Last week as a whole fit another one of the MrTopStep trading rules. It’s called “up a day, down a day during the expiration.” While many traders may not pay attention to this rule, it was something that the PitBull, Marty Schwartz, taught me a long time ago. The actual up-down price action started the Friday before the March Quadruple Witching.
- Mch 13 ESM14 -14.2 handles
- Mch 16 ESM15 +26.7 handles
- Mch 17 ESM15 -2.10 handles
- Mch 18 ESM15 +26.4 handles
- Mch 19 ESM15 -11.0 handles
- Mch 20 ESM15 +17.6 handles
We are not sure why this price action arises, but we have been looking at it for years. While this type of price action does not occur on every expiration, I believe it shows up more on the quarterly expirations where there is much greater volume and flow.
While the NASDAQ Composite index rallied to its highest level since March 10, 2000, we do not believe the circumstances are similar in any way. Sure, some people are still talking “bubble” or “crash,” but that’s been going on for a long time. Remember all the write-ups about a “Hindenberg” type stock market collapse? As of Friday’s close, the NASDAQ is outpacing the rest of the markets, up +6.1%, the Dow is up +2.4% and the S&P is up +1.7%. The ESM15 made a high at 2117.75 on Feb. 25 and last Friday traded up to 2106.75 and settled at 2099.25. The Russell 2000 closed up +2.8% last week and is now up +5.12%. The Russell has been outpacing the broader market all year as more traders have moved to the smaller capitalized stocks. Overall it was a week filled with big ups and big downs, but like most declines it led to another new high.
Why the S&P sold off when there was $1.4bil to buy on the close:
As more traders try to “read the close,” it is extremely important to know what you’re getting into. When I started looking at the NYSE’s MOCs 25 years ago combined with having the S&P futures side of it I knew the last 30 minutes were when all the big shops bought or sold the S&Ps to offset a long or short position that was going against them by buying or selling the S&P. Most traders just think of the NYSE or the NASDAQ, but there is the Russell 2000, the Mid-cap, the S&P, the Dow and many others, but the one we have always focused on has been the New York Stock Exchange. There are many occasions where a big investment firm will buy the Dow and sell S&P, but today’s chart is what we are here to talk about.
Why did the S&P sell off when there was $1.4bil to buy on the close? Well, I am sure someone on the NYSE floor could explain this better, but it’s very much like the way we trade the close in the Dow and S&P futures. We try to get a grip on the order flow going into the final 20 or 30 minutes for stocks and final 45 minutes for the S&P futures. The retail futures trader hears there is stock to buy on the cash close so he goes and buys the ESM15 thinking the cash buying will drag the S&P futures up. In most cases that is correct, but over the last few months there have been several occasions where there is over $1.bil to $1.5bil to buy or sell MOC and the S&P does not move.
The NYSE floor trader gets the info on his handheld computer that there some big names showing up buy. Goldman has 2.5million shares of IBM to buy and a few other big names to buy and the NYSE floor traders start buying IBM. The MiM shows buys and the ESM15 starts to go up a little and then at 2:45 CT the MOC comes out big for sale and down the futures go. The MOC showed big to buy, why did the S&P sell off? It’s easy..First, Goldman did have some big orders to buy, and yes, the MiM was showing buys, but just before the orders are executed on the close or just seconds before the 2:45 cash close Goldman comes back and pulls the big buy orders or sells 2.7mil shares of IBM in a cross trade. JPMorgan is famous for this type of trading too, and when they are both doing it that means millions of shares being shown out to buy or sell and being crossed or the orders being cancelled. While I am not as studied as Marlin is when it comes to following the MiM statistics and believe in his trading, I also think there is a growing side to the MiM that creates something I call the fade trade. When it’s big to buy showing up and looks great, you try and sell an extreme in the ES or vice versa. I am sure that’s what the MOC algos are doing too. They sell the retail pop on the buy side, make everyone pay up and then reverse it. Like we have always said, the S&P is never going to do what everyone wants it to do when they want it even in the last 20 minutes or on the close.
Moral of the story is patterns dictate price action and it doesn’t matter if it’s on the CME’s S&P 500 futures or in the Mid-Cap or the Russell 2000 … nothing stays the same for very long.
In Asia 7 out of 11 markets closed lower and at 6:00 CT in Europe 9 of 12 markets are trading lower this morning. This week is a busier week in terms of economic and earnings reports and Fed speak. There are a total of 20 eco reports, 8 Fed governors and bank presidents speaking and 11 T-bond or T-bill auctions or announcements. Today’s economic calendar has Cleveland Fed President Loretta Mester and Bank of France Gov. Christian Noyer discussing monetary policy context in Paris, Federal Reserve Vice Chair Stanley Fischer speech in New York, Chicago Fed National Activity Index, existing home sales and San Francisco Fed President John Williams speech on the economic outlook, in Sydney.
S&P 2120 On Tap
Our view: According to the S&P cash study for the March expo. the Monday after the March Quad Witch has the S&P cash down 13, and up 17 of the last 30 occasions, which is negative, but 5 out of the last 9 Mondays have closed higher. Based on how the ES rallied to new highs and sold off late in the face of a big $1.4bil buy imbalance on the close? First off it was the March expiration and here was huge two-way institutional flow in the last 15 minutes. The weak close seemed to be interpreted as a potential high. Sure the ESM15 can sell off a little more. That is what it does, it sells off and goes back up EVERY TIME!!!! So Friday’s little bump lower on the close was just a little late profit-taking. Our view… we are back to “thin to win” again. 3 out of the last 3 Mondays have been up; today will make it 4.
Here are the expiration stats…
- In Asia 7 out of 11 markets closed lower: Shanghai Comp +1.95%, Hang Seng +0.49%, Nikkei +0.99%
- In Europe 9 of 12 markets are trading lower: DAX -1.46%, FTSE +0.48%, MICEX -0.67%, Athens GD.AT +0.12%
- Fair value: S&P -7.82 , Nasdaq -7.48 , Dow -82.29
- Total volume: 1.4mil ESM and 12k SPH traded
- Economic schedule: Fed President Loretta Mester and Bank of France Gov. Christian Noyer speak in Paris, Federal Reserve Vice Chair Stanley Fischer speaks in New York, Chicago Fed National Activity Index, existing home sales and San Francisco Fed President John Williams speaks.
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