Traders employ as many tools as they can to help them figure out market direction. One tool is among the clearest of indicators. It’s called the 2:45 imbalance, where traders can see the amount of net buying and selling on the NYSE. In our last webinar we showed an example of the buying power of the cash close imbalances, and we are currently seeing another big round of buying. Thursday was the 9th trading day of February, which also marked the 9th buy imbalance and new closing highs for the S&P 500 futures. Is it just a coincidence that the S&P is going up at the same time?
Keeping an Open Mind
Though we all have our favorite trading tools, it’s important to keep an open mind and look at new tools. I’m not an economist, or a New York analyst, nor do I have a Ph.D. (Poppa has Dough) degree. I came from the school of hard knocks and that meant a different learning curve on the trading floor.
No one ever came up to me with a point and figure chart and said, Danny, if this trend line is broken we’re going to collapse to this price. For one, I didn’t care, and two, I was too busy to even think about it. We took thousands of orders big and small and I always kept in mind that it was someone’s money. But throughout that time I had to learn my own way of interpreting the markets. One that fit my personality and which I could understand and make work.
I have a few friends that email me charts to point out levels and I do look at them. For the last two years, Vikram (@NewCapVikram) has done the charts for this OP and they mesh perfectly with my analysis. But at the end of the day I go back to a basic element … volume.
Over the last several days while the S&P has been moving higher, the volume in the S&P 500 futures has dropped to 1.2 to 1.3 million contracts a day. That’s down from 1.8 to 2 million a day only two weeks ago. When the markets were going lower there was big volume, but as the markets started moving higher and continue to move higher the volume tapered. In our view, the current rally could be referred to as a perfect storm: coming off a decline, low volumes, and constant buy imbalances by the big investment firms and mutual funds. In my mind they dictate the direction because they buy whether the markets are going down or up.
I understand that some people don’t believe in seasonalities, they don’t look at fair value, they don’t look at overbought or oversold, they just concentrate on their levels. In my experience, and from what I’ve learned from the Pit Bull, we should always be searching for new things that work. Whether it be a retail trader with a small algorithmic program or the guy down the street wanting to show you his automated charts and moving averages, if it works it’s worth a look.
My education was all about survival, figuring out what worked and what didn’t. I wasn’t interested in theory or philosophy. Today I maintain a simple trading toolbox that includes the foreign markets, yields on the 10-year Treasury, fair value and program levels, buy and sell imbalances for the futures during the day and on the 2:45 cash close for stocks. To heighten that we also have the MiM (MrTopStep Imbalance Meter) to help provide us with an early look (http://www.closingimbalance.com).
In Asia 10 out of 11 markets closed higher and in Europe this morning 12 of 12 markets are trading higher. Today’s economic and earnings calendar includes import and export prices, consumer sentiment, Dallas Fed President Richard Fisher speech on 10 years at the Fed, in San Antonio. and earnings from Exelon (NYSE: EXC), Interpublic Group (NYSE: IPG), J. M. Smucker (NYSE: SJM), V.F. Corp. (NYSE: VFC), and DTE Energy (NYSE: DTE).
CME Floor Closed
Monday, Feb. 16 for Presidents Day
Our View
What is feel? Feel is different from a view. A view is just a quick idea of what you think, whereas a feel is more directed at current price action. For example, if the market is going down and everyone sees it and starts shorting, my “feel” would be to look to fade something like that. I would be on the lookout for when I felt things were getting stretched out or gone too far.
I have to admit that the government has made it easy. I figured out early on that the S&P could only be stretched out so far. That the disconnect or the connection was all the quantitative easing in the printing presses running 24 hours a day. The zero borrowing cost creates an atmosphere for stock buybacks which in turn forces money into stocks.
I said last week and on Monday of this week that the S&P had run the sell stops and that we were seeing all sorts of back-and-fill price action. When I saw that, I immediately started talking about running the buy stops above 2070.00 to 2085.00. Yesterday the market topped at 2085.50 and overnight it reached 2089.75. When we’re this close to a new record, at least some people will want to see it happen.
“9 Days of Buy Imbalances”
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 10 of 11 markets closed higher: Shanghai Comp. +0.96%, Hang Seng +1.07%, Nikkei -0.37
- Earlier in Europe 12 of 12 markets were trading higher: DAX +0.51%, FTSE +0.57%, MICEX +1.16%, Athens GD.AT +4.13%
- Fair value: S&P -3.54 , Nasdaq -3.25 , Dow -32.31
- Total volume: 1.43mil ESH and 3.9k SPH traded
- Economic schedule: Import/export prices, consumer sentiment, Dallas Fed President Richard Fisher speaks and earnings from Exelon (NYSE: EXC), Interpublic Group (NYSE: IPG), J.M. Smucker (NYSE: SJM), V.F. Corp. (NYSE: VFC), and DTE Energy (NYSE: DTE).
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