Rhody Trader

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Today provide a couple of decent trade entry points. The first was early in the day when the market ran through the point of control from Monday at 1386. The second was when the market reache down to yesterday’s point of control at 1375.

I didn’t get in on the short trade because I wasn’t seeing the market losing strength as I normally like to see (and I think I was on an earnings conference call for my job). I did, however, get in on the drop down later in the day and grab a couple of points on the bounce.

It’s a glorious day in Boston with temps expected to be somewhere around 80. You can bet I’m going to get off the desk and outside to soak in some of the rays!

This morning I posted in my trading education blog a mention of a movie I certainly didn’t relate to trading back when I first saw it. The flick was A Circle of Iron, which I must have first watched in the middle 1980s, though it was released a few years before that. I recently watched it again thanks to one of the free movie channels on my cable system. The story underlying the movie was actually co-written by Bruce Lee as The Silent Flute and has a very Zen flavor.

I wonder if The Financial Philosopher has ever watched it.

I’m not going to call the production values or the fight scenes (it is a Kung Fu film, after all) spectacular, but that’s not the main point. It’s definitely a film with a moral to it - and one which definitely relates to trading.

Not that I’ve been doing much of the latter today. The set-ups just haven’t been that great as yet. That could change, though.

I didn’t post a trade loo-back yesterday because frankly the market was REALLY boring and I didn’t do anything. Today was a little bit better, though for a while in the pre-open it was looking like we might get stuck in the same range around 1385 again.

The open was a bit lower, though, so there was a fairly easy bracket of 1386 and 1372. That’s yesterday’s point of control and the top of the April 8-10 consolidation area respectively.

I go short at a bit above 1383 during D period after the opening balance had been established and I saw weakness as the market was near the upper end of its range. When it got down into the 1373 area I exited upon seeing the aforementioned weakness starting to abate. Because the market didn’t really demonstrate any strength building at the time, I didn’t go long, though certainly that did end up becoming a decent trade.

Yesterday Bill Rempel and I extended the discussion I started about open interest (Warning Sign: Open Interest Declining) through a series of comments. By way of furthering that exchange, it’s worth looking at the volume and open interest pattern we mentioned.

The chart below presents four bits of information. The price plot is for the SPY (SPDR) as a proxy for the S&P 500 index. Below that is volume for the SPY. Next down is volume for the S&P 500 futures contract (from a continuous contract chart). At the bottom is the open interest plot for the futures. Ignore that drop at the right side of the chart as it’s the OI figures are delayed, so the chart is showing a 0 for the last data point.

Bill asked about the OI peak and its proximity to the March lows. I’ve drawn the verticle line at that OI peak, which you can see was slightly later. As you can see, though, OI and futures volume both run up into the quarterly rollover, then drops off again. As you can also see, those peaks do not really have anything to do with volume in the market over all.

The OI plot isn’t a great one because of the scaling problem the 0 point creates, but you can still see the pattern of lower highs and lower lows.

It might be time to consider working EUR/JPY from the short side.

This might not be a proper downtrend given that there haven’t been lower lows to match the lower highs, although there are lower closing lows. Could just be a consolidation pattern. Even still, fading a move up against a trend like with that many contact points makes sense, or at least favoring the downside in short-term trades.

I was taking a look this morning at the open interest in the S&P futures - both the full sized contracts and the mini ones. Ever since the turn of the year, OI has been very low by recent standards. Basically, there’s been a pretty massive deleveraging in the US stock market. Given what’s been going on in the credit markets, that’s really no suprise.

The problem I see, however, is that OI has been drifting lower of late as the market has been generally moving higher. That’s not something which can be taken positively. It can be read to mean one of two things. Either longs are being closed out or shorts are being covered. Neither of those developments is the sort of thing to provide ongoing support to for a rising market. We would want to see OI rising, meaning new longs being established.

It’s all a really interesting tug-of-war going on in the markets right now.

Today ended up being a rather predictable day. Yes, there was that big open higher. After that though, it settled down rather nicely into a playable range. The two main bracketing levels that contained prices today were the 1385 value area high from back on April 7th, and the 1400 level. The latter was more about being a round number with a little bit of longer term distribution significance tossed in.

My problem for the day was not thinking about 1385 as support at the start. I should have. It would have made for a nicely profitable day, no doubt. I did make a bit of profit on weakness in the afternoon, but hardly what I could have done.

If I didn’t have actual proof from looking at the stats, I would think that I was imagining things. The Forbes ad network finally seems to be showing ads (on my trading education blog). They said a few tests were going to happen, but it’s been so long in the works with this thing that I’ve gotten a bit jaded waiting. It seems like they are trying out sending ads through the different variations (banners, towers, etc.) seperately. Just saw one through the banner.

I’ve been waiting for them to get their act together to do some final rearrangements to my site format.

I knew how to trade it today, but didn’t execute.

Actually, let me restate that. To start the day I had no idea what was going to happen. I really didn’t have a feel for up, down, or sideways. My approach was to take a wait and see to find out what kind of price distribution was going to develop.

As you can see, a general distribution day formed primarily between the top of yesterday’s main value area and the rejection points from the last time we were at these levels. I did identify that early on and bought at 1261 when the market moved back down there, but when there wasn’t a quick turn I bailed out for a small loss. Unfortunately, the market ended up rallying back up and I missed out.

It’s taken about 6 weeks and a bit of a sell-off in between, but apparently some folks have finally seen what I was looking at - fundamentally - in ESEA. Word has it that Zacks Investment Research put out a note yesterday saying the stock was undervalued. They missed getting in at $11-$12, but I won’t get on them too much for that. I was a bit early with my own analysis. 

The bottom line is they’ve driven a lot of volume into the stock and pushed the price up nearly 10%. Naturally, the options have jumped considerably as well, and that’s where I’m making my own play.