Checking Close Imbalances

One of the nice features of the Schwab SSPro platform is the dynamic news window that automatically reports the daily NYSE order imbalances at 15:40 and then again at 15:50. Traders who've looked at these numbers probably also know that a few prop shops (like Bright Bros) make a good portion of their daily bread by trading these imbalances in the name of providing liquidity. Most of these imbalances are effectively untradeable by the average retail trader due to the small margins, but occasionally the skew is sooo large that it behoves a quick scalp.
Such was the case with Thursday's BAC imbalance. At 15:40 the BAC imbalance was 16.5 M and 10 minutes later that number had only been shaved by 600K shares. The implication was clearly bullish at both the 15:40 initial report and the subsequent 15:50 update. This setup is as close to a free lunch as it gets but you have to deploy significant capital to make it pay off. Entering BAC at 15:40 and exiting at the close would have yielded .14 . . not a lot, but very low risk.
VIXEN traders should have caught the clear VIX cross at 13:45 ($ 16.15) and ridden BAC to the close for a more productive .39 gain.
Note those closing volume bars. BAC actually traded 17.7M shares in the last 2 minutes.
Also note the continually upslope mid panel SMAs and the price position on the double 8s channel . . all very bullish.

Positive Thinking at Work

This VIX reversal is shown with the Qs, but it applied to all the majors across the board on Wednesday. Bernanke's upbeat comments apparently calmed an otherwise spooked market and, per yesterday's comment, miracles do happen.
This brings to mind my previous Bucket List post and although it was published almost a year ago, I might just as well have penned it yesterday. The XLF continues it's run and my little buddy the SMH, which had been dogging it the past few days, has once again surged. I'm frankly not very enthusiastic about SMH at the current resistance levels though and am standing back waiting for a retracement. More on that later.

Below is the inverse of the situation I noted in Tuesday's post . . in this case the VIX and VXX are both positive along with the rest of the major indices. Tuesday's all red situation resolved in a negative surge for the majors and yesterday's early morning all green dashboard resolved in a positive surge for the majors. I consider this little watchlist a valuable intraday tool as this is a snapshot as of 10:38 am PST. 2 minutes later the VXX turned red and 4 minutes later the VIX turned red, corresponding exactly with the VIXEN cross at 10:40 (white circle). This dashboard alignment is not a frequent occurrence, but when it does show up it's worth some close attention.

Low Beta Reversal

The VIX/VXX did finally show their true color Tuesday and it was green. The BZQ2/10 Prognosticator double negative signal at Monday's close did provide a nice heads up for Tuesday's action although the signals were in conflict at Tuesday's close. These fades typically take at least 3 days to resolve so I'm not feeling bullish at the moment and will just stand back until the signals fall back into sync.

Meanwhile, I took a closer look at the XLF components in an attempt to get a clearer understanding of the recent XLF run up. Ten components account for 55% of XLF's net asset value with BAC, JPM and WFC sharing a similar prominent weighting. While WFC and JPM have been slightly bullish, BAC has been on a run for the past week, supporting my inkling that BAC has been the driver for XLF's strength. This looks like another 3 Finger Lead study waiting to happen . . just another item on my ever-expanding "to do" list.

A MLR Rotator sort of the top 10 XLF components (and XLF) delivers USB in the #1 rank. The corresponding daily chart doesn't look bullish however, with all the technicals in all 3 panels currently downslope. While miracles do happen, this doesn't look like an attractive risk/reward situation, and I'll sit out the USB Long for this round.

VIX Teeters

A quick look at Monday's closing stats for my Indices watchlist brings up two items of note: first, DIA continues to show weakness relative to SPY and IWM and second, per my hesitation to go Long VXX in Monday's posts, both VIX and VXX declined along with the SPY, DIA and Qs. It's unusual to see this type of alignment and VXX recorded a new all time low Monday at 26.42. Looking more and more like a imminent reversal, the BZQ2 and 10 displayed a double negative at Monday's close.

The XLF has moved up to rank #1 in the Rotator sort. A considerable part of that strength can probably be traced to the recent positive momentum of BAC, and XLF looks like it still has room to move up as it currently sits on the mean of the LR30 channel and the midline of longer term support (14.00) and resistance (15.35). All Long XLF bets are off however should the VIX/VXX
come alive and usher the markets down.

Monday VIXology

This is a fractal view of the current VIX situation: daily, 3 day, weekly and monthly. Depending on your time frame preference, the VIX looks poised to revisit recent old lows (18) or mean revert back to short term resistance (24). Although we have multiple conflicts of LR channel slopes on the 4 charts, the mid and lower panel MoneyStream and technicals are all downslope, with the exception of the monthly chart.
What I would like to do is buy some VXX at this level as it hit an all time low on Friday (keep in mind the VXX didn't come alive until 1/30/09). What I will really do is wait for the early morning dust to settle, rerun the Rotator in real time and then reassess the wisdom of my gut feeling to buy VXX.

As forecast on Friday, the DIA did show weakness relative to the SPY and IWM as seen in the % change (yellow) column above reflecting Friday closing values. While not a significant number, the fact that the LR channel was able to detect this impending weakness is what keeps me looking at it. Also as forecast, the XLF has moved up in the ranking and now shares a very similar sort value with XLE and IWM. XLF has, of course, the highest beta of the 3 and it will be interesting to see if the dynamics of the sort ranking succeed in the coming week.

I've spent some time tweaking the Prognosticators over the weekend and have made some adjustments to the 2 real time charts, changing the focus of my attention strictly to the Qs in order to reflect the mission statement of the blog. The new fractal charts now display 2 and 10 minute bars of the Qs, having replaced the 30 minute bar chart as too slow IMHO for daytrading purposes.
Each chart displays 75 bars, reflecting the scope of the 2 minute GE VIXEN and the larger Qs charts also shown on the right panel of the blog. The Prognosticators incorporate a blend of both trending and trading range algorithms in an effort to identify trading opportunities in both modalities, while at the same time avoiding false breakouts signals.
The yellow and blue leading lines are 7 and 14 period linear regression lines respectively and I pay particular attention to intraday positions when the 7LR line and/or 14LR line pivot from upslope or downslope to a flat profile as this condition often signals an impending momentum reversal.

Rotator and the DIA

The Rotator model has moved DIA to slot #1, although it's probably useful to note that the top three . . DIA, IWM and SPY . . share a relatively similar sort value, so we don't want to place too much emphasis on that #1 position.
In fact, of some interest is the position of the top 3 slots with respect to the LR30 channel . . DIA is effectively at the upper channel band while IWM is slightly below and SPY is hovering at the mean . . thereby suggesting that, despite the top slot position of DIA, it's actually the index most likely to show the greatest weakness in the short term. My old buddy the VIX has once again penetrated below 21 and with each .25 move down in that index the odds for a reversal in the majors increase. We're looking more than a bit long in the tooth after 3 days up this week and I'm in a bearish view for today.

BTW, congrats to local boy Shaun White on his X-Games snowboarding gold medal, making it 3 golds in 3 years. Shaun's a likable character around here who can occasionally be seen tooling around in his new Lamborghini (he wrapped the last one around a tree). While he had been known previously as the Flying Tomato, he has now grown up and chosen to be known simply as "The Animal", as he believes he closely resembles that classic Muppet character. Way to go Shaun.

SMH & EEM Situations

Yesterday's suspicion of impending reversal in the SMH was confirmed 10 minutes after the open when 5 separate exit triggers fired. #1..the parabolics signalled a short (cover). #2.. price closed below the 8 bar hi/lo channel, #3.. the VIX crossed up through the SMH, #4.. the lower panel technicals (MACDs and SMAs) all went downslope, and #5..in conjunction with the parabolic signal, SMH failed to gain enough traction to even hit R1 resistance. Any 2 of these signals should have been enough to kick long SMH positions, what's usual is to see all the signals line up concurrently in such a dramatic fashion.

BTW, the new BZP2 market prognosticator concurrently fired a Sell at 9:40 for the larger market. One problem with the BZP2 is that you can't look back after the fact as this is a real time indicator only, so once it's gone. . .it's gone. Like real life. . .there's no do-overs. The early response to the BZP2 was very encouraging so I've added the BZP30, which uses a similar algorithm on 30 minute bars. Watching these 2 charts in real time can provide a a useful adjunct to other momentum indicators if, for no other reason, than to warn you off entering against the trend.

As promised, the current status of the EEM butterfly entered on Jan 28th is shown below. At this point the setup has earned a measly $ .21, with a full month of decay yet to transpire. The cash entry price of the EEM setup on 1/28 was 39.15 and the price as of this 2/17 9:00 AM PST update was 39.35, a net gain of .20 from the 1/28 price. While the butterfly hasn't generated a bigger gain than a buy and hold tactic, what it has accomplished is a muting of the risk factor that loomed on 2/5 - 2/8 when it looked like the bottom might fall out of the market. I'll look at the EEM situation in another 2 weeks with these benchmark metrics in mind.

Finally, I've mentioned many times my primary reliance on the NYAD for trading signals and/or confirmations. The Clueless One chimed in with a unique perspective on this invaluable metric and it's worth a close read. While I use the NYAD almost exclusively for daytrading, Clueless demonstrates a wider application. Speaking of the NYAD, the classic VIXEN also fired yesterday at 9:40 as the VIX crossed up through the NYAD, which should actually be considered confirmation signal #6 for the SMH short (cover) trade.

SMH Surge Continues

Based on Tuesday's EOD Rotator update SMH is still ranked #1. Keep in mind that the yellow column reflects % change, not absolute price change. SMH is now fast approaching the upper LR band resistance and I've lightened my long position by 50% as of yesterday's close. The prevailing momentum among many bloggers vis-a-vis the Traders Almanac is that the rest of the week will be weak. This, of course, is not a bankable risk management approach IMHO and I'm still net long, but hedged going into expiration, with one foot out the door.
An interesting development in the Rotator list is that, while the SMH made a nice power surge today, the other % change leaders, including DBC and DBA are low beta. GLD, which also made a big jump has very low beta suggesting that there are some underlying cross currents at work here and the apparent strength that we witnessed on Tuesday may be subject to some imminent reversal. For now I'll just play it day to day and focus more on daytrading setups than longer term plays.
Regarding longer term situations, the EEM is tracking perfectly in sync with the butterfly setup posted on Jan. 29th and I'll review the details more closely in tomorrow's update.
I've made some changes to the blog right panel layout, adding a Market Prognosticator which looks at 2 minute bars. The algorithm operates similar to the previously posted NYAD proxy but I've introduced some modifications to take advantage of the new, expanded version of FreeStockCharts in order to (hopefully) improve the robustness of the signal.

SMH Deconstruction Update

Almost 2 years ago I deconstructed the SMH and, based on its current dynamics and top ranking in the Rotation model, this seemed like a good time to take another look. SMH components and proportions haven't changed significantly . . INTC and TXN are still the 800 pound gorillas in this ETF and while the top 10 holdings comprise 87% of the assets, the top 2 comprise 42.5%, and the top 3 components comprise 55.5%. This rather unique situation cries out for a 3 finger lead and reverse analysis and I'll be exploring those setups in the coming weeks. SMH represents a somewhat different case than the Qs, which is comprised of 100 stocks, with the top 10 representing 47% of the assets and the top 3 representing 26%.
In the meantime, SMH continues to display unusual staying power in the face of deteriorating technicals among other sectors. INTC has been the springboard for the latest surge although TXN and AMAT look poised in join in as INTC's upward momentum now appears ready to fade. Pair traders might consider short INTC, long TXN for the next couple weeks and I'll run the ETF Rewind pairs analysis and Project Z forecast later this week to check the possibilities and probabilities.

Rotation Update

Looking forward to the shortened trading week, these are the 2 day scan results of my rotation portfolio using the 6 period moving linear regression channel. I've been watching the SMH over the past few days and have consistently noted it's penchant to lead the markets up. While SMH has exhibited an intraday fade pattern for most of the week, the net effect has been higher highs and higher lows, behavior that typically accompanies a continued rise.
I've been out of the trading loop most of the week due to an unexpected family matter, but plan to get back up to speed by Tuesday with updates on Project Z and the EEM Situation.

Offline Until 2/15

Fidelity Coup and F&O

It looked like Schwab had a good thing going when they announced their 8 commission free ETFs in December and then Fidelity comes and blows the doors off with a portfolio of 25 commission free offerings. These aren't newbie low volume ETFs, but tried and true ishares with high volume kickers like EEM and IWM featuring huge open interest and penny option spreads. Long time Schwab loyalists like myself are now faced with a simple business decision and the course of action seems pretty clear. With Fidelity's variety of ETFs it's possible to construct a relatively simple rotational model, both long and short term, using the AGG and TIP as hedges. If Fidelity would just throw a technology ETF, a commodity based ETF and few inverse ETFs into the mix they'd soon have the only game in town.

I've mentioned some of the free e-magazines before but here's a refresher on F&O, a product of the folks that publish Active Trader. This month's issue has some intriguing ideas, including a different spin on the butterfly setup and a simple Keltner channel system (for investor types).
If you visit the site you can also download the January issue, which contains a few more nuggets including the slingshot strangle, which looks like a timely strategy.
Although the title refers to futures and options, any trader worth his salt knows that many of these tactics and setups work effectively with stocks and ETFs.

Project Z and the Qs

This is the Project Z outlook for the Qs as of Wednesday's close. Based on the Project Z parameters the Qs are quickly approaching overbought conditions relative to overall market volatility. We have multiple exit conditions and trailing stops in place to limit risk exposure and retain any gains and I expect the current open position to be liquidated today or Friday. The current trade had a double entry (second entry at yellow dot) and is at a break even point after a 5 day duration on the initial entry while holding a .63 gain on the second entry .

Below, the daily rotation model using a 6 period moving linear regression has now pumped the Qs into slot #1. I've exposed a previously hidden metrics column (in yellow) which shows the % change in price for the day. This is the metric that I use as opposed to absolute price, which really provides no basis for evaluating relative performance. While the Qs lagged yesterday, they made up the difference (and more) today.

Rotation Variations

Some impressive strength and breadth in the markets over the past 2 days, although my Project Z indicator has now penetrated into overbought territory on virtually all the major indices.
Just for comparison sake I ran the 6 period moving linear regression sort on both 1 and 2 day bars. Of note is the concurrent low rankings of VXX, SH, TLT and the Qs.
Perhaps surprisingly, the SPY is ranked #1 on the daily sort with the DIA close behind. A more typical scenario is momentum leadership held by the higher beta indices. The sort results reflect SPY performance Tuesday: up 1.3%, with the IWM & DIA up 1% and the Qs up .7%.
As an aside, I personally avoid trading the DIA as it's composed of only 30 stocks, many of which are heavily gamed on a daily basis by large prop shops and the open and close in DIA components can be interesting, to say the least. In addition, a quick look at volume distribution among the DIA components will show that the hands down leaders every day are often INTC and MSFT, a fact that tends to skew DIA performance in line with the SMH. That's not necessarily a trading handicap, but it does help to be aware of the alignment.

Some major changes to the blog format and content are in the works that I hope will both enhance the functional utility of the site for my readers and at the same time allow me more time to focus on actual trading. Fellow bloggers appreciate the amount of research and preparation that goes into these posts. Unfortunately I've come to the realization that such a time commitment is compromising the amount of attention that I can devote to trading, which is what keeps the lights on and Mrs Barnes happy. The result will be a more streamlined and consistent blog content that will more closely reflect actual trading decisions that I'm implementing.
The new format should be operational by the end of the month.

Rotator and EEM Situation

Market dynamics changed quickly Monday as we avoided an ominous collapse that looked like a good bet on Friday. The TLT position got washed out right from the get go and the interesting development was that slots 3 and 4 on the rotation sort (GLD and the Qs) proved solid money makers.
I now realize that one problem with the Rotation model is that the inverse positions are limited to VXX and TLT and I probably need to pump up the portfolio of short side candidates to balance the bullish side of the list. I'm also going to crank down the time frame from a 3 day to a 2 day bar in order to catch momentum turnarounds a bit sooner.
The current sort is shown above.
As an aside, anyone wishing to dig deeper into the somewhat arcane nuances of the VXX should check out Bill Luby's (sometimes known as Mr. VIX-it) exploration of this complex ETN.

The EEM Situation discussed last week along with the butterfly setup is developing nicely based on the Project Z algorithm. The position is currently on day 3 of a BUY signal and we have 9 days remaining before a fixed bar exit closes the position. A momentum excursion into target resistance levels at 1.8 will also cause the trade to exit. The algorithm currently is displaying a value of 1.00 so I'm expecting this trade to close well before the fixed bar date.

Monday VIXology & Rotator Update

This week's charts are displayed on 3 day bars as this is the time increment I've adopted for looking at the Telechart Rotator model.
The VIX has now risen to the upper LR30 channel band and appears to be resting there while contemplating the next move. All the majors are showing lower LR 30 channel "kiss-offs" with the Qs displaying some reluctance to capitulate.
Keep in mind these are 3 day bars and on daily bars the Qs situation looks a LOT worse . . in fact, for the week the Qs showed above median weakness.

This is an update of the Telechart Rotator using a 6 period moving linear regression, a study that's resident in Telechart and offers instant sorting capability, based on a variety of metrics, for your custom built watchlist.
Last Friday's selection of TLT as the best momo candidate was suspect at the time. but ultimately turned out to be the best choice for the week. While TLT only gained .34% for the week, compared to the substantial losses of the majors (SPY -1.67%, IWM -2.62%, Qs -3.1%,
and EEM -3.66%), the TLT proven to be a safe haven.
Looking forward this week, TLT still has slot #2, with #1 being reserved for VXX . . an ETN that has it's own market dynamic idiosyncrasies that do not necessarily conform to standard indicators. Finally, I would be resmiss if I didn't mention my Clueless trading buddy who also uses the Telechart program to define his own version of a rotation model using a MoneyStream Surge. The Clueless One frequently expounds on various nuances of these setups and always has a few nuggets to share. You won't be bored.