Making Lemonade

One of the greatest weaknesses of elder generations is their resistance to change. Perhaps in their younger, scrappier years they would take changes in stride while walking two miles in the snow to school. But with the routine comes comfort and stubbornness. Eventually obsolescence sets in.

With that in mind, I will not damn my future’s platform for completing a major update over the weekend, an update so grand it succeeded in killing all of my helper robots (algorithms). Instead I simply await word from my team of scientists and engineers working around the clock to integrate the new technology into my platform.

Unfortunate for me, this means I will be trading “VFR” today. Unfortunate for you, my morning market analysis will be a bit lacking today.
You will have to look up a daily chart on your own to see Friday’s trade printed an outside day in the NASDAQ composite meaning we exceeded Thursday’s high and low during the Friday session. These type of prints signal indecision and suggest the violent act of balance is beginning.

From here three things can happen. The market can reject the idea of balancing due to strong demand for stocks. This would propel us higher and away from the Thursday/Friday range. The opposite can occur to the downside due to a flood of supply entering the marketplace. The third is the balancing dance, much like the courting rituals of a finch—jumpy, choppy, and everyone gets horny at the extremes before getting faded.

I have highlighted key market profile notes on the following charts with the caveat that Friday’s data has been vaporized and is not presented below:

I have a tremendous gift of self-awareness but only most of the time.  Self-awareness may not be a virtue yet I can assure you it helps a trader.  Every time, and I MEAN EVERY time, I think I have this game all figured out I get a shovel to the face and teeth.  Whenever I find myself having these thoughts I throw on the caution lights and pull to the roadside.

These accounts I trade have swollen well this year.  I like to think it is all my hard work and dedication paying off.  And it’s likely that’s a part of it.  But the market has been bountiful.  This is my first time trading stocks in an environment where correlations have tanked.  I remember holding correlations sacred when I first started.

Treasuries up, equities down

Dollar up, metals down

Index up, stocks up

…and so on

Now I have a 90% long book, and it goes sideways/up while the market corrects.  Absurd I tell you!

I suppose I will keep on dancing until the music stops.  This is my first full year of blogging for you, the finest folks of the interwebs.   If you think my pen is dull today, you should read my archives for a cringe.  I am getting better.  I come to this site every business day and most weekends for the same reason as you—to learn from the outliers, the outlandish, and grow as a trader.

It is working because the team assembled here is incredible and helpful to boot.  I intend to be no less than 5x better a trader in 2014 then I am today.

Chess and I talked through why selling TWTR yesterday made sense.  These conversations are as valuable as an annual membership. Get inside the pay wall and check it out before they increase the rates!

I am a merry gent over here today as I appear as they say to have the Midas touch.  Yesterday’s sale of TWTR near the high of the day puts a twinkle in my eye.  Let me explain something—selling your multi-week long yesterday is exponentially more intelligent and awesome then shorting twitter yesterday.  Good job, you took a low probability position and it paid off.  I will see you in two years, when you are serving me roasted duck.

Today I sold MODN because back room discussions with good people led me to question the virtues of their management.  I took the quick fix gain.  Next.

My SINA long from 12/20 started working, and when everyone was running from sellers this morning I bought MOAR…MOAR I TELL YOU.  I bought a bunch of CLNT too.  And I must say, the Chinese lottery has today feeling like X-mas all over again.

The markets engaged a one directional drift this week after news of a The Fed tapering on December 18^th reignited the spirit of the long term directional control—the bull.  As the [Santa] rally has progressed we start to see the marketplace working into equilibrium.  This process can be seen as overlapping price action.  As our balance establishes further it will be seen as overlapping value areas.

These prints are the result of sell orders entering the market with a force equal to and at times greater than the force applied by buy orders.  As the rally ages, we eventually reach balance or see a sharp rejection lower by selling.

This has not occurred yet.  However, we may see profit taking start to kick in today ahead of the weekend.  This does not mean you should automatically take profit in your own portfolio, only that your plans should be assessed on individual stocks and consider taking profit or selling if your desired target has been achieved.

We also want to measure any downward move and whether it makes logical sense in the auction process, or whether we are seeing a shift in control away from the long term trend.  Should we see selling enter the market, my expectation is for algorithms to begin hunting stop orders.  This action could take price in the NASDAQ futures down to the support zone from 3565.25 – 3563.50.

I have highlighted this zone as well as a few other market profile thoughts on the following chart:

My time is very limited so I will make this message brief.  I had to sell some of my Twitter shares today.  I did not want to, in fact, I want to be long Twitter until I am a salty old dog and then pass said shares on to my unappreciative decedents.

But my steam is completely transfixed upon the name.  It could keep climbing tomorrow but technically I am not liking today’s print.  It suggests buyer exhaustion.

Will they exhaust today or tomorrow?  Perhaps.

Or this run will continue.  With most “traders” taking the rest of the week off, the patterns they typically form may not exist today.  I read that this morning.  I disagree.  Order flow is order flow, and I smell buyer exhaustion.

If it goes higher, I continue to ride with a ¼ long.  Hopefully I can buy some retail liquidation in January.

I just call it like I see it.

http://youtu.be/n-b63y6oZA4

The globex market opened back up for business this morning at 6am and was greeted by an early bid which drove prices higher. In the short term we have become overbought and it will be interesting to see how these conditions are met as we approach regular trading hours.

Seeing price swing a fresh high in the premarket provides an interesting bit of context for bulls to hang their hat on, as the likelihood of making swing highs during non-cash trading hours is low. This type of context is not always actionable, however, as the mornings swing high cold hold for days and even perhaps weeks prior to being eclipsed. Therefore the premarket swing high is interesting from a context perspective, but not necessarily actionable from a timing perspective.

Price is currently trading entirely outside of Tuesday’s range suggesting we our coming into a market which is out of balance. This creates a higher risk/reward environment then a market opening in prior range.

Early on, my expectation is to see sell flow work into the market. On the NASDAQ, I am looking for order flow to take price back into Tuesday’s value and perhaps through our entire range, putting any newly initiated longs underwater. Sell stop hunter algorithms will be targeting 3558 – 3556. This price zone is just below Monday’s VPOC at 3560.50. The VPOC still stands naked after buyers reacted just above the level on Christmas eve.

Should we instead see buyers driving off the open, I will be testing their might verses 3580 -3580.50. If price is sustained above this level early on, it would be wise to avoid any fade or gap fill intraday shorts. A gap fill would take prices down to 3571. Given the close proximity of the gap, my expectation is for a fill to occur today.

I have highlighted a few of the levels on the following 24-hour market profile chart:

My expectation on this shortened holiday session is to see markets balancing with a slightly bullish bias.  Given then conditions precluding this holiday trading session, and given the expectation of balance and drift, I anticipate us spending time getting familiar with yesterday’s volume point of control (VPOC) at 3560.25.

The VPOC represents the most traded price level during regular trading hours yesterday.  This price was found to be most acceptable by both parties to the auction, buyers and sellers.  When we trade into a VPOC, the market tends to slow as if trudging through thick snow.  This is the effect of auction participants becoming active at the level.

I have highlighted yesterday’s VPOC, as well as a few scenarios on the following market profile chart:

There was nothing subtle about the positioning required to bank coin this month.  If you directed your browser to iBankCoin you were greeted with picks, long side, delivered with the specific intent of outperforming your peers in the stock market.

Big gap days can be a challenge to trade intraday.  I came to my terminal and bought the opening print in SSYS.  That was it.  Then I sat back and let the market go on a holiday trot.  And it did.

Twitter nearly printed the six four handle.  I have my shares, do you?

In summary, cut the lights out, crack open your finest liquor bottles, and enjoy the blackest Christmas in stock market history.

Merry Christmas from all the staff here at Raul and co.  May your Christmas be warm and spirited.

Best Regards,

Raul

The index futures are currently trading well outside of yesterday’s range.  The S&P futures are set to open nearly 10 handles higher.  This is pro gap territory where attempting to fade the price action for the gap fill down is more difficult. 

Turning our attention to the NASDAQ, via the /NQ_F, we can see the market printing two distinct distributions overnight as price drifted higher. 

Intraday trading in this large gap environment can be difficult, but it is best to choose one side and stick with it to avoid getting chopped.  The opening type will help shape this bias.  Should price drive higher or lower off the open, we can gather who is in control of the action.  A sideways auction with little given back to the downside would suggest the market has accepted the overnight move and to play the long side, for example.

I have highlighted a few levels of support, as well as a few scenarios on the following market profile chart:

What a week folks, the kind of week careers are made, and lost, in.  Buy the dippers are often ridiculed for their Pavlovian antics but the last dip was not easy to buy.  Emotionally, it was trying, at least for me—a tick or two above plebian class.  I am more merchant class, if you will.  Do you know who didn’t get emotional about buying the last dip?  Robots.

When a financial model is right, 80% of the time, it is at your own peril that your ignore their signals.  The PPT was there for us, whispering in our ear, and patting us on the butt when we struck out on swing longs.  “Get back out there and buy something.”

I made a few mistakes during this last rally.  I used to make bigger mistakes.  If I can continue making less mistakes, the moneys will keep coming in.  This may have been an easy year to buy stocks, but I am still proud to be notching out my best year ever.

I work at this game more than you see.  There are others on this site that bank coin a bit more fluidly, the type of flow you see from masters.  I love seeing them at work and know I will be there soon.

I will be down here on my little tab, grinding, ear-to-ear smiling even when the market is beating my head in with a shovel.  I like it.

Have a great weekend.