous day.

The ES and the SPX cash have now both tagged the 200 day moving average so that longer term downside target has been met. Whilst most sentiment measures and quant stats still indicate odds favoring higher prices from here, the worrying thing and what I call the X-factor is the Greece situation. In normal circumstances I would lean to be an intermediate bull from here but there is definitely caution as indicated by a significant rise in the VIX even on a day where most of the cash indices finished slightly up. This indicates a bit of fear still and that mainly revolves around the situation in Greece where there is still great uncertainty about how to resolve their debt problems. Credit spreads and CDS for the European sovereigns are at record wides and that fear is spilling over to the equity markets and other assets. There has been much talk that a default by Greece would trigger a full blown reactionary sell off as when Lehman collapsed. Under the hood, cumulative ticks last night finished at -60,000 after spending half the day above 5000 (collapsed after 12.30pm ET). Another interesting fact is that we've had 10 straight last hour sell offs. Normally the definition is that the first hour belongs to the amateurs and the last hour belongs to the professionals. If that's the case you can make up your own mind as to what that streak is telling you. I very much doubt that many traders will be holding longs into the weekend without protection (likely to be hedged as judged by the rise in VIX). Interestingly skew in the SPX puts has finally started to pick up and has now risen quite sharply at 148% (at the money compared to 10 delta put) compared to only 128% only a week ago. It could be that iron condors may start to look attractive again, with some protection of course. Other trades that may be worth looking into are ratio spreads and BWB's.

How to play it from here?

Further to my previous post, the way to play it from a trading standpoint is to wait for confirmation before committing to either the bull or bear side from here. As I've said we are at an important inflection point here. Failure to hold the March lows with a strong close above it and we could get a sharp move further to the down side. Thus at this juncture, you should be lightening up on all longer term (longer than a day) positions if not totally in cash and wait to see who wins the battle here. Of course some speculative trades are would be ok but only if they have asymmetric payoffs (ie limited risk, unlimited reward eg. options). Otherwise I would keep strictly to intra-day trading (which is why I continue to favour this type of trading in the current market environment).

Wednesday 15th June 2011 Recap

Following on from my last post yesterday, cumulative ticks finished at -90,000 after fluctuating for the first 2 hours. From then on it was a steady trend down as the selling got under way. Volume was extremely heavy after 11.30am which was pretty much the time when the markets tanked. As you would expect, all the internals were very weak with breadth at sub -2000 and -1600 for the NYSE and Nasdaq respectively. Up volume to down volume was 10:1 negative on both exchanges as well. Furthermore the price action from yesterday's session does not reflect one that is likely to bounce today as indicated by the fact that there was no sharp rebound and price finished near the lows of the session. The fact that price spent so much time near the lows only reflects that the market is fairly valued on an intra-day time frame.

On a technical level, most major markets are now at very important points of inflection. eg. the ES is at the 200 day moving average, the USD is close to breaking an important resistance point, the Euro is precariously at prior swing lows, gold is close to breaking it's longer term trend line. So whoever wins at these price levels will probably determine what lies ahead for the next weeks and possibly months. I'd say that it's most likely that the USD rallies higher from here, as well as bonds given that we've seen higher highs and higher lows on an intermediate term time frame. Given these are both risk averse assets, that would spell further weakness in equities.

On the trade front I had to shut down my short RUT put spreads after my conditional order was hit and took a decent loss. My VXX trade has now flipped to a small loss but I'm inclined to hold given how it's structured and depending upon what happens here with the inflection points. I also have on an June OEX Put BWB with strikes at 565/560/550 which is showing a nice little profit but am hoping that we get a little bit more follow through and ideally finish somewhere close to 560 by tomorrow (expiration day) which is where the March swing lows are. That would make for a nice weekend if that happened!

The damn bots!!

Sometimes you have to think like the algorithms! After all the pre-market fear what did the market do? It basically sucked in more shorts and then ripped them a new one. From what I could see, most of the buying was done by the algorithms or the black boxes. Of course it makes sense, as all the weak hands would have sold pre-market and then new shorts expecting a continuation got squeezed getting their butts handed to them. Still we could see some type of afternoon reversal as most of the retail crowd is expecting the market to hold at these levels. Cumulative ticks have been a mixed bag oscillating between -5000 and -1000 showing wild swings in between. Trading today on the e-minis is likely to be dominated by the bots so it's not a really good environment to trade in unless you want to get chopped up.

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.

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!

This can't continue indefinitely.......

Further to my previous post, the current move cannot continue forever as expectations of greater liquidity and thus inflation will indeed become self fulfilling causing central banks to begin to raise rates. Of course they will err on the side of caution then risk raising rates too early so expect a continued rise in risk assets.

Oh by the way, quant studies continue to point to higher prices, 3 months to 1 year out.

Current market thoughts & observations

As you all know the market has been trending higher and is exhibiting very bullish tape action. My thoughts are that we are going to continue to see more stimulus from central banks and continued liquidity in the form of bailouts etc etc. This is all reinforcing the risk trade and that's why we continue to see equity markets higher, oil higher, gold higher etc etc even though fundamentally something like oil really shouldn't be higher given that inventories came in yesterday well above expectations (2.9 mil versus 1.6 mil). The mentality of late that I've been seeing in the early morning futures trade has been to wait for the flush out early in the morning and then buy the lows as we have ripped every time.

Really, really tough to trade option income trades in this environment in my opinion. The best trades for the last 2 weeks have been to sell puts or buy call spreads. I will update later with a trade that I have on the SPX which is a unbalanced iron condor but I have had to keep massaging it by buying call spreads just to keep the deltas in line with my theta. At this point, we are so close to retesting the recent highs of 1344 on the SPX that it would absolutely shock me that we don't get there. I think it's a given that the market wants to go there. This might set up some interesting spec trades like long some cheap out the money call spreads as we head into the last 2 weeks of expiration.

Mass liquidation??

A bit of risk aversion all across the board. Everything that has probably been bought on leverage is starting to unwind and that includes crude, gold, silver etc etc. All market internals are solidly negative. In fact they stink and the robots (ie program buying) that have bought at low levels on each time we've had weakness lately are now where to be seen. Ticks are solidly negative and cumulatively we are down -20,000 already. Seeing a massive jump in volume today which shows that a lot of distribution is going on. I myself did go with the open but I did fade the first bounce we got on the TF for a nice winner. I don't think we will see any meaningful bounces today to be honest. Still you never know with this market. Very quiet in the pits though so not a sign that we've hit some sort of extreme just yet (normally lots of noise indicates that selling or buying is reaching an extreme). Treasuries and the dollar are up so definitely some safe haven allocation going on.

Back to regular programming soon!

Hi folks,

I've been a bit busy lately since I got back from holidays and I haven't yet gotten into the blogging mood but I will rectify this over the weekend. Current thoughts are:

• Very strong inverse correlation between crude futures and the e-minis. The fear to me at this stage seems to be that if we get a large spike in the price of crude, then this may force central bankers to start raising rates earlier than expected. Note that the comments from one of the ECB bankers a couple of days ago really spooked the Euro and it had quite a bit of a meltdown (normally you would have expected the Euro to rise but I guess traders are thinking more about the longer term effects that higher interest rates would have on the struggling PIIGS to repay their debts and what that would mean to the Euro if any one of them defaulted). Any rise in interest rates would signal an end to the flood of liquidity we've had and that would not be good for equities or the global economy as a whole as it is still recovering.
• Based on quant studies such as patterns, the odds still point to a higher market in the intermediate term 3-6 months out. ie any nice pull back or correction sell off is likely to be a good opportunity to get long.
• The short term technical picture for the S&P shows that we are forming a triangle pattern as longs and shorts keep building positions by fading the lows and highs. Watch for an eventual break of this range soon as all we need is a catalyst to make a big push in one direction and one side is forced to cover. I might make a separate post about this.
• We've had some pretty good distribution days of late as seen by cumulative tick action (there's been 3 days over the last 2 weeks where we had more than -60,000 in cumulative ticks).
• Each day that we begin with a weak opening and a bit of a sell off, I've observed program buying stepping in and pushing the market back higher again at key levels. How do I know?? Because I keep hearing alerts on my trading platform when I get spikes in NYSE tick action of +600 to +1000. How long does this last I do not know
• We are seeing large gap downs in the overnight futures right now below the low of the cash session. This presents a high probability that the gap will not fill and is suggestive of a continuation move down in the cash session. It will be interesting to see whether the low of a few days ago, 1302 in the ES, holds.

Will be away for a few days

There will be no posts for the next few days as I'm on vacation.

Safe trading everyone!

The selling did come but not before I went to bed!

In hindsight, I totally mucked up yesterday's short trade. After stating that I would likely fade the gap fill and that the suckers would try and buy the opening weakness and push the market higher, I went short right at the open with a 5 point stop on the ES expecting it to be a full blown trend day. ie sell off from the open and never look back. For the first 5 mins there, it did look that to be the case. However once the paper sellers stopped, the locals who were then all long having absorbed all the supply were able to push higher along with all the gap faders. However the locals then failed to find paper buyers after a nice 6 point run and so were forced to flatten up after that which then took the market lower again. After that it just became an avalanche as those who faded the open began to cover their longs as there were just no buyers to be found. For me the error was due to a couple of things:

• Getting the market structure slightly wrong by not anticipating that there would be an upward bias on the open as weakness of late has been bought. This would have caused me to fade the gap fill at a slightly higher level.
• Setting my stop too tight on a day where we were bound to get an expansion in the range (or volatility)
• Trading the ES instead of the TF as the ES showed remarkable resiliency to the early onslaught. It is likely I would have covered my short position in the TF within the first 5 mins as it absolutely got smacked about 3.5 points.

I will remember this lesson for next time!

Absence of paper sellers

No avalanche and the pervasive bullishness continues as the futures hold up. Paper sellers are absent after heavy selling off the open which is why we continue to push higher. I am now stopped out of my ES position after covering about 5 points higher. A nice loss today!

Goldman a big seller in the pits

As expected a lot of "paper sellers" this morning with Goldman selling a couple of thousand off the open. Oddly enough the ES is holding up considerably better than the other e-minis which have now bottomed somewhat but internals are still very weak. I'm short from 1326 on the ES. Should be an interesting session. Watch for a break of the first hour range here. Volume as you would expect is extremely heavy. At this stage, the locals are heavily long after buying from paper so anymore continued selling will create an avalanche of supply and they will be forced to cover, thus pushing the futures lower. At this juncture, the locals will try and push higher from here and try to trigger some buy stops from those that are short (myself included).

Volatility analysis

Well after week of capturing the volatility data from my TOS platform and doing the calcs, I can already notice a few things:

• The VIX is not a very reliable indicator of vols as it finished relatively flat on the week but the at the money implied volatility on March options actually crept higher. Check out Mark's article about this. (Option Pit blog)

• Downside skew has also been picking up. Was this an early indication that the market was pricing in some kind of a sell off and the Libyan situation happened to give it an excuse?
• Contango between March and April term structure is on the increase after the spread was very tight a couple of weeks back. Will this continue as it has remained high over the last 2 years relative to how it normally is or will it come down to these levels again after this sell off? In my opinion I do think that elevated levels of contango will remain for years to come as I still see various and frequent shocks continuing to hit the world's financial markets (I think the world is in longer term a transition period).

18th February 2011 - Market Recap

Cumulative ticks: +35,000 but traded sideways since hitting a peak of 40,000 at 1pm.
A/D: +350 for the NYSE and 0 for the NAS. The NYSE finished off the highs hit at noon of 700 while the NAS was well off the opening print of 700.
Breadth: approx 50% positive for both the NYSE and the NAS. Both basically traded at this level the whole day.

SPX front month 10 delta put skew: March 160.34% (21.55/13.44)
SPX front month 10 delta call skew: March 89% (10.9/12.24)
SPX Horizontal skew or Front month versus next month: 12.84% (average of March ATM options) versus 14.67% (average of April ATM options).

VIX: 16.43 (-0.16)
SPY volume: Finished 3.5% below the 30 day median average.

Quant Predictions


1-3 days: Bearish in terms of pattern and bearish in terms of seasonals
1-4 weeks: Bullish
3-6 months: Bullish

Well on Friday, I faded the morning gap up (as that was what the gap guides provided over at masterthegap.com ) showed to be the best setup. The TF was the weapon of choice because the gaps were quite large and I didn't want to hold for entire gap fill in case we again rallied so the TF being the most leveraged of the e-minis was ideal as the extra leverage would give me a decent profit if I was right and I would be able to get in and out of the trade quickly as I wouldn't have to hold it for too long in case I was wrong. As it turned out I went short at 835.20 and covered at 833.20 for 2 points or $200 per contract right after the first 10 mins of the open. Thankfully I covered because after the first 20 mins after the open all of the futures bottomed and rallied higher till noon from when it preceded to sell off into the close right back to where it opened. This kind of pattern is unusual and perhaps it is a clue that some of the longer term time frame traders have hit their targets. Either that or some people knew that the situation in the Middle East was going to unravel over the weekend and no one wanted to hold positions over the long weekend. (Maybe Goldman knew as it was a quiet big seller on Thursday according to Ben from Trader's Audio).

I expect some big time selling tonight as people bail on positions so will likely be fading the gap fill. 

Large down gaps in the futures

Seeing a lot of risk aversion at the moment largely sparked by the situation in the Middle East. Futures are well down at the moment and as I've pointed out many times in the past that when you have very large gaps >0.5% and gaps that open above the highs or below the lows of the previous session, the odds of gap fill are low whilst the chance of a trending day is high. Therefore the best trade should we open around here (<1336 on the ES) is to fade the "gap fill" ie go with the direction of the gap. No doubt there will be a lot of the amateurs trying to buy this open and early morning weakness expecting us to rally as we have done for the last 2 weeks or so but I expect these "suckers" to get run over. I will be listening to Ben from Trader's Audio for clues to see whether the big institutions are net buyers or sellers off the open. I expect them to be net sellers in a big way meaning the locals will be forced to cover as the supply will become too much for them to hold.

16th February 2011 - Market Recap

Cumulative ticks: +15,000 but off the early morning highs of 20,000
A/D: 1300 for the NYSE and 800 for the NAS. Both A/D lines again trading off the morning highs.
Breadth: approx 70% positive for NYSE and 73% for NAS. Both basically traded at this level the whole day but slightly off the highs in the morning.

SPX front month 10 delta put skew: March 147.1% (21.8/14.82)
SPX front month 10 delta call skew: March 88.6% (11.15/12.58)
SPX Horizontal skew or Front month versus next month: 13.7% (average of March ATM options) versus 14.55% (average of April ATM options).

VIX: 16.72
SPY volume: Finished 5% above the 30 day median average.

Quant Predictions


1-3 days: Bearish in terms of pattern and bearish in terms of seasonals
1-4 weeks: Bullish
3-6 months: Bullish

Looking for a short here on yesterday's highs. Gap probabilities at this point look ok with these small gaps. However the best play may still be to fade the gap fill.

15th February 2011 - Market Recap

Cumulative ticks: -10,000 which was the lows after bouncing to 5000 during 1.09pm ET
A/D: -600 for the NYSE and -600 for the NAS. Both A/D lines traded in a narrow range but off its lows whereas the NAS finished near its lows.

Breadth: approx 60% positive for NYSE and 60% for NAS. Both basically traded at this level the whole day.

SPX front month 10 delta put skew: March 148% (21.35/14.34)
SPX front month 10 delta call skew: March 87.1% (10.8/12.4)
SPX Horizontal skew or Front month versus next month: 13.37% (average of March ATM options) versus 14.19% (average of April ATM options)

VIX: 16.37
SPY volume: Finished 16% below the 30 day median average.

Quant Predictions


1-3 days: Neutral
1-4 weeks: Bullish
3-6 months: Bullish

Once again the dip buyers showed up as the futures sold off in the morning. However the highs and lows were established after that and the futures just traded within that range. It still amazes me how the dip buyers are showing up every time. It seems to be the lay up trade of the last week or so. Anyway we have decent gaps up in the futures this morning but the odds show a mixed bag in terms of probabilities for fading it so I will probably stand aside and watch to see what happens from here. Bonds selling off a bit after the PPI numbers came in pretty high again. I think we are starting to see inflationary pressures build and that would be bad for bonds and could be bad for this market.

Market Recap - Monday 14th Feb 2011

Cumulative ticks: +34,000 after trending higher from 11.09am ET
A/D: 250 for the NYSE and 200 for the NAS. Both A/D lines traded in a wide range before narrowing at the end of the day (indecisive market).
Breadth: approx 60% positive for NYSE and 60% for NAS. Both basically traded at this level the whole day.
SPX front month 10 delta put skew: 131% (21.55/16.46) - March 144% (20.97/14.53)
SPX front month 10 delta call skew: 98.7% (11.8/11.95) - March 89.6% (10.67/11.91)
SPX Horizontal skew or Front month versus next month: 14.20% (average of Feb ATM options) versus 13.22% (average of March ATM options).

VIX: 15.95
SPY volume: Finished 35% below the 30 day median average.

Quant Predictions


1-3 days: Neutral to bearish
1-4 weeks: Bullish
3-6 months: Bullish

More comments later

Monday 14th of February - Pre Market Thoughts

All the futures are showing small gaps down apart from the TF. Probabilities for gap fill look good for these small down gaps especially given the overall bullish tone of the market. I will probably look to fade the gap for fill but will wait on the open to see if we can get a bit more selling so that I can get a better entry point. Not much news to speak of this morning so odds are that the market will have a positive bias and fill the gap. Given how overbought the market is, I would say that a 3 point winner in the ES would be worth taking. Anymore than that and you're probably risking it as I expect a bit of consolidation (ie range trading). 1323 would be a good entry methinks to the long side. That's if we can sell off a bit to there.

Trending day example - Market structure

Friday was a good example of a trending day. I say good because there are better examples (ie 28th of January when we had that nice down day). Here is what the market internals should look like on a trending day. This is a snapshot taken of Friday's market internals eg. breadth (up volume to down volume), A/D lines (advancers versus decliners) and ticks.

As you can see all the internal indicators trended up for the entire day.On a perfect example of a trend day the market internals will almost appear as a straight line as per the yellow trend lines I've drawn in. Another clue that we had a very strong bullish bias was that the bulk of the tick action was squarely above the zero line as captured by the two purple lines I've shown. Also the moving average line as indicated by the blue is also well above 0 indicating the positive bias for the day.

As a side point, (it might be hard to see) but we had an extreme tick reading of 1008 on the NYSE ticks at 11:15 E.T (the times you see are local time to my computer ie Perth) at which point the ES hit at that time a high of 1326.75 on heavy volume and then proceeded to pull back 5 points to 1320.5. This is can be considered a short term tick exhaustion move and John Carter does a good job of writing how extreme tick readings can be faded as a trade setup in his book Mastering the Trade.

Anyway, it's all very easy after the fact to write up an analysis on the day's market structure, the hard thing is to actually determine in real time what kind of market structure is developing before it's known to everyone in the trading universe. However you can get good clues from keeping a tabs on the market internals. Like I always preach, trading is a probability game and it's always pays to keep the probabilities on your side!

11th Feb 2011 - Friday market recap

Cumulative ticks: +17,000 after trending higher the whole day
A/D: 1421 for the NYSE and 882 for the NAS. After starting in negative territory, both trended higher the entire day and finished near the highs.
Breadth: approx 70% positive for NYSE and 60% for NAS. Again both rallied from the lows early in the session (80% & 60% negative) to finish at or near the highs.
SPX front month 10 delta put skew: 156% (19.98/12.8) - March 154% (21/13.63)
SPX front month 10 delta call skew: 88% (11.4/12.97) - March 85% (10.66/12.5)
SPX Horizontal skew or Front month versus next month: 12.89% (average of Feb ATM options) versus 13.06% (average of March ATM options).

VIX: 15.69 (-0.4)SPY volume: Finished 30% below the 30 day median average.

Quant Predictions


1-3 days: Conflicting studies here. Bullish based on seasonality but weakness based on pattern.
1-4 weeks: Bullish
3-6 months: Bullish


Well Friday was a good example of a trending day. The futures gapped lower on the open but that was pretty much the lows of the session as they all trended higher for the remainder of the day. Even though the gaps were fairly large and the probabilities I use for gap fill were low (ie the historical probabilities showed that there was a good chance the down gaps would not fill), the bullish pervasiveness prevailed yet again. Possibly on the Egypt news, consumer confidence or plain old POMO. I was inclined to fade the gap fill again but was away from my trading computer so did not trade at all on Friday. Good thing as I would have been run over. It's interesting to note from the above numbers that the vertical skew in the SPX has steepened from the day before. This is probably from the fact that ATM implieds have come in (moved up the curve) with the VIX falling to 15.69. Term structure or horizontal skew is pretty tight for Feb/Mar and not too bad for Mar/April so time spreads might not be such a bad trade for the income traders. Given that next week is OpEx I will probably start quoting the March options as front month to see what the vertical skew is to see whether normal flys are any good to trade (ie prefer flat skew for normal flys).


On the quant side, all the seasonals point to a strong start to the week followed by weakness on the Thu/Fri before the President's day holiday. So overall I'm inclined to buy any weakness on the Monday/Tuesday and exit perhaps on Wednesday. Market is overbought here so tight stops would be preferred. The bulls do have POMO on their side though and one look at the schedule below from the New York Fed shows that there is an abundance of liquidity been injected into the system for the next 4 weeks. Perhaps this is the source of the pervasive bullishness??   


http://www.newyorkfed.org/markets/tot_operation_schedule.html

Looking further out beyond Feb and we do have the Irish elections coming up. It would appear that the opposition are set to take over and they have already mentioned the possibility of renegotiating the bailout agreement with the EU so that senior bondholders will take a hair cut on the debt currently owed. If this comes to fruition then it might set the cat amongst the pigeons. Clearly the Market has not priced this in but will have to do so if and when it becomes a reality (as it always does) (Feb 25th is the date of the elections so keep that in mind). Any pullback or meaningful correction in US equity markets arising from this should be bought if all the longer term quant studies especially from the current tape action are to be believed. Fundamentally money fleeing from Europe will make it's way to US equity markets just to the fact that the US is the strongest in relative terms of all the global economies (with most fund managers believing this to be so). This will continue to be helped with the fact that the US Fed will probably keep to it's loose monetary stance the longest as well (inflation measures are still benign in the US but they are showing up everywhere but - interesting isn't it??). Emerging markets are not faring as well (just look at their charts) and so I expect money to flow back from here to US equities as well. Supporting this is that the dollar seems to have bottomed somewhat and so have UST's. I expect both of these assets to trade sideways to up from here.