TRADESTRONG MANAGEMENT

trading realities

2014-10-19T14:49:00.003-04:00

back in the day, markets were inefficient and dominated by heavy retail participation. pricing was a value oriented phenomena that actually reflected the laws of supply and demand. technical analysis was more effective back then, because markets were more auto-correlated, and retail participation in the markets contributed to the self-fulfilling prophecy that drives ta. historical price patterns were more reliable, and price reacted in predictable ways after this conditionality was presented. if one could identify these repetitive patterns, then determining path dependency was easy. the markets are now dominated by commercials, commodity funds, indexers, etfs and hfts. the financialization of traded instruments has resulted in more cross asset correlations which have stripped individual assets of their uniqueness, and price discovery and risk transference functions.

over the past decade, institutional management of equity portfolios has increased from 54% to 81% and over the same period, “real institutional trading” has declined from 47% of trading volume to 29%. there are far fewer market participants today than just ten years ago, managing much larger portfolios across more asset classes, and using much less trading. the retail trader has all but disappeared, and traditional traders are predominantly competing against professionals and machines in a relatively illiquid market. this perspective is important to realize, because it underscores how markets have changed. given the near extinction of retail participation, and the almost total dominance of professional and algorithmic trading, it is unlikely that the biases and readily "available" cognitive reference points that are the hallmark of the retail trader, still exert their influence on pricing today.

more than ever, the market is predisposed to preying on unsophisticated traders; and there is no shortage of material for the flexions to practice on to refine their skills. the internet is full of trading forums, venting the opinions of naive wannabe traders who don’t know the difference between a stock and a bond, yet live in the delusional world in which they believe they can better the traders who are rigging the game. at the core of their beliefs is the illusion that they can grind out a living i.e., they can overcome trading friction and be consistent enough to collect a steady paycheck from the market, while taking very little risk and very small profits. they continue to believe in the existence of the exploitable edge that is reproducible on a daily or intra-day basis. and, herein lies the biggest and most stultifying misconception about trading -the belief in the existence of alpha and the denial that the grind is gone.

one of the many advantages of being a local trader on the floor of an exchange was that a trader could earn the bid/offer spread as an incentive for providing liquidity. when a local made a trade he could buy-the-bid and sell-the-offer, which meant he was buying below fair value and selling above fair value. in addition to this edge, traders were able to transact business at a cheaper rate than the public, and had first-hand knowledge of market structure and order flow. this enabled them to trade ahead of large orders and "race" the retail stop orders. a member trader did not have to go far in his quest for alpha.

following decimalization and regulatory initiatives aimed at creating competition between trading venues, the equities market fragmented, and liquidity was dispersed across many lit venues and dark pools. this complexity, combined with exchanges becoming electronic and for-profit, created profit opportunities for technologically sophisticated players. high frequency traders (HFTs) now use ultra-high speed connections with trading venues and sophisticated trading algorithms to exploit inefficiencies created by the new market structure, and to identify patterns in 3rd parties’ trading, so that they can use it to their own advantage in much the same way as the floor trader used his proximal and informational edge to generate alpha.

however, as a short-term, point-and-click, discretionary directional trader, one does not have access to the same process required to generate alpha. for traditional traders, the new market conditions insure that the playing field is tilted against them. retail traders continually find themselves falling behind these new competitors, in large part because the game has changed and because they lack the tools required to compete effectively. nevertheless, as the complexity of trading increases, it is still possible for a trader to separate from the pack and profit. the trader who has the better (more complete) and more timely (current) analysis will enjoy the greatest edge and have the greatest success, because they will have increased the gap between the traders who have adapted to the new environment, and the less informed, less diligent, and less talented ones.

it’s not that alpha doesn’t exist- it just doesn’t exist for the retail trader. what traders earn beyond the risk-free rate is not a true profit but simply factor compensation—the market rate for the risks they take. any positive expectation is the result of accepting that risk: the payment for taking such a position is compensation for risk, not an excess return. so, a trader must assess his approach to trading and decide what steps must be taken to find a proxy for alpha; and it begins with adopting an attitude, that is both realistic and relevant. the best any trader can hope to achieve, under any circumstance, is an incomplete, but probabilistic knowledge of the trading environment. so a trader must realize and accept that the markets are dominated by the rules of chance and randomness, both skill and luck come into play. how traders cope with probabilistic uncertainty and their imperfect view of the market is critical to their success. the essential job of traders then is to reduce uncertainty, not risk.

as a leveraged trader, one makes short-term decisions/trades, but understands what is happening at time frames greater than the one he's currently trading. the decision to trade and its management, flows from an analysis of price action. he is aware traders operate at different time-frames, markets are interconnected, themes abound in markets and that probabilities and departures from value govern trading opportunities. he understands and incorporates relevant informational signals from a wide range of deterministic processes to arrive at a summed probability that acts as deeper context.

he manages the risk through diversification, keeps draw-downs to manageable levels and strikes a balance between profit maximization and loss mitigation by adjusting trade size and stop-loss levels, so that only an extreme event will trigger the stop. he keeps losses in a predetermined range, and prevents getting stopped-out of a potential winner by managing expected value along with p&l, while allowing for a margin of error, so that he may stay-in-the-trade.

he is not concerned about how often he is right about the market, and frequently adds to his winners and turns short-term winning positions into longer ones. yet, never loses sight of the fact there is a downside scenario with an associated probability. the way decisions are evaluated affects the way decisions are made, so one does not allow stress, cognitive load, emotions, and bias, to non-linearly affect the decision process.

smart traders have the capacity to aggregate and synthesize large volumes of information, analyze it, and then derive an edge from it. the primary step in this process is to develop the capability to gather timely information from all the various sources and attach relevance to the information as accurately as possible. then merge both data sets, public information and proprietary tools, to derive insights that are applied in making trading decisions. good traders figure out what game is working and play that game. if they can understand the interactions of the individual factors and their effects on the market as a whole, then they will be able to identify higher order patterns that are the result of these interactions. going beyond the standard correlation/causation question, the trader must ask, does this source of edge make sense? is there a behavioral or structural reason why this source of edge should persist? and he must expect to be surprised and have to make adjustments, and build that into his expectancy.

good traders are always working on themselves, always refining what they do. in an important sense, they don't just use introspection to improve their performance. they work on their performance as a means of extending their personal mastery. the best traders spend significant time generating trade ideas, researching markets, and staying on top of developments worldwide. the ratio of time spent in preparation to time spent actually in trading, is a measure of a trader's professionalism

every trade a trader makes provides an opportunity to learn. gathering information from every trade, as opposed to a select few, helps give the trader a better understanding of how those trades may perform in the future. the more frequent the analysis, the more relevant the findings will be. however, the findings serve a purpose only if they are acted upon. the key is to use information to guide actions whose outcomes are then analyzed and the findings reapplied. this creates a continuous iterative loop that drives towards ever greater efficiency.

if you look at alpha as various types of beta doing different things at different times, then a trader's returns are going to be lumpy and cyclical in nature and performance will revert to the mean. the central message for traders then, is to trade efficiently, and make the most money with the least cost. it's not how often you're right, but how much you're right. if you want to make money, then maximizing geometric returns should be front and center in your thinking.

the market and its past is identical for all observers. yet, the market and the future are understood uniquely by each trader. no matter how crude or refined a method one follows in ascertaining the likelihood of change, it still boils down to surviving against one's own incomplete intellect, a misfired bout of randomness, in controlling the risk, and in executing a set of consistent ideas day in and day out, so that chance can prevail. the opportunity is there for the traditional trader to capture his personal alpha. all he has to do is see the market for what it is, and not what it was, or what it appears to be.

my solemn pledge

2014-04-15T13:11:00.001-04:00

i must confess, i’d rather just guess

than be duped and fooled, by randomness

i rather think twice, than just roll the dice

since lines on a chart, do not drive price

rather think like a fox, not be put in a box

as the markets are, a recursive paradox

if not arc sine laws, then ever-changing-cycles

if you are in denial, it can be almost suicidal

these damning effects, must be circumvented

but not with the invented, nor the misrepresented

not with tools that are myopic, or simply synoptic,

lest the retail hypnotic, not benefit the agnostic

a causal understanding, is certainly demanding

but in-or-out of sample, it sets the best example

there’s so much more, than just trade and win

like adding to profits, when others are cashing in

immune to the tout, trading without any doubt

entering trades, where others are stopped-out

not stepping out-on-the ledge, with an illusory edge

there’s no need to hedge, this is my solemn pledge

it ain't over till it's over...

2014-04-02T14:44:00.000-04:00

last friday’s end-of-the-week bullish festivities failed to endure past the european markets’ close, and couldn’t even reach a level lofty enough to allow thursday morning’s longs the opportunity to escape at break-even, before the es began it’s daily swoon. after all was said and done, the spx was still trapped in the ~40pt trading range that had defined the market for the past +1 month. emerging markets re-emerged and displayed very good relative strength as money rotated out of past over-performers (bio-techs-naz and momentum stocks-rut) into past under-performers (EEM). the yield curve continued to flatten and credit spreads widened as the market discounted yellen’s and others, hawkish comments. once again, internals were mixed, with bearish p/c ratios and breadth, juxtaposed against a benign and bullish $vix. after settling the week midway between the weekly S1 and the weekly pivot, the market appeared to be waiting for long-term traders at-the-margin to finish weighing their options before stepping in full force. relatively low vix and skew readings indicated an unreasonably complacent mood in the market, although a $2.8BB put position was executed last week - so someone was concerned about downside tail risk. the market had taken on the visage of an aging fighter who had absorbed an inordinate amount of blows to the head and body, yet still remained standing; willing, but not as eager as he once was, to continue fighting. of course, the market couldn't stay in the current trading range indefinitely; some endogenous or exogenous event had to cause the threshold to be breached, so that the market could make it' move away from current value. perhaps the fix was in, but somebody was betting a lot money, that an overextended and beaten down mr. market, would finally utter no mas on his way to a hard landing on the canvas. but like it has , so often, the past 5 years, the market summoned up it's courage and strength and rallied once again, forging new historical highs. it was a comeback that many had thought to be unattainable; and in it's aftermath, there were the usual accusations that the fight was "rigged". mainstream media denied the rumors and in another classic example of hyperbolic hypocrisy, the game's biggest promoter denounced the practice and announced it was getting out of the game. or as the boys at goldman would say, timing's everything.

Zappa said it best...

2014-04-02T14:07:00.002-04:00

The market may not appear to be portrayed against a bullish backdrop, but irrespective of fundamentals, geopolitical perturbances, inter-market context, and lofty location, it is the willing beneficiary of the matriarch's munificence and investor inflationary expectation.

you are what you is
you is what you am
you ain't what you're not
so see what you got
a cow don't make make hams
and a bear don't make clams
five years since its birth
the bulls still inherit the earth

p/c ratios, breadth and volatility are all sanguine — but not overly so, it is what it is — and that's all it is

are we in store for another structural change to the market?

2014-04-02T14:00:00.002-04:00

a long career in the markets has afforded me the perspective to see how the markets have changed over the years. when i first started trading more than 40 years ago, markets were undeniably less efficient; information was extremely asymmetric, spreads were large, audit trails were virtually nonexistent, and there weren't any computers, nor the internet. however, the law of ever-changing cycles has had some help along the way; not the least of which are:

government regulations
changes in order handling rules/reg ats
market fragmentation (dark pools)
financialization/indexed instruments & etfs
electronic trading
decimalization
for-profit exchanges
systemic market shocks (flash crash)
global economic shocks (credit crunch)
advances in information processing and the internet
algo/hft driven trading and market-making
central bank policy/qe-zirp

so, if we were to see hft banned or regulated, and a return to normal levels of human market activity, would the markets morph, once again?

never trade retail...

2014-04-02T13:58:00.000-04:00

uncertainty is a fundamental reality in trading. the best we can hope to achieve, under any circumstance, is an incomplete, but probabilistic knowledge of that environment. most new traders neither understand the markets are dominated by chance and randomness, nor possess the ability to cope with the day-to-day gyrations of the market. the natural inclination is to find a comfortable resolution and a shortcut to order amongst all the chaos, while never understanding the structure of its source. ironically, they tend to herd with other naive neophytes into a socialistic like trap, incorporating cliched and anachronistic methods, strategies, and approaches to the market. like churchill remarked, it is a philosophy of failure, and a creed of ignorance, whose inherent virtue is the equal sharing of misery. paradoxically, the less they really know and understand about the market, the more they think they know, and the more likely they are, to have a predictive bias to the market.

as previously mentioned, strategies with the greatest commitment to predicting the future, maximizes the probability of failure. trading today's markets requires a new approach that must be built on an analytical framework that is relevant to current drivers of price. what dramatically distinguishes today's markets from yesterday's trade, is market structure and fed policy. to a very large extent, price action is no longer controlled by humans, and to an even larger extent, price action has been contaminated by qe/zirp. unless we see a return to normal levels of human market activity, and an absence of artificially controlled markets by the fed, we will never see markets that even bear a resemblance to markets of the past, nor will yesterday's approaches to market analysis ever be applicable again.

how traders cope with probabilistic uncertainty and their imperfect view of the market is critical to their success. incorporating relevant informational signals from a wide range of deterministic processes is the foundation for a trader’s success. this means resisting the sirens' call to assign causality to traditional ta patterns, trend-lines, fibs, and other hackneyed tools that were created for highly auto-correlated markets, driven by human decisions and real risk/reward considerations. the new-normal approach begins with recognizing the current dynamics of liquidity provision and developing an informational framework with signals that reflect the machine driven reality of hft, along with an understanding of the the impact of qe/zirp and risk-on/risk-off on relative value and carry strategies. there is a right way and a wrong way to deal with the inherent fuzziness and noise in today's markets, and without the right tools and the proper perspective it's easy for human decision makers to be misled by the machines and policy makers. or, you could just wait for a head-and-shoulders top, trend-line resistance, or a moving average crossover to get short, and then hope and pray.

don't blame the player, blame the game OR if i could, i always would

2014-04-02T13:50:00.000-04:00

i must (somewhat) sheepishly admit, that i don't see that much difference between yesterday's human-driven liquidity providers (floor traders) and the machine-driven liquidity providers of today (hfts). the only difference is that as a local in the pit, we often possessed exogenous information, that was yet to be incorporated in the market. predatory algorithms must rely on their endogenous actions to trigger the desired outcome. of course, in my own version of strategic sequential trading, i would often hit bids and lift offers in search of stops, just not as efficiently and unemotionally as hfts. of course, our rather dubious actions were as summarily and similarly rationalized back then as they are today; as our privilège intitulé and due compensation for the risk we incurred for providing liquidity. after all-was-said-and-done however, we did it for the same reason that a dog licks his balls... because we could. perhaps, if goldman wasn't obama's largest campaign contributor, sec employees didn't have quid pro quo agreements with private sector bd's and wall st. law firms (for post govt.-service employment) and the exchanges hadn't gone for-profit, mr. lewis would have had to write a book on a different topic.

And in the "Hypocrisy Never Takes a Holiday" Department

2012-05-24T15:09:00.003-04:00

In response to JP Morgan's much more aggressive approach to investing the bank’s own funds than its competitors, Brian Moynihan, Bank of America's chief executive told an investor conference this week, that his bank did not pursue a macro hedging strategy of the type thought to be responsible for losses at JP Morgan’s CIO. Other bankers are questioning JP Morgan’s approach to customer deposits, and as these banks rush to distance themselves from JP, hypocrisy reigns supreme

Of course, it would have been quite refreshing if Mr. Moynihan would have gone on to say...

"We don't put the banks money at risk. At B of A we're old school, we prefer to rip-off our customers the "old fashioned" way. We like to nick our customers to death with inflated over-draft fees, and abuse them with improper, robo-signed mortgage foreclosures. We especially enjoy taking advantage of minorities, by selling them riskier sub-prime mortgages, even though they qualify for safer fixed-rate ones. And then to top it off, we like to reward our executives whom implement these policies with inordinately high executive compensation, and keep it a secret from the shareholders. However, we are extremely circumspect and conservative, when it comes to investing the bank's capital."

However; Hell hasn't frozen over yet, so I don't think we'll ever actually hear Mr. Moynihan, utter the truth.

The Importance of Being Earnest, A Serious Thought about Trivial Effort

2012-03-11T16:04:00.004-04:00

Trading itself is a naturally solitary endeavor - everyone needs to develop their own individual methodology and execute and manage their trades by themselves. But, we all benefit greatly from collaboration in all the events that lead up the actual trade, i.e., research, methodology development, and support.

Please continue to post your thoughts and observations. The flow of ideas is the lifeblood of creative process and the raison d' etre for forums and blogs. It is also, the most efficient way to build and expand a network of collaborators. This will geometrically increase the odds for generating new ideas which may add further robustness to our trading.

It is always interesting to look at market variables in different ways. Adding a new class or creating additional classes out of an existing class, creates a portfolio effect. Different classes of measure do not behave in the same way or at the same rate; similar to a portfolio of stocks not acting the same way as an individual stock. The portfolio effect then, diversifies our methodology, creates more viable trades, and adds robustness to our overall results.

Even a competent trader’s long run edge is smaller than one would think, due to variance, ever-changing-cycles, and emotional pressures. Add the deployment of HFTs, and the problem is compounded to the point where the whole is now greater than the sum of it’s parts. The result is a finite sample of viable trades in any trade population, in any given time period, that defines a point of diminishing returns (over-trading). It follows then; to be exposed to the full sample, you would have to be in front of the screen the entire time period, and have the ability to recognize every trade opportunity.

In order to take full advantage of the sample, the trader must then be able to hold a position (that goes against him), be able to add to a position (that goes his way), and always be able to take the next trade. The less skill a trader has, the less likely, the trader is going to be able to recognize a good trade, or manage it properly once he is in it.. Think about how many times a day, week, month, or a year, a trader fails to execute properly, and you will have an idea of how easy it is for a trader to diminish his probability of success. Now consider the sample size of viable trades, for a trader with one set-up, or a trader with a limited knowledge base and skill-set, compared to a trader with a portfolio of knowledge and skills.

The novice trader must have a sense of purpose and immerse himself in gaining trading knowledge. After the trader has reached the level of competency and profitability, he must continue to put in screen time, in order to add dimensionality and nuance to his trading. And in an era when markets are continuously changing, a trader needs to continuously develop fresh insights and perspectives, in order to adjust his trading and maintain expertise. There is a saying attributed to Woody Allen that states, “80% of success is showing up” which must mean, the other 20% is making the most of your time.

LIQUIDITY SHOCK

2011-11-20T00:31:00.001-05:00

Futures exchanges and stock exchanges were created to justify separate economic needs yet both have been called into question as to whether a genuine service was being provided, or if the exchanges and traders were just redistributing the wealth for the benefit of themselves. Commodity futures exchanges were intended to be a venue for price discovery, risk transference, and price speculation, while stock exchanges were developed as a source for raising capital for extant companies and a co-location for investors who wished to share in the profits of these companies. In both marketplaces, customer orders flowed into the exchanges, where liquidity was provided by market-makers, fair value was determined, and price information flowed back to the customers almost simultaneously. Competition among the MMs resulted in narrow spreads and deep markets, which resulted in efficient price discovery.

Decimalization eliminated the majority of market makers willing to provide liquidity in the equity arena, while the end of open-outcry and the migration to electronic trading, eliminated futures market makers. The majority of liquidity is now being supplied by unregulated high-frequency traders, who according to the TABB Group, are responsible for 56 percent of the NYSE’s volume (includes proprietary trading shops, market makers, and HFT hedge funds), while institutional traders comprise 17 percent (mutual funds, pensions, asset managers), hedge funds-15%, and retail-11%. In an Orwellian twist of fate, the business model of the stock exchanges may have been permanently altered as a result of the exchanges going public. Now driven by their own shareholders’ need for returns, capital formation appears to taken a back seat, as the exchanges roll out new technology to attract even more high frequency traders.

Investors have yet to return in full force since the “flash crash”, leaving the market vulnerable to the machinations of the algo-bots, indexers and other short time-frame traders. In 1960 the average holding period for stocks was 8 years, in 1970-5yrs., 1980-33 mos., 1990-26 mos., 2000-14 mos., 2010-6mos, and in 2011 just a little over 2 mos ( NYSE Factbook). In addition, markets have become fragmented. Mary Shapiro admitted, as little as five years ago, the NYSE executed nearly 80 percent of volume in listed stocks. Today, the NYSE executes approximately 26 percent of the volume in its listed stocks. The remaining volume is split among more than 10 public exchanges, more than 30 dark pools, and more than 200 internalizing broker-dealers. 30 percent of volume in U.S.-listed equities is executed in venues that do not display their liquidity or make it generally available to the public.

The trader initiating a transaction is said to demand liquidity and the opposite side of the trade supplies liquidity. Liquidity demanders place market orders and pay the spread, and liquidity suppliers place limit orders and earn the spread. The algorithms that drive high frequency trading respond quickly to order flow and price . Quotes are revised in response to trading, and trading is done in response to changes in quotes, giving rise to a two‐way dynamic relationship.

Algos can easily take into account common factor price information and adjust trading and quoting accordingly, moving away or cancelling existing bids and offers. Other algos are designed to identify order flow and other information patterns in the data and react in the same way or shut down altogether. Liquidity demanders will wait until the supply of liquidity is ample, therefore, volatility is more often a result of liquidity being pulled by suppliers e.g., the flash crash, than an increase in buying or selling that demands liquidity.

Markets tend to function well when a sufficient number of diverse investors interact (liquid markets), and they tend to become fragile when this diversity breaks down (illiquid markets). In an illiquid market weak hands will act in concert, and take the same position based on the observations of others; independent of their own. This of course, leaves them vulnerable to getting blindsided by predatory traders and parasitic algorithms. The attendant volatility and velocity of current moves, along with the absence of follow-through, is evidence of this phenomena. In spite of the Fed’s almost daily injections of liquidity, headline risk regarding sovereign debt spreads continues to embolden the strong hands to pull liquidity when they sense the timing to be advantageous. The bulls have stepped up to the plate and continue to bring the market back each time, like a game of Pong, but professional money is still short. They continue to blame the volatility on Euro-uncertainty, but it is simply the flag of convenience under which they sail, and the corollary of their self-interest and bias. It also the reason why they will continue to do it.

Market structure continues to evolve at a rapid pace while traditional market practices quickly disappear. Obligations to provide liquidity and restrictions prohibiting practices that would disrupt market stability are disappearing, which gives rise to some very relevant questions.

Is the market more (evolving)or less (devolving) efficient now?

Is high volatility caused by a lack of liquidity, or is the lack of liquidity caused by high volatility?

Does higher volume mean greater liquidity?

What happens when HFTs make up 80% or 90% of the volume?

What happens if the market continues to fragment?

Should liquidity providers be allowed to pull liquidity completely?

Is attendant volume still valid as a metric of price action?

What happens when the average holding time for stocks is a a day?

Should there be a transaction Tax for HFTs?

What does the increased velocity of price moves mean for price discovery and market stability?

Is price discovery nothing more than a negative feedback loop?

Are the major equity indices just a de facto measure of the money supply?

Is the Volker rule to be blamed?

Dreamers& Schemers

2011-10-24T16:34:00.001-04:00

Anyway, no drug, not even alcohol, causes the fundamental ills of society. If we're looking for the source of our troubles, we shouldn't test people for drugs, we should test them for stupidity, ignorance, greed and love of power. P.J. O’rourke

It was rollover and I was standing close to the center of the bond pit so that I would have access to both the spread paper and 2nd month brokers, when Darrell Zimmerman walked up to me. The bond market was experiencing a brief respite from it’s usual frenzied trading activity and Darrell had taken the opportunity to come by and talk to me. He informed me that he was working with some large institutional traders in New York and overseas, and that they were going to be trading some size in the 30 year. He then asked me if I would like to fill their orders, or at least a portion of them. I explained to Darrell that although I occasionally did brokerage, it was only as an accommodation to the floor brokers I stood next to, so that they would be able take a break or have lunch.The majority of the time I functioned as a trader, and I wasn’t interested in being taken out of the market, to fill some orders. Besides, I didn’t know who these customers were. Darrell went on to tell me that there was going to be a considerable amount of business, and that if I did a good job, I could have the deck. I respectfully declined his offer and Darrell walked away. It wasn’t long before I saw Darrell talking to another broker on the other side of the pit, and then another. Little did I know, that I had just made one of the smartest decisions of my life.

I had met Darrell and his wife Lisa, who doubled as his clerk, in the lounge of my clearing firm. He was a very talkative and gregarious guy, but in a used-car-salesman kind of way. He was a perennial bust-out, kicked out of numerous clearing firms at both the Merc and the Board, but now had an account where I cleared my trades. There were a lot of Darrells that hung around the Merc and Board; ego-driven dreamers that chronically blew up their trading accounts, yet always found a way to get back in the game; hanging on a little while longer before justice was inevitably meted out. A lot of them would quietly disappear, while others would get jobs on the floor, evaporating into the milieu of floor clerks never to be seen or heard from again, yet always fantasizing about making it big one day.

Every trader did it; dreamed about the big trade; fantasized about taking a shot. Chicago’s traders had their own mythical way for making this dream come true, the O’hare spread. The idea was to put on an incredibly large position, get in a cab, and head for O’hare airport. If the trade was a winner, you either returned home or got on a plane to Hawaii - if the trade was loser, you bought a one way ticket to a country that did not have an extradition agreement with the U.S. We also had a saying, “If you are going to blow out, blow out big” If your debit was too small, your clearing firm would write off the loss, and then write you off. But in the CBOT's version of “too big to fail", if you hurt your clearing firm bad enough, they would arrange a way for you to generate the income necessary, to pay them back. Apparently, Darrell had taken these fantasies to heart having already already planned to put on an O'hare spread, before he approached me in the pit that day. While I had refused his offer, he did manage to enlist 9 unwitting brokers to assist him and his partner, Tony Catalfo, in a scheme that would bring down one of the oldest clearing firms at the CBOT.

The bell rang at 7:20 AM on a Thursday morning and Tony, who had strategically placed himself in the Bond options pit, was buying up every at-the-money put he could get his hands on. Meanwhile, Darrell was putting in huge sell orders in the bonds to the 9 brokers whose help he had enlisted earlier. Tom Baldwin was on the other side of the bulk of these orders, and when the options traders started to lay off the puts they sold to Tony, with short hedges in the bond futures, panic ensued and the market had nowhere to go but down. Darrell then entered the pit himself and began to sell more bonds. In the Bond options pit, the put options were going through the roof, and Tony was beginning to take profits on his long put position. This all took place before 7:30 AM, when an economic release came out which was negative for bond prices. In a stroke of incredible luck, the market broke even more and Tony covered the balance of his position for about a 1.5 million profit, while Darrel was now short about 12,000 bond futures, and up about 5MM on his open position. The feedback loop of selling they had created was working perfectly.

Darrell had been dismissed long ago from my clearing firm, and along with Catalfo, was now clearing Stern & Co., a family run business that was founded by Lee B. Stern. Lee had made his fortune trading grains, and owned the Chicago Sting soccer franchise, a piece of the White Sox, and was one of the most respected members of CBOT. Lee rarely came onto the floor anymore, but when he did make an appearance in one of the grain pits, his actions were highly scrutinized by other traders, as a possible clue to where the market was headed.

Bad news travels fast in the futures industry and virally fast on the floor, so it did not take long for word of Zimmerman’s and Catalfo’s involvement in the bond panic, to reach Stern’s office. Lee’s son and a few of the firm’s employees rushed to the floor and quickly enlisted the help of the security guards. Zimmerman had lost his count and was standing outside of the pit when they grabbed him, while they physically pulled Catalfo out of the Bond options pit. After witnessing this melee, traders in both pits began to piece together what had happened. Tom Baldwin , who had been unsuccessfully taking the opposite side of Zimmerman’s orders, realized the sell-off had been artificially induced, and that traders would have to cover their shorts. He quickly took advantage of the situation and began to bid up the price of bonds. Bond futures and bond options prices reversed on a dime and snapped back with a vengeance.

Meanwhile, Stern’s employees, who had wrestled the trading cards out of Tony and Darrell’s hands, were frantically trying to get a handle on what was now, Stern's position. In addition to the trades that Tony and Darrell had made, were the fills of the 9 floor brokers, which had to be collected and aggregated in order to get an accurate count. It took them 2 hours before they could figure out the position, and what had been a $5MM winner, had turned into an $8.5MM loser by the time the position was liquidated. Had they been able to figure out Zimmerman’s position quicker, and not tipped off floor to what was going down, Stern could have escaped with anywhere from a small loss to a small gain. Instead, Stern had to make good for Zimmerman’s $8.5MM loss, and as a result, lost it’s clearing status after 25 years in business, and had to lay off 20 employees.

Catalfo tried to collect on his $1.5MM profit on his options position, but received a 42 month prison sentence instead.The proceeds from his trades were awarded to Stern to help offset his losses, while Stern went after the 9 filling brokers for the balance. Zimmerman hopped in a cab to the airport and got on a plane to his parents home in Canada, completing the other leg of the O’hare spread. He was eventually extradited and sentenced to 42 months for his efforts. Darrell Zimmerman came very close to pulling off his insane plan, but he let his ego and his greed get the best of him. Had he executed his plan on a smaller scale, in a more restrained manner, he might not have aroused the suspicion of his clearing firm. He had the market right where he wanted it, and had he not lost his count and tipped his hand, he might have been able to cover his position while it was still a huge winner. Whether they would have let him keep his profits is highly dubious, because Zimmerman’s sole legacy from his lunatic scheme, is the eponymously named rule, that allows clearing firms to seize the profits of any trader that attempts to take a shot at them.

Off To A Dubious Start

2011-10-22T13:54:00.001-04:00

As stated earlier in the week, price action warranted that a “modestly bullish discretionary bias” be adopted for equities. Long time-frame participants made the case as they finally asserted their dominance by marking up the ES, on Friday, closing it above the 200DEMA, the 10-day “mini” trading range (1085-1225), and the +2 month trading range (1070-1230), with a +90% day (charts 4&5).

For the week, the Dow was up +1.4%, scoring a fourth straight winning week. The S&P 500 gained +1.1%, but the Nasdaq Composite Index was down-1.1% for the week, along with the 2K, which was down 0.01%. Friday the trading volume total reported on the NYSE was higher, while volume was slightly lower on the Nasdaq. Advancing issues beat decliners by more than 6-1 on the NYSE and by 3-1 on the Nasdaq exchange. New 52-week highs expanded and in the process, outnumbered new 52-week lows on the NYSE and on the Nasdaq exchange 97-24.

Breadth followers (McClennan, Hulbert), investment sites (Bespoke), and perma-bulls, were quick to jump on the breakout bandwagon and herald the “confirmation of a new uptrend”, even though key earnings reports and Wednesday’s EU summit meeting developments, still pose a potential threat to the viability of the very nascent breakout.

The past few trading days saw long term breadth indicators hold onto their bullish signals (chart 1), while their short-term components were negative, implying that the market had underlying strength, but was overbought. If an overbought market refuses to decline, it is usually a sign of strenth. This typically happens early in a new bullish phase, and it appears to be what's occurring at this time. However, the bulls haven't gained complete control, and there are still some divergences present that are a cause for concern.

Most notable, are the respective negative closes of the Comp and R2K this week. Both of these indices have shared the role of “leading index” in both directions, among the four major indices (SPX,COMP, DJIA, RUT). The fact that these two leading indices closed lower on the week, belies the supposition that this latest move is indeed the beginning of a stronger intermediate-term bullish phase in the broad market (chart 8). The most bearish indicator however, has been the $VIX (chart 9), which closed below 30.00 last week, only to rally as high as ~37.00 and close above 30.00 every day, this week, which may explain why the COT report shows smart money's short position increased as they sold into the rally (chart 3).

As always, there is a case to be made for the bullish camp. There is the very bullish October, and 4th quarter seasonality associated with equities, and as was alluded to earlier, there is the possibility that Operation Twist, may indeed have the same salubrious effect on the market, that QE1 and QE2 had on equities (chart 2).

That being said, I think the market rallies from this level, but exhausts itself before ever reaching the 1260.00 level. Then we’ll see if the bulls step back in, support the market, and run it up in time for Santa to bring his annual cheer to the markets.

Stairway to Heaven or Highway to Hell

2011-10-21T11:28:00.003-04:00

The market continues to be event driven as it awaits a resolution over the EFSF leverage issue. In the interim the market is in a holding pattern hovering just above support at it’s 50DEMA and just below resistance at it’s 200DEMA (chart1). The burning question is whether the market is consolidating above support (1190-1185) or whether the price action is distributional as a result of the market's continued inability to break the 1220-1230 level. A break lower would result in the ES testing 1170 and a break higher would result in an assault of 1260.

Unfortunately, signals are mixed. Cumulative market breadth ($ADD) and cumulative $TICK are positive, however their shorter time-frame constituents are negative, which implies that the market is simply overbought (chart 5). Breadth was mixed today, with a slight positive advantage on the NYSE and a modest negative margin registered on the NASDAQ, however the amount of new lows expanded, while the amount of new highs contracted, offering further evidence of short-term weakness, while the continued strength of the $VIX issued a clear signal of present danger, as it once again, closed above it’s 50DEMA and traded as high as 36.87 today (chart 4).

On the bullish side of the coin, market lows are usually made in the month of October, and the fourth quarter has historically been the strongest quarter for the market. Since1928, the S&P 500 has averaged a gain of 2.44% in the fourth quarter, and over the last 20 years, the index has averaged a gain of 4.57% in Q4, which is more than twice as strong as the next closest quarter. So even, if the market were to break from here, there is a high probability that it would snap right back. The yield curve is steepening once again as treasury yields rise which may be a welcome presage for the bulls, if OT’s effect on the market is similar to the effect QE1 and QE2 had in the past (chart 2). However, as with the market sell-off scenario, I would expect a near term rally to quickly exhaust itself at the aforementioned level of 1260.00.

Opex Pump and Dump?

2011-10-20T06:08:00.001-04:00

The bulls failed to follow through on yesterday’s comeback rally, as the event driven market ran out of steam at the 200DEMA, once again. As was stated yesterday ,“the market needed to accept above Friday's VAh @ 1215.25, and quickly make new highs with a close above the 200DEMA, in order to meet it's 1260.00 target, otherwise the double-top reversal scenario would take precedence going into opex,“ which is exactly the situation the market now finds itself in, with 1215.25 now becoming short-term resistance.

While the ES still closed well above it’s 50DEMA, and held the bottom trendline of it’s bull channel, the VIX closed above 34.00, and above it’s 50DEMA, along with the $ TICK daily, which closed below zero for the first time since the rally began on 10/04, casting doubt as to whether the nascent rally is capable of being sustained.The October VIX Futures settled at 33.15 this morning, down 57 cents from last month's settlement. This is the third month in a row that the futures expired with a value above 30. This hasn't occurred since the 2008 crash, proving once again that fear is a stronger emotion than greed, and that a break to 1170.00 is highly probable.

Bulls Blast Off!

2011-10-18T17:23:00.002-04:00

The bears failed to follow through with what they began early Monday morning, allowing the bulls to regroup and maintain control. Once again, the market quickly discounted the negative news out of Europe, allowing the bulls to not only support the market, but to unceremoniously, launch it higher. Market rebounds needs a certain amount of strength showing up in the A-D numbers at the beginning of an uptrend, or else prices roll over and head back down to the level of the prior low, or even lower. The NYSE answered the call today, with close to a 90% day, on 9-1 positive breadth, and 26 new highs to go with the NASDAQ’s 24 new highs, on very good volume. And, in the process, may have answered the question on everybody’s mind the past few trading sessions. Are the bulls getting stronger, or were the bears just laying in weeds, waiting for the right opportunity to deliver maximum pain? While the question may have been answered resoundingly today, I must admit, the price action still casts a sliver of doubt in my mind.

The market now needs to accept above Friday's VAh @ 1215.25, and quickly make new highs, or the double-top reversal scenario will hang over the market going into opex. Nevertheless, from the attached chart, it is evident that the ES was still firmly ensconced in it’s recent upward trend channel. One of the best indicators of a change in the short term direction of the market in the recent choppy trading environment, has been the holding or breaking of an extant trend channel, as we witnessed this morning. Sometimes, it's best to keep things simple.

Just When You Thought It Was Safe To Buy Equities...

2011-10-18T08:33:00.001-04:00

Last night’s rally on bullish follow-through momentum from Friday, ran out of buyers early Monday morning as the ES ran up against it’s 200 DEMA and RTH - R2. Once again, headlines out of Europe was the catalyst for another global equities sell-off, as the ES took it on the chin for 38 points (H-L) with the small caps (TF) and European indices (FESX,FDAX) leading the way down.

Liquidity was adaequate which resulted in an orderly trend-day-down which never reached waterfall status. No doubt weak longs were the target of the sell-off, which resulted in an only 9% day on the NYSE and a 17% day on the NASDAQ, with declining shares leading advancing shares 5-1 on both exchanges. Nevertheless, there were 30 new highs combined on the 2 exchanges, but also 29 new lows.

Market internals and price action still suggests that the bulls are in control, as the bulls continue to support the market on bad news, and rally the market on good news. Ranges have contracted, and liquidity is not being pulled as often as it had been, along with the recent improvement in market breadth and leadership.

While all the indicators are not bullish, the major indices are still above their 50EMAs and the VIX is still below its 50EMA, but they must quickly consolidate at current levels (1190.00), and assert their strength once again, (accept above 1220.00) if they are going to resume the uptrend and fulfill their upside potential.

Still, in the near and intermediate term, the market remains vulnerable to headline risk out of the Euro-zone, along with negative economic news at home. An $SPX close below 1170 and a $VIX close above 34 would consequently, alter my somewhat bullish view.

Trading With A Twist

2011-10-16T10:16:00.002-04:00

As a recent article in Bespoke pointed out, “It has been three weeks now since the Fed formally announced its $400 billion Operation Twist program on September 12th. If early indications are a sign of what's to come, however, this will be the third straight time the Fed has tried and failed to lower long-term interest rates through the Treasury market. “

Operation Twist involves selling short-term Treasuries in exchange for the same amount of longer term bonds. The policy’s intent is lower yields on long term bonds, while keeping short term rates little changed, in essence, to flatten the yield curve. A failed policy in 1961, I seriously doubt that Bernanke himself, thought that increasing the average maturity or “twisting” the Fed’s portfolio, would have any effect on the economy or rates. In reality, it was more of a PR move designed to reiterate the central bank’s policy objectives, and maintain credibility with the investing public.

While the Fed’s policy attempts have fallen short at bringing down rates and invigorating the economy, there is no denying the impact they have had on the broader market. Once again, the SPX appears to have put in a swing bottom that is highly correlated with the Fed’s actions, and once again rates are rising concomitantly. (Chart 1)

Whether intended or not, the Fed’s machinations have an effect on the markets, that can present observant traders with relevant opportunities that have a high probability of success. Operation Twist, of course, involves the simultaneous sale and purchase of both short and long-term securities, so it’s impact will be the greatest on the Treasuries’ yield curve.

Investopedia defines the yield curve as, A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.

In futures terms , it is the spread between the yields of the same security with differing maturities, and the NOB spread is one of the most heavily traded yield curve spreads. If you expect the yield curve to to steepen, you typically want to buy the spread. If you expect the yield curve to flatten, you will want to sell the spread.

If a trader expects the yield curve to steepen, he can buy the 10 year note and sell the 30 year bond( buy the NOB). When the yield curve steepens, the 10 year Treasury cash yield will fall relative to the 30-year Treasury cash yield, and the10-Year Note futures price will rise relative to the 30-Year bond’s futures price.That is, a long position in the 10-Year Note futures will gain more than a short position in 30-Year bond futures will lose. Due to the inverse nature between price and yield in Treasuries, the yield spread will increase, but the price spread will decrease as with any bull spread.The converse is true, for a trader that is expecting the curve to flatten.

True yield curve spread filters out directional effects (i.e., changes due to parallel shifts in the yield curve) and responds only to changes in the slope of the yield curve (i.e., non-parallel shifts).The goal is to filter out directional effects and design a spread trade that will respond only to changes in the shape of the yield curve. In order to do so, NOBS are usually traded as ratio spreads, with the current ratio being 5:2, notes over bonds. This ratio matches the dollar value of a 1-bp change (DV01) in the yield of the shorter-term maturity futures position and that of the longer-term maturity futures position. A DV01 indicates approximately what one futures contract will gain or lose in dollars for every 1-bp change in yield.

It is best to trade the NOB in the direction of the prevailing trend, by buying weakness at or near support or selling strength at or near resistance, however a mean reversion strategy can be utilized in a range market. A daily chart can be used to identify the prevailing trend, and a 15 minute chart is good for execution. Since the end of July/ beginning of August, the yield curve had been flattening, so selling the NOB on rallies, was the best strategy. However, in an ironic twist of fate, yields on treasuries have rallied, and so has the yield curve, since Operation Twist was implemented on Sept. 21. Until a bottom in yield and a change in the curve is confirmed, I would consider the curve trade a trading affair. (Chart 3)

Unfortunately, if you use NinjaTrader, their platform is not conducive to spread trading, so if you want to put on a spread, you have to leg it. You will also be unable to place a stop using the spread price, so it must be done dynamically. Other platforms, i.e., TT and Cunningham, cater more to spread traders. I like the “pairs suite” indicator, along with a few others that can be found on BMT or NT, that work just as well. In addition, I overlay the PRC2 indicator on the “pairs ratio” indicator, which provides me with support/resistance and a visual of the near -term trend, and use the RSI of the spread for confirmation. I trade the spread with a 2:1 ratio, instead of the recommended 5:2, just for simplicity’s sake, but one can experiment with different ratios to achieve different deltas.

“A yield curve spread trade is a speculative trade, but it shifts the burdenof speculation from taking a position on interest rate or price direction to taking a position on what you expect the yield curve to do. This gives you an extra way to be right, for you have no concern for rate or price direction, only for yield curve steepening or flattening.” CME Group

Bullish Breadth

2011-10-15T10:37:00.000-04:00

While the war is certainly far from over, the bulls won the battle today, staging a late afternoon rally, after what had been a day of distributional action and indecisiveness. Retail sales rose in September by the most in seven months, however, consumer confidence cast doubt as to whether gains in spending could be sustained, as shoppers’ confidence waned. The market rallied briefly after the news, making new highs, but a short term overbought market, was unable to overcome the sell-the-new-high algorithms.The market then traded in a narrow range, under the session VWAP, unable to get above it’s opening range for most of the day. However, the market languished in a territory that was well above the previous day’s value and never below the RTH session R1, as capital flowed into risk assets and out of treasuries and the dollar.

While market breadth continued to swing wildly back and forth with the market’s volatile movements, the past few sessions has seen breadth expand to the point where breadth indicators began to elicit buy signals. According to Bespoke,“77% of S&P 500 stocks are now above their 50-day moving averages, which is the highest level seen since the April highs. Bulls have been waiting for a nice expansion in underlying breadth for confirmation of a rally, and now they seem to have it.” Today’s internals confirmed, as the NYSE put in an 83% day, with advancing shares leading the way, by almost 5-1. New highs blew away new lows on the NYSE and NASDAQ, 49-15 as techs took charge, once again. For the week, the Dow Jones Industrial Average rose 541 points, or +4.9%. The S&P 500 Index gained 69 points, or +6.0%, its best week since July 2009. The Nasdaq was up 188 points, or +7.6%.

Volatility continued to be drained, as the $VIX finally broke below it’s support @ 30.00, signalling that it is now safe for any reluctant bulls, to buy. According to Rennie Yang, the $VIX has fallen 7 straight days, 37 times since 1990, and 91% of the time, the SPX was higher 2 months later. The ES has now retraced 50% of it’s move from it’s 52 week high-low, yet unlike the NQ, it has yet to trade above it’s 200DEMA at 1232.00. And while those in the bulls' camp would prefer to see a more decisive "confirmation day", with market acceptance above the 200MA as a sign of renewed institutional demand, the bulls appear to have the upper hand, holding the door open for a move to 1260.00 - which certainly suggests that a modestly bullish discretionary bias is warranted in the short term.

2011-10-12T19:43:00.001-04:00

Recalcitrant Rally


ESZ 135min

Although the ES closed up 1% today, on day 7 of the rally off the last Tuesday’s swing low, the market was wacked for 20 handles in the last hour of trade, as it approached it’s 200 DEMA, and the 6E tested it’s 50DEMA. Ironically, the market had been enjoying a very strong day, and still put up very good numbers on the day, with the NYSE enjoying close to a 90% day, on good breadth( 9-1), and new highs outpacing new lows 17-2. The NASDAQ experienced a 72% day, with advancing shares leading declining shares by 4-1, and new highs exceeding new lows 21-14.

Waning momentum finally caught up with the ES, as it came within 5 points of reaching the 1220 level which was previously identified as being an upside target, and an area of resistance. Although the market’s rally is still intact and not technically damaged, the inability of the market to stage a true follow-through-day, should quickly attract shorts. Support now looms below at 1180 and 1150. A break below 1150 would no doubt embolden the bears for a run at taking out last Tuesday’s low.

2011-10-11T18:15:00.000-04:00

Crunch Time

While both the ES and the $VIX closed unched for the day, the bulls managed to keep the trade above the VWAP for the majority of the day. This was the 6th trading day since the swing low was made last Tuesday, and the first day the market didn't close higher. It was also notable for the lack of volume, which was lower than yesterday's, which was a bank holiday.

Nevertheless, The ES closed above it's 50EMA for the second consecutive day, and the $VIX , closed below it's 50EMA for 2nd straight day, also. Breadth was slightingly bullish, and as could be expected, it was an approximately 50% day on both exchanges. Of note, however, was the fact that new highs finally led new lows on the NYSE, as new lows led new highs on the NASDAQ. In total on both exchanges, new highs led new lows, 40-25.

Of greatest concern for the bulls, is the anemic volume, although some leadership appeared today, with the slight expansion in the number of stocks making new highs. A convincing FTD would confirm a continued rally, however it is most ideal for a FTD to come between day 4-7 of a new rally attempt - so time is running out.

Certainly, all the shorts who wanted to cover, have had their chance, so it is doubtful, whether there are any weak shorts left, that could continue to fuel the rally. Buying, in the form of new longs, is needed for a sustainable second leg of the rally.

Instead it is beginning to look a lot like price exhaustion. As TD said the other day, tops and bottoms are not made by selling and buying, but by an absence of buying and selling. The lack of volume the past 2 days is indicative of buying drying up, and a swing top.

Once again, the market is at a level, where it has rallied dramatically to before, and failed, just as dramatically. It appears that tomorrow (Day7), may be "crunch time" for the bulls, where a failure to rally on big volume, with emerging leadership, will spell the end.

2011-10-09T09:58:00.000-04:00

Good News Bulls

11/07/2011

$VIX

ESZ 60 Min

ESZ 135 Min

ES continued to trade within it’s 4 day up-channel, which had lifted off on Turnaround Tuesday, with a 45 point rally in 45 minutes. Although the market dramatically sold off just after the New York lunch hour today, the market held the lower trend-line of the channel and a confluence of important levels (50EMA - 60 min. and the weekly pivot) @1145.00 (ESZ). Nevertheless the market did close lower, leaving a bear hook reversal on the daily chart; certainly a negative development for the bulls after having received positive news this morning from the BLS.

Declining issues led advancing issues on both the NYSE and the NASDAQ by 4 to 1 and new lows led new highs 51 to 21 on the 2 exchanges. Relatively low volume and a lack of leadership has been characteristic of this week’s nascent rally, and large specs accordingly seized the opportunity to get slightly shorter. The closely watched $VIX closed steady, but held it’s major up-trend line, and closed above it’s 50EMA , while the NQZ traded above it’s 50EMA, but closed below it, as did the FDAX.

Time is running out for the bulls to mount a serious offensive in the form of a follow-through-day, as the market has not demonstrated strong leadership from any of it’s major indices, and the pool of weak shorts, yet to pay up, is quickly drying up. The past week’s short covering rally was due in part, to the fact that all the bad news concerning Europe had been fully priced into the market. However, it now feels that all the good news has been fully discounted by the market, and all that is left is the actual collapse of the banking system.

Nevertheless, if the market were to rally, the next area of resistance is ~1180.00 -1184.00 and if the market were able to breach that level, it could melt up to 1220.00, however such a scenario seems unrealistic. The governments and central banks in Europe continue to pour money into the financial system in order to forestall the European Banking crisis, which no doubt, fuels inflationary expectations, which includes equity prices. This reaction probably contributed to last week’s global equity rally, but will certainly not be able to sustain any kind of a meaningful rally. Re-emerging negative headlines out of Europe, is more likely to occur, and a failure from these levels would have very bearish implications. Near term targets are 1130.00, 1115.00, 1100.00, intermediate term target of 1050.00 basis the SPX, and longer term targets of 980, and eventually, below the March 2009 low of 666.

2011-10-02T11:06:00.004-04:00

Liquidity On, Liquidity Off

For those of you that think that the market's current price action and attendant volatility is a direct result of headline risk out of Europe, or general economic uncertainty, you might want to think twice. The 3 day break that began with the market topping out at ~1190.00 on Tuesday afternoon, culminating in this afternoon's swing bottom at ~1133.50, most certainly belies that assumption.

Please note how the market was run up each of the 3 ETH sessions and how the market was taken down each of the 3 RTH sessions. What's especially interesting about this pattern is the way in which this strategy is implemented.

Notice how the relative volume drops off Wednesday and Thursday right before the market sells off, and continues to remain low during the duration of the move. This demonstrates how the algos pull liquidity on the down moves in order to allow the market to fall.

It is this pulling and adding of liquidity that is the major cause of the recent increase in volatility. By observing these patterns of on-again/off-again liquidity states,, along with price action patterns, one can gain a much better understanding of how the market actually operates.

2011-10-02T11:02:00.003-04:00

PIIGS in a Poke?

While country after country in Europe is either in the midst of a debt crisis, or on the verge of slipping into one, European stocks posted their largest weekly gain in 14 months. Positive news out of the U.S. and Germany did nothing to stem the selling in U.S. equity markets, however, Germany’s pledged support for an euro-area rescue fund, helped the European markets pare quarterly losses.

While the debt crisis in Europe still appears to be far from resolved, the charts of the FESX and FDAX, may be pricing in some kind of resolution or stop-gap. While both indices had shown relative weakness to the SPX, having already taken out their early August lows, hedging activity in an attempt to circumvent the European short selling ban, may have been the cause. For now, the FESX and FDAX have put in double bottoms and are forming bullish falling wedges, although the volume has been relatively low and liquidity relatively thin. The US. dollar meanwhile has sold off from it’s August highs, which may suggest that Euro-zone money that had previously sought safety in in the U.S., is being repatriated to Europe.

The main source of the world's fears these days has been found in the Euro-zone sovereign debt crisis, so it will be interesting to watch the European markets next week, for further signs of real strength. It just may be that the European market "got ahead" of itself due to the hedge activity, and the market is now being run up to shake the weak shorts, trap some new longs, and add to existing shorts.

In either case, I’m sure the domestic bears will have their eyes fixed on the PIIGS.

2011-10-02T10:59:00.001-04:00

Take Me by My Little Hand and Go Like This

While the purpose of the Fed's Operation Twist program is to lower long term interest rates, the reality is that the only long-term rates that are falling are Treasury rates. Long term bonds are still in an uptrend. and although Treasury yields are falling, spreads on high yield debt are rising at just as fast, if not at a faster rate.

The high yields are sending a message that risk to the economy and the stock market remains above normal, as the high yield funds are now breaking below their early August lows, (JNK with HYG on the verge). Ironically, spreads had been essentially range bound until Operation Twist was formally announced; it was then that yields on high yield debt actually broke out of their recent range and made new highs. This is especially bearish when you consider we are entering the strongest performing time of the year for bonds.

2011-09-27T21:39:00.001-04:00

Cryoport Technical Update:
Another Look
End of a Trend?

click on text to enlarge chart

The purpose of looking at descending fan lines is to look at another indication of a potential reversal of CYRX’s intermediate-long term trend, by drawing trendlines from CYRX's lowest swing point, which marked the beginning of it's last ascent, with a possible decline to below the third and lowest fan line, showing the start of such a reversal.

In other words these descending fan lines offer an excellent tool to gauge a possible reversal of the near term trend and something that is worth watching now that CYRX is on the verge of taking out the lowest fan line. It’s potential move below this all important line at $1.10 would mark the actual reversal in CYRX’s intermediate term trend from up to down, and portend a subsequent rapid decline to the low 0.60’s, as the Wolfe Wave also indicated below.