Market Data Trader

The higher the markets go, the sicker I feel.  No that’s not quite it.  I did catch a cold over the weekend.  And, I am actively monitoring price action.  If I see any really strong opportunities that stand out, I will call them out.  Otherwise, it will not hurt to sit tight for a few days, as post-fed and post-unemployment the market clarifies it’s current conviction and direction.

If you must trade, there are a couple key markets ripe for some straddling, coffee and cotton are at the top of that list, with markets like sugar and indices not too far behind.  But, the big picture, the dollar is really weak here.  I’d advice to watch this play out.  We could quite likely take 2-5 days for the dollar to clarify that it is going to take on lower levels.  In which case, step aside and watch the foolery ripple through the rest of the markets.

Don’t expect much activity this week as I work off this cold.  Meanwhile, stay warm and keep your capital out of harms way.

I can’t tell you what tomorrow will bring.  But, given the non-days of Monday and Tuesday, I’m not exactly expecting tomorrow to find the beginning of a substantial trend tomorrow.  Plain and simple, I have very little to say tonight.  Whether I’m wrong or right, I’m pretty much planning on postponing any significant trading until the market starts to inflict some more pain.  Although this sideways action might be helping fatten me with some premium on the butterfly on silvers I throw out last week, it’s not doing a lot for my speculative futures plays.

Instead of getting frustrated, I’m getting focused on a few other things for the moment.  So, I’m going to wait and see.  I’ll be back before the week is over.  But, my interests going forward are definitely honing in on Friday and next week.  Who knows, perhaps we’ll see some head fakes in a few key markets over the next few days.  Read the tape, watch intraday if you can’t get away.

I’m looking at a very curious daily trading range of 5.12 for the Dollar Futures Index on NYMEX.  That’s about 5 times larger than the largest daily range in the past five months.  Within the next couple weeks, most quote vendors will have cleansed today’s bar out of their quote systems because it makes their charting software look broken.  But, the reality is, if you had a stop order in, you just got filled.  The US Dollar just swept through about 6 months of trading range in about five minutes this morning.

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.

Not a whole lot here.  But, I listened to Michael Bowles talk on Neural Nets and Rules-Based Trading System at Fora.tv.  It leaves a lot to be desired.  He uses Neuroshell and some really basic examples.  Not a particularly profound or well organized speech.  But, if you are fiend for this sort of research, you might give it a shot.

Additionally, ZeroHedge pointed me to the IQS Quant blog, which they refer to as a must read for Quant types.

I’ve written about coffee quite a bit over the past few weeks.  It’s been a topic of my posts because of what seemed to be an interesting opportunity to get long coffee in the near future (a couple weeks back).  It was something I stumbled onto in my nightly research.  I was a little surprised by how hard coffee bounced today.  And, I wanted to see if I had missed the boat on that opportunity.  Let’s review.

So, the forecast suggests two interesting timeframes to be looking to get long coffee between now and year end: October 26th and November 19th.  These are highlighted in the chart below.

Now, let’s take that to the chart.

What’s the chart saying?  First off, look at that beautiful coil.  We have definitely penetrated to the upside.  Can we hold it?  Good question.  Only time will tell.  But, look at this historical resistance around 144.25.  If price can hold above there, I’m a believer.  You see my target up towards 160.  There is potential for a solid trade as this price action unfolds.  Just keep the risk reward ratio in mind and don’t be a chasing fool.  Forecasts have to take a back seat to price action.  They are only guides to get our thinking started.  Price action is the authority.  Watch this unfold.  And as always, see the disclaimer.  Futures are high risk.  I am not offering any trading advice and take no responsibility for your actions.  This is strictly for educational purposes.

As precarious as the world feels and as heated as the markets are, it is starting to feel that things might very well proceed in a more orderly fashion.  What is orderly?  A very curious cascade of ill timed events and slight price adjustments teasing prices generally higher with due correction from time to time.  But, many markets are testing critical levels or are nearing the end of significant coils.  So, at any moment, things can change quite dramatically.  Proceed, life as usual, one hand on the cup of coffee… ho hum… and the other on a shotgun.  Just in case, we have unwelcomed intruders, we are prepared to defend ourselves.

Because market timing is never something we will know with any great accuracy, it’s important to keep trying and probing.  Even though, I’m much more interested in the downside of a lot of these markets, I’m still actively setting up trades to take advantage of the long side.  As always, every trade, long or short, know your entry, your exit, your target, your risk, and your reward.  Under no uncertain terms, these are all givens.  It’s the research and preparation that goes on before you relay an order to your broker.  There is zero tolerance for improvisation when you have your trading groove on.

So, where is my attention tonight?  How have my thoughts adjusted over the past 24 hours?  Yesterday, I had orders on in Bonds, Cotton, Sugar, Silver, and Crude.  I got zero fills.  No biggie.  It played out as a very orderly “bounce” / range bound day after a monster trend day.  Perfect days for losing lots of money.  I was grateful not to get pulled in.  And, it gave me a chance to look at things again with fresh eyes.  What do my “fresh eyes” see?  Two things primarily: #1) I’m less interested / concerned with equities, bonds, metals, dollar…. more small moves ahead… worth waiting for the story to develop further before taking key positions.  #2) It brought a little more personal interest towards the bullish scenario.  So, I personally will be looking for both long and short side on some of my key remaining markets.  But, again, I’m putting some of the gunpowder back in the shed.

Be ready.  Above and beyond all things, be prepared.  Know what you are willing to risk and what you are looking for.  You don’t always have to be right.  But, you need to know what you believe; and, your belief must include an expectation with both a very specific measure by which you will know you are right and most importantly a very specific measure by which you will know you are wrong.  If you don’t enter every trade with both exits in mind, the profitable one and the losing one, you aren’t trading responsibly.

Last week should not be taken lightly.  A 5% sell off on US equities is not a trivial affair.  If we can take off up to another 10% in the next two weeks, I will be relieved and strangely bullish.  On the other hand, if we take out the highs, I will very quickly be on guard for significant crash symptoms ahead.

What do I expect this week ahead?  I expect over the course of this week and possibly part of next week to put in some short term bottoms on equities and a number of other commodities.  But, more important than expectations are what you are prepared to handle.

Keep in mind 2 of the 4 indications of a very large market top being put in have occurred.  The first being we have extreme correlation.  Not only do we have more markets intensely correlated than is systemically healthy; but, many of them are starting to get to extreme levels.  It’s pretty much the world against the dollar and bonds.  If the dollar and bonds go down, stocks, grains, oil, metals, other currencies, other commodities, go up and vice versa.  The second key ingredient to a major market top is extreme volatility.  We are seeing VIX over 30, 5% weeks, breaking of major support and resistance in a wide range of markets.  You should be on alert!

If you followed my commentary last week, I wrote:

Favorite set-ups on the horizon: Very interested in an opportunity to short metals on the immediate horizon.

Silver opened the week at 1771 and closed down at 1630, falling 8% for the week.  So, if you didn’t catch my post on Wednesday before the GDP announcement to take profit, you got another break on Friday.  Of course, if you have more contracts out there, leave some for the longer run.  I read about Joe Ross calling Gold at 400.  Why not leave a little on for the bigger play.

Meanwhile what other opportunities lie ahead for this week?

I’m starting my week looking at possible short in Cotton, Oil, and Sugar below current prices.  Only below current prices.  I’d love to be long bonds.  But, I just don’t have the appetite for that much exposure at the start of the week.  So, as much as I may believe in the trade, I’ll hold off on that one.

General outlook:

We are officially on red alert.  Be prepared to sustain this pace right up until Thanksgiving and beyond.  It is very unclear as to exactly how the story will unfold in the immediate future.  But, this is a great time to pay attention.  With both Fed announcement and Jobs reports, this is likely to be a high impact week.  Be safe.  Be conservative.  And above and beyond all, be prepared.

It’s very rare for modern trading blog sites to actually take a look at 30 years of history.  It’s not all that common for a trader to have that sort of data on hand.  But, today, we are looking at 30 years of history on the 30 year bond.  The chart that follows is the back adjusted futures contract for the US treasuries.  The series starts around 1977 and goes to the present.

There are two things that should be blatantly obvious from looking at history.  First, 30 year treasury bonds have tended, over the past 30 years, to go up in price (in quite jagged price swings).  Secondly, price is currently exploring the lower boundaries of what historically has served as a pretty important guide for lower value. 

What does that translate to?  Expect upward pressure in 30 year bonds.  I can always be wrong.  And, I know at exactly what price levels to start reevaluating.  But, until price takes out those levels, I’m bullish bonds.  There is a very interesting, possibly longer term, move setting up.

As always, this is not trading advice.  This is market analysis.  You trade your own money at your own risk.  Please see the disclaimer on the side bar.  And, get ready, this is going to be a really interesting few weeks.

Whether I’m right or wrong about this NOT yet being the market top that many of us have been waiting for is a somewhat mute point in the bigger picture.  We don’t bet our careers on a single trade.  The trading decisions ebb and flow as I see a confluence of events evolve into an opportunities.  It is largely a practice of discipline, prudence, and patience.  I find it helpful to maintain focus and perspective to entertain the bigger picture and the deeper questions while managing the mechanics of technical trading.  The focus of this post is to consider where one’s attention “should” be right now.

Out of pure principle, I do believe that we are in a secular bear market.  The markets are extremely vulnerable to being subjected to another heavy round of deflationary pressures.  It’s not so much a question of “if,” rather “when”?  The government is trying to do the right thing; they were a bit too short-sighted.  A little bit of “too little too late” and a lot of bit of “non sustainable” fixes.  The government to a fault exercised a bunch of one trick ponies, such as the cash for clunkers series and tax breaks.  At some point, this runs out; yet, the problems remain.  When it does, it will get ugly; it will be extremely visceral.  It will be some sort of headline / newsworthy, next round of staggering collapses and changes.  Or not.  Maybe nature has another journey in store for us.  Perhaps the energy markets will be driven into the stratosphere and before Spring “peak oil” will be on everyone’s mind.  But, tonight, plainly, I’m biased towards the former.  So, what do I look for between now and the next turn?

A few ideas as to where the candy might be:

#1) How about the leading indicators? – Prince Albert’s idea of fading the Leading Indicators in a bear market seems pretty straightforward.

#2) Keep an Eye on the News – wait for a headline to hit your local news declaring a solid recovery on the front page.  (You might be waiting for a long time.)  (NOTE: Obama’s press announcement declaring recovery does not count as a substitute.  He has good advisors that let him know he will may only have a one or two chances in his career to make such a claim, he shouldn’t squander them.) (Over-confidence)

#3) Bear Capitulation – watch and wait for when your boldest “short” friend throws in the towel.

#4) Private Sector Loan Demand – Fade it.  When it returns to healthy levels of activity, it will unleash the next round of beating.  Basic logic is that businesses and governments sacrifice and struggle to get cash to flow to businesses again.  The first signs that they’ve achieved their goal causes them to stop attending to the necessary measures to fix the problem and to go focus on other problems that are hitting.  This loss of attention induces a relapse.

#5) Again… Keep an eye on the news for crisis: If you see major calamity hit again.  Imagine the USPS filing for bankruptcy.  Big.  Visceral. 

#6) Probably worth fading a sizable housing recovery, as all things do indeed occur in waves of one form or another.

Alright, just a few ideas to get your juices flowing.  Happy Halloween!

With the extreme amount of rampant fear out there, it’s a relief to find someone who can speak quite plainly about the impact of the bailout program.  Lawrence Mishel of the Economic Policy Institute gave a short and focused talk which is now out on Fora.tv.  It’s a well spent twenty minutes, covering how the bailout money was spent and what remains for 2010.  I highly recommend it for you next trip to the gym.  As a listener, the biggest relief was to hear someone speak intelligently on the impact of the bailout while focused on the humanity of the situation.  So, much journalism much of the journalism on the topic is lost in the shear magnitude of the mandates that they forget to focus on the impact they are having today.

If time allows, I’ll come back with an unofficial transcript.  But, for the meantime, here are a few comments that stuck with me.

• There is a real social calling here.  Leaders and individuals alike need to rally to find our way out of this situation.  If we fail, this will be one of the greatest failures of known human history.  
• Areas of the United States that were in a recession while things were good are going to be in really bad shape as things get harder over the next few years.  There are many United State’s citizens that will not be in a position to afford basic care over the next few years.  We as people must be prepared to help provide financial relief.
• We are way behind on jobs.  Presently, we are an estimated 9 million jobs short.
• State governments have been a significant part of the bailout and will continue to be so.  If the federal government does not help them, they will in turn tax the people and business and will have a negative feedback loop, estimated at .5% of GDP.
• The biggest portion of the bailout that remains unspent is the infrastructure and jobs portion, which was slated for 2010.  Expect government to be spending significant money on improvements with the intention to provide a place for some of the 9 million.
• An estimated 30% or 60% (I apologize; I can’t recall) of US citizens today are afraid of significant salary reduction in the near future.  (By significant we are talking in a range of $7 – $12k.)
• Keep in mind that as united as the states may be the impact of recession is NOT evenly spread.  African American’s make up significantly more of the unemployed.  The young as a whole are having the hardest time finding work.  Woman are doing better than men.  Etc.  (Warning: social unrest ahead.)