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.
Summary
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 Daily
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.
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Happy Trading,
Vinny
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