January 13th - Early trade

Before I started my workday, I thought I'd take a chance on a paper-trade scalp in ILMN. I saw the tightening consolidation at 9:40 & 9:45 am after a big run-up from yesterday. At the time of the trade, I noticed that the SPY was rising and ILMN wasn't rising with it... so I took a trade short considering that when the SPY slipped down that ILMN would move down in a stronger fashion. It did and I covered for a small gain. The little drop in ILMN continued into the next candle before a nice burst back up shortly afterward. Lots of price volatility makes this possible. There's no way I'd be able to scalp $129 from this move on an "average mover" stock.

As I write this, the clear winning trade was buying the "burst" up that I mentioned above. It has been about 12-13 minutes since I covered my short and the price has climbed as high as $1.12 per share from my cover price of $39.37! The screen shot above is later than the orginal I took of my trade so to exhibit the "pop" I've mentioned.

As an aside, the price moved down toward the 7-EMA during and touched in the next candle just after my trade, before that burst upward... the 7 EMA continues to be a moving average corresponding to support/resistance. This EMA profile I use is recommended by Robert Deel in his book and is present on Scott Farnham's charts at FNG, though by his own admission does not really use them in his trade decisions.

I am likely done for the day with this one trade. I have much day-job to perform and am late getting to it because of my market attention so far.

A good trading day to you all.

Good to know...

I saw this at Dr. Brett's site http://www.traderfeedblogspot.com/ and thought it was important info to reprint. Dr. Brett does a lot of analysis around identifying and quantifying the presence of large, institutional buying and selling of stocks as a way to anticipate market movement. His posts on the subject are frequent and as such, hard to track because of all the links within the essays he has written over the recent years. They are a broad web of posts that interlink, but, navigating all the paths of information on his site is worth the time; an eye-opener for new traders. Go to the original post at his site if you wish to see the chart he references in the essay.


Sunday, October 08, 2006
Who Controls the Markets?

In my posts, I have frequently emphasized that large market participants dominate the equity index markets and control its movement. My trade-by-trade analysis suggests that the largest 3-4% of trades (those over 100-200 contracts each in ES) account for well over half of the total volume in that market. Because volume correlates very highly with price volatility, the presence or absence of large traders in the marketplace is an important determinant of opportunity for the intraday trader.

Above we have a demonstration of how size controls the markets. The chart represents the S&P emini futures (blue line) over the past month. The red line is a cumulation of the ES price changes over the month that included only those one-minute periods that traded on twice (or more) the average volume expected for that time of day. In other words, the red line is price change solely attributable to time periods in which size has hit the market. These high volume occasions accounted for only about 11% of the minutes in the trading day.

The two lines correlate almost perfectly: .96. Essentially all of the movement in the ES can be accounted for by the small number of periods in which large participants have entered the market. When large locals and institutions are not in the market, the market--for all practical purposes--goes nowhere.

Many market indicators and technical analysis formulations treat each time period during the day as equivalent. An alternative--and promising--strategy is to separate signal from noise by analyzing only those time periods in which large participants are present.

My data suggest that fully half of all ES trades are one and two lots that only account for 3% of total market volume. In a very real sense, over half of everything that occurs in the equity indices doesn't matter. The key is focusing on the trades--and traders--who do move the markets.