From October 2008 to March 2009, the financial system was crashing. A lot of funds got wiped out, a lot of dumb money was eliminated. The remains are not so much the fish that were so abundant, but a lot of sharks. This brings me to the topic of what I view as very peculiar overnight action the past week. I am sure the stock traders could care less, but I'm mostly a futures trader and it matters to many of us. A bread and butter play of many stock traders is to sell emotional large gap ups, and buy emotional large gap downs. However, those plays are well known and many smart traders anticipate the RTH (regular trading hours 9:30 - 4:00) moves and buy or sell ahead in the premarket.Big gap ups that reverse in regular hours are not that common anymore, because the smart traders who anticipate the RTH reversal are already in pre market pounding on the futures while they are gapped up big. By the time the market opens, the gap up has been shrunk in size to where there is little edge. This is what happened after the State of the Union speech by Obama on Wednesday night. We traded up to 1103 on the futures but we drifted lower all night in the overnight session until the gap up was whittled down from 9 to 3 points.
Same can be said for the big gap downs. On Monday night AND Thursday night, we had mini panics in the Asian hours. On Monday night, the market went down to 1081 during Asian hours, after closing at 1092.5 in the RTH session. Usually, this means that we stay down big during afterhours and gap down big ahead of the RTH session. But the smart traders smelled the gap down buying opportunity and jumped on it, buying up futures overnight in anticipation. So a gap down of 11.5 points turned into a gap down of about 6 points. Same thing happened on Thursday night, but was even more extreme. The market closed the RTH session at 1079.25, and started weakening in Asia, down to 1071, an 8 point gap down, before staging a massive reversal and gapping up on the day by 6 points.
The competition out there is as tough as I have ever seen. There is an immense amount of statistical data that is available to the big trading institutions. They are looking for whatever edge they can get, and it is mostly coming up with mean reversion strategies that buy weakness and sell strength. That is the fundamental statistical strategy among seasoned stock market traders. They seem to be crowding out their own edge and are partly responsible for these recent unusual overnight patterns.
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12 comments:
Interesting. Your very average trader(like me) doesn"t really have a shot in the market.
OL DAWG,
When trading against the trend you have to take profits quicker and err on the side of caution.
Hindsight is 20/20 but here is what I see looking back at the past week. The oversold reading last Friday was not very strong because the decline was only 5 days old at the time or 3 depending where you start your count from. By Thursday morning of this week we were still above last Friday's close. The market spent over 3 days going sideways which nullified the very short term oversold condition.
This week's oversold condition will be much stronger because the market will be oversold on a 10 day basis. That said, any rally will still be a counter trend move and it will likely pay to err on the side of caution even though the rallies should be a little stronger.
Once the 10 day oversold condition is worked off we should get another leg lower. That in my opinion will be the more durable bottom.
Or at least thats how markets used to work.
Yeah, I am only playing long for a bounce, I am not looking to hold this as a swing position. I do think we'll have another lower low in this downleg, maybe down to 1040 or so. But I think the following week will spend time between 1060 and 1085.
Tsachy it seems you're saying if we drift lower by this coming friday than 1073 spx we will reliably maximum oversold. I like to make 10% plus on a trade. On monday I was up 4% on EDC and 9% on MED. Obviously I didn't sell not reaching my targets. I don't think I have enough experience going from long and then switching short when the market turns from bullish to bearish. I fade the top and make profit and then get long again expecting the correction to right itself. Monday was a tell tale sign.
It took me too long to recognize the chart is broken and that 6% decline is nothing compared to 70%. The fact that the market didn't bounce after a week tells me it's not coming back especially since all previous corrections took no more than 3 or 4 days before bouncing. Now we need to go lower before establishing a long position
We are currently down 7% on the S&P. 1150 high. I had called for a 5-8% pullback, then a rally. Tsachy was more bearish. I think he said 10%. Either way we are almost there. I highly doubt we are going to retest last March lows or anywhere near them. Not now anyway.
Even the dumbass Cramer told his viewers last week and this coming week to stay out of the market. He's the bullish of bulls.
Capitulation is near, get ready to go long for a trade. Maybe Tues/Wed.
Then we leg lower. Below 1000. But not next week. IMO.
Just a clarification. The market is now maximum oversold on a 10 day basis by my measure. When I said "The oversold reading last Friday was not very strong" I was referring to Friday, December 22 (not yesterday).
Maximum oversold does not mean that the market can't go down but it means that it will be much tougher for the market to go down. Even during this amazing rally since July the market corrected every time but once when we became maximum overbought. One time it went sideways for 4 days before the next leg higher.
The reason I only have modest long positions is that sentiment doesn't seem to be in the right place, but I'm hoping that another down day will take care of that.
OL DAWG,
I think what you are saying is that you were playing as if the trend had not changed. As if this was just another correction like the ones we have seen in the past few months.
Judging by your posts you made so much money playing all those other corrections and not trying to call a change in trend that this was a small price to pay.
Market Owl. Are the levels you are referring to S&P 500 levels or futures levels? Do you know what your range equates to on SPY?
He trades the futures so you have to add anywhere from 3 to 5 points to get cash or SPX value. I think before this correction the market was a big game of musical chairs and the basis for getting long and buying dips was to go 1200. Well that notion is out the window now and there are probably a lot of bagholders. I am not getting long the index bull ETFs if we go up on Monday but will if we go down.
Big Crashes happen when everything appears oversold. I am still holding my shorts. Resistance 1090 and support 1060. GS/GE/AAPL/AMZN/C lead the way.
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