Friday, July 02, 2010

A New Approach

It's easy to be pissed off and frustrated by the HFT manipulation of the markets that has become commonplace. Unless you've been trained as a jet fighter pilot like some of my trading buddies your reflexes just can't keep up with the intraday big bar trend reversals that have become the new paradigm for daytraders.
There's still the standard benchmarks for traders like the pivots that continue to provide valuable intraday reference points and, perhaps interestingly, I've noticed that the pivots appear to have become even more reliable as stop and reverse or stop and rest points than they have before. This may have to do with the nature of some of the preset risk management controls embedded in many of these HFT programs, because once the pivots are violated the volume surge typically accelerates substantially.
Now, you know me . . I'm always looking for a better mousetrap, or in this case an easier mousetrap.
I've been following the recent developments of my trading brother in arms the Clueless Q Trader, who shares my underlying fascination with the Qs as a trading vehicle. Clueless has now migrated a goodly portion of his daytrading over to the SSO and, as I pondered and examined this development, it's simple brilliance struck me.
I've often said that if I could just trade the NYAD, life would be a breeze. Of course the NYAD is just an indicator reflecting the relative NYSE advancers versus decliners. BUT, the SPY is a perfect mimic of the NYAD . . you'll never see any significant divergence between the SPY and the NYAD. Using the SSO just doubles the beta. . voila!!.
Thus my new trading platform setup as shown above to capture those SSO moves. This is the Schwab SSPro platform and includes just 4 charts . . SSO/VIX, VIX/NYAD, NYAD/VIX and TICK. In between the charts are 3 dynamic scrollers that display the new highs and lows count of the day for the NYSE, the indices and the Nasdaq. Below the scrollers are 2 watch lists. . one of the major indices, the other of the volatility indices plus a few wild cards. The Watchlists have an interesting Schwab feature that let's me turn on the real time tick for each item, so I can see at a glance whether the major or vol indices are in alignment.
I've been using this setup for just a few days, but am extremely impressed with it's reliability and ability to discern the market turns. The charts above are shown on 2 minute bars, but the whole display is fractal and can be set to 1, 2, 5, 10, 30, 65 minute or daily bars.
One thing you might notice is the clarity of the VIX chart relative to the SSO chart. The dynamic ATR of the VIX 2 minute bars is surprisingly low relative to the SSO and this is the reason that I juxtapose the 2 setups side by side. While momentum might not be immediately clear on the SSO chart it's crystal clear on the VIX chart.
This is a work in progress and no substitute for a co-located server at the exchanges and a million dollar software program but as a discretionary trading tool it's the best thing I've found to date.

2 comments:

Daniel said...

Yes. This seems like really good work, and a good approach. I know of the Schwab Watchlist feature you speak of and find it yet another of the useful items on their simple, easily customized Watchlists. Cross market correlations are easy to do with their setups, especially at inflexion points where some groups or sectors are making intraday HIs (or LOs) but other sectors are not confirming.

What of the notorious addition of much claptrap to the NYSE over the years, in the form of closed end funds and preferred stocks, and mainly interest-sensitive securities, which supposedly “pollute” the equity-only aspect of the NYAD?

Is there in fact an A/D ratio, with a universal symbol, which reflects ONLY the UPs and DOWNs of the SP500-- just those stocks? Not the claptrap? That indicator would be nearly an exact correlate to the SSO...

I know charts like this exist, Carl Swenlin has posted such on his blog. But I don't know if a streaming ratio-number can be generated on a Watchlist with this data, the way ‘NYAD’ does.

If there were such a SP500-specific one, it would be the one to use. It IS possible that NYAD and SPY may NOT correlate as closely in different interest rate environments than the current.

You are pushing the cutting edge, always enjoy reading your posts!

Daniel

bzbtrader said...

Daniel,
Having been at this for over 20 years I still think this is about as good as it gets. The CEFs and preferreds volume is piddling when considered in the context of total S$P minute to minute volume so I'm not really concerned about the possible noise factor. The beauty of watching the SSO (or SDS) in conjunction with the NYAD and the VIX is the real clue. I could also show the SSO action against the TLT which has an equal of better signal than the VIX for daytrading on 65 minute bars.
Thanks for checking in.