Qs follow through

The Qs followed through with the upside move from Friday. Although the RSI is now flashing a moderate overbought signal and the MACD looks ready to reverse, the 3/7 DSMA is wide open and suggests we may see the old high revisited before a meaningful reversal. Volume was tepid for most of the day, finally picking up for the last 2 hours as the NYAD went upslope 45 degrees. Strangely, TICK readings were not reflective of the early strength in the markets, modulating between the PP and S1 pivots until the last 2 hours. Short covering? Hard to tell at this point, but the next 2 days should tell the tale. The Qs have demonstrated greater strength than the DOW, IWM or SPY for the past 4 days and appear poised to make new highs, notwithstanding negative fallout from this week's news.

The VIX went downslope for most of the day after an opening pop, and only showed a reversal during the last 1/2 hour. The VIX continues its slide below the 10 DSMA as the MACD rides the zero line. As with Friday, few clues here as to the next move.

NYSE and Program Trading

This is part 2 of a series of posts started Sept. 1st on order flow dynamics. This post covers program trading (PT) .. that portion of trades accomplished through automatic executions driven by set buy/sell algorithms. Also see http://www.programtrading.com/ for more info.
A couple things strike me about this data:
Volume of trades - PT accounted for fully 80% of the NYSE trades during August. That's a lot. One thing to keep in mind is that there is no single trading algorithm used to trigger trades, but rather thousands of them, based on a variety of parameters including support/resistance, time of time, technical indicator signals, arbitrage with the futures, pair trades, etc. And most of these algorithms are dynamic and scalable, ie., triggers at 6:30am don't resemble triggers at 7:00am. What PT takes out of the equation is the foible of human emotion trying to second guess or finesse a trade. Nothing personal, just good risk management. And the reason there are so many PTs is simple mathematics . . . if you want to buy 250,000 shares of WM and do it at 100-200 shares per trade so as not to show your intent, it's going to take about 1600 trades.
Size of average trade - this is interesting because it is only 2/3 the size of the average retail trade. Where are all those 1000, 10,000 and 50,000 share orders? It's hard to tell and program trading is designed specifically to make it that way. There's a very successful local company (San Clemente,CA) that markets and manages software called "The Executioner". The clients are those trading more than 1M shares a day (you get a price break if you trade more than 10M). The software is designed to take a 1M share order and break it down into 100 and 200 share orders and trickle them into the pipeline at the most advantageous time. There is similar software available from a number of vendors designed to accomplish the same ends, although you don't read about it Active Trader or Technical Analysis of Stocks and Commodities. The net effect is little disruption to the price . . which benefits both big buyers, who don't care to show their hand and pump the price, and big sellers, who don't want to show their hand and drive the price down. Front running orders has become a lot more complex lately unless you've got a Sun8000 computer and some very sophisticated (and pricey) software. So, as you sit in front of your trading screen, watching level 2 quotes flow by displaying an apparently endless stream of 100 share orders, you're really watching a flood of program trades interlaced with a trickle of few others.
Implications - I routinely use the TICK, NYAD, VIX and volume to gauge short term momentum and trend strength because I assume the specialists and market makers (MM) can't manipulate these numbers. This is a popular view among many bloggers and traders. Trying to determine market strength by looking at L1 or L2 data is not practical, since MM aren't obligated to show their true order size - the same option I have available to me as a retail trader. So I'm always looking for a clue, an edge, an indicator, a tell that the MM can't finagle and that will provide me an undistorted peek at the true character of the market. I rely heavily on the MACD of the TICK and NYAD to guide my day trading (along with pivot targets), and while it is hard to fudge the NYAD I am now rethinking the effectiveness of the TICK indicator based on this current research. Dr. Brett's hybrid TICK/volume indicator looks like it still has legs, and I will explore this issue further in coming posts.

NYSE and the Retail Trader

This begins a 4 part series on NYSE and NASDAQ market participation and is a follow-up of my August 17th post on the Facts of Life.. I began this study to better understand how orders flow, who controls the markets and how they do it, since I'm always looking for a trading edge. As the NYSE evolves from the specialist mode to a hybrid mode to an electronic market like the Nasdaq, the dynamics of order flow and how it is controlled have also evolved. My goal is simply to look at the statistics provided by the NYSE and Nasdaq and to determine if, in fact, some patterns and probabilities can be detected.

I welcome your thoughts and comments on these posts as I do not claim to be a savant (or even very smart as Mr. Market keeps reminding me) and 2 heads are always better than one when looking at a data field. The data is presented as digital photos for ease of presentation. If anyone wants the Excel files to play with, e-mail me at bzbtrader@aol.com and I'll be glad to forward them.

The statistic that stands out for me is the size of retail trades. This represents the volume of trades through retail brokers such as Schwab, Fidelity, TradeStation, Interactive Brokers, ETrade, AmeriTrade, etc. There's an awful lot of money being spent by these brokers trying to attract a client base as evidenced by my weekly mail and phone calls from at least 3 of those mentioned above. Assuming each client makes 1.5 trades per day equals roughly 123,000 traders on an average August day. That's not a lot. Neither is the volume of retail trades. The consistency of the average trade size is also interesting since I had expected that traders would scale up on positive days and scale down on negative days. In fact, the tendency appears to be the opposite. This sheet reflects only NYSE data, an arena I much prefer to the Nasdaq (Qs are the exception), although many traders I know would rather eat ground glass than trade the Big Board. If there's any simple lesson to be learned from this first glance at the data, it's that going with the flow is an absolute must and that to follow or get out of the way are the only safe courses of action.

For several years I was able to generate a respectable and consistent ROI when I found that it was possible for a retail trader to actually move NYSE stocks, in the low volume (less than 75,000 daily volume) issues which tend to be illiquid with huge spreads and thin or no options . But this endeavor requires at least $200K in risk capital and a special set of trading skills and risk management rules. My current risk comfort level prevents me from following this path again as I encountered more than a few moments of dread and terror along the way.

Qs tickle 49

It was a struggle, but the Qs hit our 49 target, before a modest anticipated retreat prior to the long weekend. It was a solid day, although the volume was a bit subdued. The Qs closed with a doji and have now flashed a 10/20 DSMA buy cross on a rising +.5 MACD. This signal should be good for at least 1 more up day, although at 49 we are at a solid resistance line, so I am prepared buy some QIDs for insurance and fight the good fight another day.

September has a reputation as "the cruelest month" and Adam over at the Daily Options Report noted the anticipation that September will be a volatile month, so gird your loins.

The VIX had a relatively slow day, with less than a 7% range, and closing on a long tail doji chasing a falling 10 DSMA. I can't read much from this pattern other that it doesn't contradict the Qs positive signals. The portfolio added some near Q/49s buy/writes this morning on the pullback.

Stock Traders Almanac

I've mentioned the Almanac several times in recent posts and received several e-mails from folks not familiar with it. Published annually for the past 40 years, the almanac provides a wide variety of statistical probability studies of seasonal, daily, hourly, etc. trading patterns on the SP500, Dow and Nasdaq. The typical day in the market trading profile based on 30 minute bars is worth the price of the book alone (p. 139). Some of the longer term expectational analysis setups have not panned out very well lately, but this is a study of probabilities, not certainties, otherwise the price would be a lot higher than $28. The 2008 version will be out in a couple months. or you can pick up a cheapo 2007 copy here that will carry till the end of the year.

This is an FYI post only..... I have no financial interest in this deal.

Qs show muscle

The curse of Thursday before Labor Day lives, but not for the Qs. Almost everything else was down . . energy, financials, gold, retail, housing, the DOW, the SP500, the IWM, but both the COMPX and the Qs (and SMH) managed to close in the green. Given today's overall negative market tone, the Qs are showing strength on increasing volume (first EOD volume finish above the 8 DSMA in 9 days). Historically, (my trusty Stock Traders Almanac) the NASDAQ has a 70% probability of of closing up the last trading day of August, and while I'm not betting the farm on this one (the Almanac has had less than stellar results this year), I think we will see Qs 49 before Qs 48. Of course, based on current volatility levels we could realistically see both Q49 and Q48 within Friday's range as risk managers bail prior to the long weekend.

The VIX had only an 8% range today, which it flashed at the open, then retreated, then clawed back up to close .50 off the high. This was an inside day hammer, with the VIX now fluttering around the 10/20 DSMA convergence, and still at the MACD zero line. The crystal ball is a little cloudy at this point and I'm reserving judgment on any likely next move until the day after Labor Day, which has a mixed history of performance.

Over the weekend I will begin a 4 part series on tells from NYSE and NASDAQ order flow.

What a surprise !

The markets did a complete about face today, performing absolutely the inverse of yesterday. Buying started strong out of the gate and never wavered for the rest of the day, closing just pennies off the high. It will be interesting to see if the market can hold at this level and avoid the curse of Thursday, which has been up only once in the last 10 years.

The Qs almost retraced losses for the previous 2 days and are poised back at the 50 DSMA and intermediate resistance and ready to launch a pre Labor Day assault on the 49th parallel again.
The VIX had another 10% day, accomplishing an abrupt reversal and closing at the MACD zero line once again.

We've got some news tomorrow, and that will doubtless provide the catalyst or damper for further market progress, although the more I look at market internals, the less I believe in event driven market performance and the more I believe in market manipulation. More on this over the weekend. Until then, the portfolio is now 85% net long.

VIX back to 20 DSMA

Qs volume picked up today, but few buyers appeared as the Qs retreated from the 50 DSMA to the 10 DSMA in a pervasive selloff. Both the volume and the selling accelerated into the last 2 hours, turning parabolic for the last 30 minutes and I don't think it's over yet. Both the RSI and the MACD are poised to fall further before an oversold signal flashes and we seldom get reversals at current signal levels.

The VIX made another 15 % jump today, blowing past the 10DSMA to close above the 20 DSMA. The frequency of these high volatility 10-15% daily moves has characterized August with fully 10 of the last 20 trading days showing 10% or greater moves. The MACD is now above the zero line and headed up so VIX 30 will be the next likely target.

This was a very weak day. The NYAD flatlined along .20 for most of the day before giving up any hope of a rally 90 minutes prior to close and finishing at a dismal .15.

The TICK was similarly weak all day, staying below the 5,20,3 MACD histogram zero line for all but 20 minutes during the noon hour.

VIX bounes on 6 week volume low

The Qs gave up some ground today, bouncing off the overbought 50 DSMA and doing so on the lowest volume in 6 weeks. 6% of the Qs total daily volume traded (down) in the last 10 minutes of the day and the selling can be expected to carry over into Tuesday.

As expected, the VIX retreated from the oversold lower band and rose almost 10% to close just off the daily high at 22.72 as it continues a move back to the 10DSMA.

The last 90 minutes of the market was decidedly negative with special virulence reserved for the last 15 minutes, punctuated with a closing TICK of -150 and a NYAD of .39.

Qs Jack-in-the-Box

The Qs showed surprising strength today, climbing to close at the daily high and at intermediate resistance. The Qs also closed at the 50 DSMA, a new 12 day high and at the MACD zero line. The fact that this was accomplished on the lowest volume in 30 days (88M) is not the only cause for concern.

The VIX continued its descent, now approaching the lower band and pushing through the MACD zero line. The RSI is flashing a solid oversold signal after today's action and , typically, we would expect a retracement (bounce up) at this level.

For those who are familiar with the Stock Traders Almanac, I note that they mention August 31st as the close of the shortest bear market in history which lasted 45 days and ended 8/31/98 after the S&P recovered from a 19.3% decline. If the market can sustain its current recovery, we may beat that record next week, however, Labor Day is typically a time for market volatility with next Thursday expected as a major threat, being up only once in the last 10 years. It will be interesting to see how the market sets up next week prior to the extended weekend.

Qs stumble; VIX oversold

The BAC move to prop up CFC had only an overnight impact as the pop fizzled at the Open. Woe to the after hours traders who paid up to a $5 premium on yesterday's CFC close in anticipation of a bigger pop today. The perception of a looming major financial crisis was evident today with the lack of market strength and/or direction. The markets seem poised awaiting the next shoe to drop.

The Qs strength couldn't carry though today after the Open, and after stumbling around much of the day, finished again at the 20DSMA on volume close to yesterday. Not a lot to note today in the Qs other than the overbought dinky top.

The VIX is flashing an oversold signal, still hanging 10% below the 20 DMSA.

VIX 10% below 20 DSMA

The Qs extended their gains today, still showing greater strength than the DOW, but accomplishing it on the second lowest volume in the past three weeks. The Qs are at the 20 DSMA. This is the 4th day up and the Qs are tickling the overbought band. After hours the globex is way up, presumably on BAC announcement to bail out CFC. This should create a large gap up in the morning and gap faders might take note of Tuesday's post.

The last 1 1/2 hours of the market showed consistent and sustained buying with upslope TICK and NYAD and significantly downslope VIX. Closing TICK of 841 is bullish.

The VIX has now retreated to close 10% below the 20DSMA. This is typically a signal of oversold levels, but these are not typical times. Lacking any intervening data, the BAC/CFC news will carry the markets flying in the morning, along with a continuing decline in the VIX. The question is will the gap hold?

One characteristic of market activity during the past month is that classic technical patterns have developed in a greatly accelerated mode. That is, MA crosses and RSI breaks that normally transpire over 4-10 days now occur in 1 or 2 days, ostensibly reflecting the elevated volatility. I suspect many traders, including myself, did not immediately catch on to the new warp speed paradigm of market dynamics, and were thus frustrated in the process. I also suspect that it's not over yet.

Qs close at 10DSMA

The Qs edged up to hit the 10DSMA today, unfortunately on lower volume than yesterday. The Qs did show more strength than the DOW, riding the whole afternoon session between R1 and R2 and closing strongly, again with none of the typical closing volume surge.

The TICK was interesting today ..... after running upslope 2 1/2 hours, it basically flat lined for the rest of the day, giving little encouragement to buyers.

The VIX has now retraced to the 20 DSMA and has reached support and short term oversold territory after a relatively low volatility day (lowest in 3 weeks).

The question is: was today positive (Qs) and (SPY), or negative (DOW)?

Based on Wednesday turnaround patterns, if we count today as negative, then tomorrow is more likely to be a positive day. That expectation is supported by the technical indicators, although as the VIX gets more oversold the likelihood of a return to selling looms and the current lack of volume argues for that scenario.

Filling the Gap

For those who prefer the excitement of playing gaps, Bespoke conducted an interesting little study on Friday's gap behavior that's worth a look.
Gap studies seem to have become very popular lately.
Here are a few recent print articles on the topic:
June 2007 Active Trader magazine: One Day Jumps - by David Bukey
August 2007 Active Trader: Opening Gap Trader - staff writers
January 2007 Active Trader: Gauging Gap Opportunities - by David Bukey
July 2007 Technical Analysis of Stocks & Commodities magazine:Laps and Gaps - Larry Connors
Also in July 2007 TASC: Premarket Prediction- V. Wang

Holding pattern

The Qs showed a doji today and the VIX had a wide range close low bar at the 10 DSMA. The RSI and MACD readings of the Qs suggest continued movement towards the 10 DSMA. As mentioned previously, that goal is a pretty good bet. After that.... the games afoot.

Volume was considerably subdued, the second lowest in the past 3 weeks. The previous low volume reading (6 days ago) was also accompanied by a doji that was the harbinger of 3 dramatic down days.

The markets may find renewed strength short term, but major reversals do not typically occur in a smooth slope and action in the financials today indicate that not everyone is buying the buzz. The dreaded W bottom (or variation thereof) is a much more likely scenario so caution is advised until the market shows real momentum.

Facts of Life

The above picture is, of course, Norman Rockwell's Facts of Life. Here are a few of them that you ought to be aware of based on Thursday's exciting trading activity.

NYSE Closing Summary
Trade Date 8/16/2007
Number of Issues..... 3,591
Advance-Decline Ratio.... 0.6
NYSE Trades ....8,908,020
NYSE Volume....2,989,836,240
NYSE Dollar Volume ....115,188,118,914

Retail Buy Trades ....152,848
Retail Sell Trades ....204,524
Total Retail Trades ....357,372
Retail Buy Volume....53,008,213
Retail Sell Volume.... 76,575,492
Total Retail Volume....129,583,705

Program Trading
Index Arbitrage Program Trades ....576,924
Non-Index Arbitrage Program Trades ....6,231,010
Total Program Trades....6,807,934
Index Arbitrage Program Volume ....111,238,364
Non-Index Arbitrage Program Volume ....1,534,370,009
Total Program Volume....1,645,608,373

NYSE Broker Volume Top 5
Nasdaq Execution Services.... 794,915,984...... 19.70%
Goldman Sachs Group....339,484,455....... 8.40%
Merrill Lynch....269,748,370....... 6.70%
UBS....213,478,481....... 5.30%
Morgan Stanley & Co....205,736,575....... 5.10%
Lehman Brothers Inc....195,926,832...... 4.90%

.

Program trading accounted for 55% of total NYSE volume.

Retail trading accounted for 4% of total NYSE volume.

Program trading accounted for 76% of NYSE trades.

Retail trading accounted for 4% of NYSE trades.

These are typical readings, although retail trading is normally 5-6%. If you want to track the NYSE data on a regular basis, go to the NYSE site. Lots of free data and some pricey real time databases for the pros to help them develop program trading algorithms to challenge your skills. (Also see August 10th post).

VIX touches 10 DSMA then heads back up

Amazing how quickly this market turns ... in large part thanks to the overnight FED intervention to lower loan rates .5 percent. And they decide to do it on options expiration. What a coincidence! All the trading gurus that proclaimed Thursday the bottom are now high-fiving and yucking it up. Enjoy it while it lasts.
The Qs shot out of the gate at the open, along with the rest of the market and after an early retracement, chugged along back up to close solidly just off the high of the day, with no Friday afternoon fade. Volume backed off a bit to 223M, which is at the 20 day median.

The VIX is considerably harder to understand. After opening down 6.50 from Thursday, the VIX rose for 2 hours as the general market declined, then basically went into a funk for the next 3 hours as the market chugged up. Then at 5 minutes to noon, the VIX exploded up .80 while the rest of the market was basically dead. I'm still looking for an explanation for that phenomenon and the subsequent behavior of the VIX as it actually continued to rise into the close. VIX got down to the 10 DSMA in one day from a level yesterday that looked like a long, long ways off. Now that the market makers have had their way with the rest of us it will be interesting to see if we get a follow through on this strength Monday or whether VIX will head back to the upper bollinger band. This seems more like a probability than a possibility as the VIX finally closed at 29.99, more than 10% above the 10 DSMA.

VIX hits 37.50 but closes down 6.70

The Qs sailed right through the 200 DSMA at the open (45.40), continuing down to 44.40 before showing a 5 minute bar hairy bottom at 10 (pst), finding a tenuous base and cycling up to finish at 45.62. The 1.52 daily range and the huge volume (362M) only begin to hint at the wild ride that traders experienced today. It was even more frustrating for Schwab clients when the entire SSPro trading platform, the website and the phone lines went dead for about 20 minutes today around noon, and while I could get quotes from other data providers I was unable to access my account and make trades. NOT A HAPPY SITUATION, SCHWAB and I can't wait to talk to Chuck about that.

Once again the VIX was the story.... hitting 37.50 at one point with the DOW down almost 350 points. The range on the VIX today was 7.06 . . . that's a very big number! The VIX is still riding the upper Bollinger band and is not exteremely overbought after today's retracement. When the VIX does retrace to the 10 DSMA, then it's time to gird your loins and prepare for renewed volatility.

I'd like to bang the drum along with our friend above and a lot of the trading gurus, but being risk adverse I'm withholding judgment on whether this was the bottom for a few days. I've got a hutch that the VIX may make another run at 37.50 before we see a real turnaround as we are beginning to see some sector rotation in the face today's action. VIX redux may not happen until next week and I'm looking for select setups to profit for that eventuality.

Hair Raising VIX

The Qs continue to falter, dropping through support at 46, closing on the low and now headed to the 200 DSMA at 45.30 on increasing volume unless we get a breather here soon.

The story, of course, is the VIX, now at a 4 year high after hitting a stunning 31.76 today and then pulling back just a tad for the close. The weekly VIX chart is attached just to show how some of these parabolic short term VIX doubles have resolved in the past (May 06, March 07) although the current MACD readings suggest this is something different as the VIX remains only modestly overbought.

Loose Snake

Looks like the spitting cobra mentioned on Monday did get out of the bag, and it wasn't pretty. Next stop for the Qs is in the 46 range and the weak indicator signals along with the NOT oversold reading argue for that target to materialize. Whether 46 will provide support, or just a jumping off point to lower levels remains to be seen.

Contrary to the previous post suggesting expiration week might provide lower VIX readings, this has not come to pass, so far. With retail, housing, financials, energy and gold all taking major hits, it's a real leap of faith to believe the markets can turn around and hit new highs any time soon. The VIX, despite the current lofty levels, is not in overbought territory, and while continuing to give hints that a retreat to the 10DSMA is imminent, these initial spurts have turned into wide range head fakes with no indication that this pattern is about to end. I continue to sell near ATM/OTM calls on the marginal rallies and buy back on the slides, although there is not much juice left in these with 3 days to expiration..