A long time friend and I were chatting this morning about traders that use bizarre methods to “time” market tops and bottoms. While everyone is entitled to their opinions, it can cost you dearly. Instead, we would suggest watching price action, and more specifically, the other side of the trade.
Price is King!
By the “other side of the trade” we mean institutions, dark pools (DIX), dealers, and market makers. One example of dark pool activity is this chart from squeezemetrics.com. Please consult for more information on DIX.
We would expect dark pools to be way ahead of the crowd on a market selloff. In other words, the light blue line would be near the lows, not the highs. Enlarge the chart by clicking on it. It’s hard to read, unfortunately.
This from spot gamma, paraphrasing, “Tuesday’s quick move into Market on Close (MOC) appeared to be a large amount of “short term” ES volume. Then a fairly large MOC imbalance of approximately $1.3bn to sell, further pressured the markets. Price action crossed “Zero Gamma.”
In addition, poor liquidity in S&P500 futures made price action more susceptible to this type of move, while still supporting the idea of mean reversion once these “big player(s)” lay off.
The dip on Tuesday was not “real money” and fundamental selling. It was a lack of liquidity. No volume.
SPY would need to close below the 21d to facilitate a sell signal. Price action closed below the 9ema, a warning signal, on Tuesday. RSI would need to drop below 50. MACD would need to cross below its signal line.
Finally, we have OPEX monthly this Friday, marking the third open interest close since the February drop. In these three months, “price action” has helped market makers, dealers, institutions get back to “neutral gamma.”
This means the kind of drop we saw in February would need to see these participants shift to gamma negative for them to start “selling futures” like they did the end of February through March.
Therefore, we would need to see a close below 280; while 290 is resistance.
When it comes to opinions, I leave mine at the door.
Join us today in the trading room for our LIVESTREAM broadcast
during market hours, as we navigate the current environment. Watch, listen, and trade from 9:20 AM to 4:15 PM Monday through Friday.
Want to become a member? Check details here:
Disclaimer: Do your Own Research
Our content is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional investment advisor in connection with, or independently research and verify, any information that you find on our Website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. Trades and or positions listed and taken from the watchlist are my own and should not be considered “advice” to enter any particular position or asset.
We would like to draw your attention to the following important investment warnings. The value of shares and investments and the income derived from them can go down as well as up; Investors may not get back the amount they invested – losing one’s shirt is a real risk; past performance is not a guide to future performance.
Live broadcasts are educational in their content. Proper risk management is considered on every trade or asset mentioned.
*** Stocks highlighted are for information purposes only and should not be considered as advice to purchase or to sell mentioned securities.
As always, the use of technical and fundamental analysis is encouraged in order to fine-tune entry and exit points to average seasonal trends.
These mentions are stocks that we may or may not decide to trade as outlined in the watchlist. Always use a stop.