I’ve lost the illusion of sensing I can see good opportunities on the grain markets.  And, the softs seem a wee bit off kilter for my tastes.  So, I’m pairing my focus at the start of this week to metals, currencies, and indices.

Options traders remember we have expiration coming on Friday!  The next expiration will be December expiration at which point the smarter trading community will already be taking position for the new year’s trend.  It’s not too early to start thinking about 2010.  This markets may be able to run higher, but, not forever.

While I’m on the subject of options, keep in mind what sort of traders will be rewarded this expiration.  Let’s just assume our more sophisticated traders are using rather dumb market neutral strategies.  Let’s assume the more naive players have a directional bias.  So, roughly speaking the majority of “smart” trades would have gone on around October 16th.  Let’s assume sometime around 10-15 days into the trades, IF AND ONLY IF, they were profitable, they would have taken them off.  Otherwise, smart money would be looking for those markets to be within a similar price range as we close out those contracts which will expire this week.  At which point those markets will be free to explore new ranges in ways they haven’t previously been able too.  One market near and dear to my heart is the metals market.  If this logic pans out, I could see perhaps one more sucker’s rally before a decent breather.  Time will tell.

General outlook:

As always, this is purely an empirical and a theoretical exercise.  Trading is extremely risky.  If you were to trade, you should only ever do so with money you can afford to lose.  Be well, be safe, and be warm.

It’s Sunday evening and the futures markets are testing Friday’s highs.  I love it.  That’s encouraging for the bears in the neighborhood.  I’d be looking at an opportunity to catch a short on the equities Monday through Wednesday of this week.  Of course, a big part of this observation has to do with the risk/reward.  Although new highs in equities is somewhat hard to imagine, new lows in the Dollar isn’t.  So, as always I’m quite likely wrong.  So, if you find yourself short the market and hitting new highs, get out.  Big picture: this looks like as good a risk reward as you could look for on a trade and the markets are heading towards halfway home… perhaps it’s time for a break.

This is not the first time we have seen this sort of behavior in electronic markets.  But, it is very questionable behavior.  And, it brings to light the question as to how well electronic markets actually function.

Here is a view of this chart from an electronic broker:

And here is another view through another data vendor:

As I say, this is not the first time.  The last time it was a downward spike in the US Dollar Index.  It was within the past 6 months.  I’d show it to you on my charts, but, of course, it’s all been cleansed out to make the charts look pretty.  But, I remember it vividly because I was actually long dollar then.  And, in about five minutes on a Sunday, I was in extreme pain, as my charts indicated that the Dollar had made about a 3 month move in five minutes during a time I was vulnerable, I was manually entering stops on a daily basis that week.  I went for a run to catch my breath before I did anything hasty.  Upon my return almost the entire move had come back, much like the move out there this morning.

It’s not a good way to live.  Chalk this up on the list with Dark Pools and Flash Trading, under questionable practices on electronic markets.