The model is bearish again, an explanation of how I will trade it into month-end

For the second time in four weeks the IndexModel, which is prepared every Sunday as part of the Exodus Strategy Session, is signalling bearish.  Before we go into how I will trade the signal, lets discuss the purpose of the Exodus Strategy Session.

Financial markets never truly sleep.  In our quasi-free-market society money is always moving around the world, 24/7.  This is facilitated in a number of ways from credit cards, to wire transfer or ACH, and even via the exchange of physical currency (which drives governments mad).  But the USA public stock markets do ‘close’ briefly, from Friday afternoon until Sunday evening.  This short pause is somewhat arbitrary, and as we become more immersed in a world augmented by artificial intelligence, the way the stock market closes for 49 hour and 45 minutes every American weekend is becoming increasingly archaic.

But it does close.  Therefore it makes sense to use the brief pause to strategize and plan our next actions.  Hence the Sunday strategy session.  It used to be written by a person I’ve never met in real life called Chessandwine [chess and wine].  As a young man I found him to be an admirable character who demonstrated a level of stock market understanding I had not yet achieved.  In fact, that was the case with many of the contributors to iBankCoin back in the early days.  One day Chessandwine defected from iBankCoin, completely abandoning his post as the creator of the Sunday strategy session.  I had been reading the report for years.  And I imagined many others did too.  And it seemed like many people would be put out by this abandonment, which sucked.

I was just blogging in public forum back then, posting my research and trade ideas and doing my best to ‘put myself out there’ in hopes of learning how to be a competent trader.  It was working.  I found my niche trading NASDAQ futures, which I heavily supplemented with algorithmic signals.  You can click here to see how my mind approaches deep understanding.  Here’s a brief snippet for anyone too lazy to click:

Nothing builds confidence in an idea like statistics and probabilities.  Therefore as an addendum to the weekly course, I have built out the relevant IB statistics for my product, the Nasdaq E-mini future contract.  I used five years of pure IQ Feed data to compile the following stats.  Some highlights:

• We break initial balance 94.75% of the time
  • By 11:30 – 73.03% of the time
  • By 12:00 – 81.13% of the time

• Normal IB range (69.87% frequency) is 11 – 24 points
• Normal IB volume (66% frequency) is 40k – 75k contracts

Anyhow, The Fly tapped me to take over the Sunday Strategy Session.  The problem was, I had no desire to do the report.  Back then it was tailored, by Chessandwine, to be a tool for people who traded individual stocks.  I rarely trade those instruments.  But I tend to find ways to say yes to people, so I took over the report.

For a few months it brought me great anxiety.  My research was going to be broadcast out to 100s of paying iBankCoin investors and traders.  It wasn’t going out to some dorks reading marketwatch or whatever, it was going to hard core, punch your fucking jaw off, iBankCoin traders.  For those of you who weren’t around in 2007, this was a violent website solely dedicated to making money.  Nothing else mattered.  Eat what you kill and if you’re a distraction then face humiliation until you were banned and shamed out of existence.

It was truly a wonderful place for a rabid dog like me.

Anyhow, I would go to bed early Friday so I could prepare the report Saturday.  It would take me 7-10 hours and I could not enjoy the weekend until it was done.  The final product was my absolute best attempt at preparing a report for stock traders.  Hopefully they found it useful.

It was useless to me.

At some point I snapped and made the report exclusively for me, and also for any younger humans similar to me who were in their 18th-to-22nd year of existence.  What did I need to know going into the trading week?

For starters, I trade equity index futures.  Not stocks.  And for the last four years only one instrument, front-month NASDAQ futures.  The 100 largest non-financial stocks trading on the NASDAQ are market cap weighted into an index.  A contract called a future is a derivative of that index that you can trade.  These futures trade on the Chicago Mercantile Exchange.  The NASDAQ is in New York City but in reality it exists only on the internet and in our minds.  There is no physical exchange.

The first thing I need to know is what the stock market has done since my last report.  Aka, the first of ‘the big three’ questions…what has the market done?  Section II covers this as objectively as possible.  We go top-down, starting with the 1-week performance of the four largest USA indices, then working down into sector performance then finally the industry level.  I used to factor oil into the equation but found its behavior irrelevant to my needs.  This section of the report helps identify what happened and also what the risk appetite was last week.  I need to know this.  It also helps to answer another big question…what is the market attempting to do?

If you are wondering where these questions come from, they come from one of the [very] few useful books on active trading called Mind Over Markets.  You can find it on Amazon and one of the writers recently started a twitter account and is practicing the methods presented in the book live.  You could go follow him right now but please come back and keep reading the RAUL blog:

ES Overnight inventory is short as of 8:38 AM Eastern; the odds favor a counter-action. Failure to see that counter-auction would be an indication of weakness. #ES_F #futures $spy

— Jim Dalton Trading (@daltontrading) May 17, 2018

After we answer those questions we ask the most important question of all…what is the market likely to do from here?  This is where the rubber meets the road.  The right edge of the chart.  Everyone’s so damn good at pointing to old charts and confidently explaining what happened and why.  Eventually, if you trade long enough, you’ll start to realize charts are okay, they present information well.  But it can be difficult to consistently act based off of them.

The only people I see consistently acting from charts are options traders who studied under The Option Addict.  They tend to buy directional bets on charts that are consolidating into tight wedges.  These guys are only right like 15-20% of the time but when they are, huge huge gains.

I find statistics to be a better forecasting tool.  That is what Section IV and V of the strategy session are all about.  We rank things like 2-3 day trend, volume, and more, and track the outcomes when abnormal readings occur.  This allows us to consistently forecast a directional bias over the next five trading days.

And that is what I need to know.

One of the signals, the bearish signal that triggered today, is called Rose Colored Sunglasses or RCS for short.  It is called that because it is describing the current situation as best as I can with words.  The indices paint a rosy picture, lulling everyone into complacency.  Meanwhile, below the surface, Exodus sees things differently.  It’s micro interpretation of over 4000 stocks and a handful of other macro components are telling a different story of bearish undertones.

If you have never worn rose colored sunglasses, just know that everythings better with rose colored sunglasses.

A directional bias means I will favor one side ‘of the tape’ while I trade the NASDAQ 100.  Going into next week the model is bearish, therefore I will be aggressively shorting the NASDAQ 100 intraday.  I will also put on a position trade early in the week using the SQQQ ETF and hold it until we tag ATR bracket low or the week ends.  This serves as a placeholder for my bias and reminds me that I have a bias.

Want to know what trade setup will have me most aggressive and most excited?  An overnight gap up, inside the prior day’s range. I will be shorting that open very aggressively until I am proven wrong or we fill the overnight gap.  This is my bread and butter trade, the overnight gap in range, further stacked in my favor by the Strategy Session.

So that’s it.  That’s how the Exodus Strategy Session came to be what it is today.  And that is how I will trade the signal.

Sometimes after I prepare the report inside Exodus, I come out here, in public forum and discuss my directional bias in a colorful way.  It’s really just an attempt to engage the reader.  I think most people prefer to be entertained more than they prefer learning how I do business.  But for those who do care to learn, there is the Exodus Strategy Session and the morning trading reports.

Only like 40 people read both.

Which is fine.  The way my brain is required to think in order to produce the Strategy Session, and the resulting bias creation has taken me out of trading plateau I had been on for a long time.  The elevation in my performance is significant.  Having a bias made me a way better trader.  So to me, it doesn’t matter if anyone finds it valuable.  I find it valuable, and I eat what I kill.

The Strategy Session makes me a better trader.  So do the levels presented on the morning report.  And so does all the hard work that goes down behind the scenes.

I prefer being in my quiet little corner of the internet, misunderstood by most and left alone to make money.  It took me many years to realize attention has the dangerous ability to cut right to my ego, which time-and-again is my arch enemy in trading.  And in business.  And in life.

The models are bearish into the last full week of May.  Therefore I will be selling IN MAY.

So it is written, so it shall be.

RAUL SANTOS, May 20th, 2018

Exodus members, the 183rd edition of Strategy Session is live, go check it out!

NASDAQ futures are coming into Friday gap down after an overnight session featuring extreme range on elevated volume. Price was balanced for most of the overnight session before a wave of selling hit around 8:15am New York.  As we approach cash open prices are hovering along the Thursday low.

There are no important economic events today.  It is front-month option expiration day.

Yesterday we printed a neutral day.  Started out gap down in range, buyers close gap, push RE up, briefly take out Wednesday high, sellers at our hypo 3 price level, then traverse the entire range and go RE down, putting us neutral, excess low formed, back to the mean by close.

Neutral.

Heading into today my primary expectation is for buyers to work into the overnight inventory and close the gap up to 6905.50.  Look for buyers to target 6913.50 MCVPOC before two way trade ensues.

Hypo 2 sellers reject us down and out of Thursday low 6875 setting up a move to target the open gap at 6843 then then 6832.75 before two way trade ensues.

Hypo 3 stronger sellers press down to the 6800 century mark before two way trade ensues.

Levels:

Volume profiles, gaps, and measured moves:

NASDAQ futures are coming into Thursday gap down after an overnight session featuring normal range and volume.  Price worked lower overnight, and as we approach cash open we are hovering along the Wednesday lows.  At 8:30am initial/continuing jobless claims data came out mixed.

Also on the economic calendar today we have leading index at 10am and a 10-year TIPS auction at 1pm.

Yesterday we printed a normal variation up.  The day began gap up and with sellers unable to quite fill the small gap.  Instead buyers stepped in and drove higher a few times, stalling ahead of the Monday high and settling into two-way trade.

Heading into today my primary expectation is for sellers to test down through overnight low 6898 and close that gap down at 6890.50 then continue lower, down to 6871 before two way trade ensues.

Hypo 2 stronger sellers trade us down to 6843 before two way trade ensues.

Hypo 3 buyers work into the overnight inventory and close the gap up to 6937.50 setting up a move to take out overnight high 6944.50.  Look for sellers up at 6959 and two way trade to ensue.

Levels:

Volume profiles, gaps, and measured moves:

NASDAQ futures are coming into Wednesday flat after an overnight session featuring normal range on elevated volume.  Price worked sideways overnight in a balanced manner.  At 8:30am housing starts and building permits data came out below and above expectations, respectively.

Also on the economic calendar today we have industrial/manufacturing production data at 9:15am and crude oil inventories at 10:30am.

Yesterday we printed a normal variation down.  The day began gap down below the Thursday-Friday-Monday range.  Sellers drove lower off the open to prices unseen since last Wednesday before a sideways chop took hold.  Said chop went range extension down briefly before reverting back to the daily mean.

Heading into today my primary expectation is for sellers to press down through overnight low 6875.50 setting up a move to target the open gap at 6843.  Look for buyers at 6841 and two way trade ensuing, perhaps marking the low-of-the-week.

Hypo 2 buyers work up through overnight high 6907 setting up a test above Tuesday high 6817.25 before two way trade ensues.

Hypo 3 stronger buyers drive up to 6958.50 before two way trade ensues.

Levels:

Volume profiles, gaps, and measured moves:

NASDAQ future are coming into the week gap up after an overnight session featuring elevated range and normal volume.  Price worked up beyond the Friday high overnight before settling into balance right along the Friday range high.

The economic calendar is light this week.  Today we have only to be aware that the US Treasury is auctioning off $48Bln in 3-month and $42Bln in 6-month T-bills.

Crypto currency traders will likely be paying close attention to New York city this morning.  At 9:40am Federal Reserve banker Bullard is speaking at a crypto conference in the city.  Central banking meets ‘decentralized’ money supply.

Last week kicked off with a rally.  Buyers extended beyond the trend day printed two Friday’s back then the week became quite choppy.  Wednesday afternoon buyers reasserted themselves then we went gap up into Thursday.   After rallying through Thursday morning we chopped our way into the weekend.  The 1-week performance of each major index is shown below:

On Friday the NASDAQ printed a neutral day.  The day began gap down, in-range, and after a choppy open buyers stepped in and closed the overnight gap then briefly made new highs before discovering a responsive seller.  Then we went range extension down, putting us neutral, before ultimately rallying back to the mean late in the session.

Neutral day.

Heading into today my primary expectation is fro sellers to work into the overnight inventory and close the gap down to 6960.25.  From here we continue lower, down through overnight low 6953.  Look for buyers down at 6948 and two way trade to ensue.

Hypo 2 stronger sellers take us down to 6918 before two way trade ensues.

Hypo 3 buyers work up through overnight high 6994.25 setting up a move to close the open gap up at 6999.25.  Look for sellers around 7000 and two way trade to ensue.

Levels:

Volume profiles, gaps, and measured moves:

Hallelujah, happy Mother’s Day and good morning,

I do not seek your admiration or praise while I highlight that we called the beginning of the correction here on the RAUL blog.  I only highlight this historic post to demonstrate that there is a method to these market and if you focus on the right information, consistently, then you will develop a means of extracting actionable signals from the stock market.

Anyhow, 3-months removed, and I am making another call.  The correction is done.  Unless a major event occurs (asteroid, nuke, evil forces like CITI GROUP finally succeeding in destroying Tesla) then bulls will cruise into summer, ushering in ‘boring’ Dow 40 days and rally after rally on low volume.

It should be noted that before February 3rd I have never called for a correction.  And therefore I never had the chance to say when a correction was over.  So today is very special.

I have little more to say.  Soon an entire gaggle of mothers will descend upon mothership.  Yesterday I did the prep work to host these meat loving ladies, who will be enjoying a barbecued chicken thigh that I marinated overnight and lightly coated with Sicilian olive oil.  Sides include little potato pouches full of buttery herby goodness, a cauliflower and cashew mash, a traditional Italian table salad, and an assortment of fun sides like frozen grapes to keep the champagne cool.

Mother’s day is the one day to project stability to the women in your lives.  Women spend an inordinate amount of time worrying.  If we can alleviate their silly nature for just one day, let this be it.

I am balls-on-the-carrot-chopping-block bullish into the rest of May, and possibly beyond.

As always, TBD.

Exodus members, the 182nd edition of Strategy Session is live, go check it out.

For the first time in 2018 we experienced volume and range within the confined of ‘normal’ relative to a five year study of the instrument.  There have been several days with normal range, or normal volume, but not both.  This may or may not be significant.  Price worked to a new weekly high overnight before coming into balance.

The only economic event today is University of Michigan’s primary May reading of confidence.

Yesterday we printed a double distribution trend up.  The day began with a gap up and sellers unable to work into it.  Then the rest of the day was spent slowly campaigning higher prices unseen since March 19th.

Heading into today my primary expectation is for buyers to work into the overnight inventory and close the gap up to 6964.75.  From here we continue higher, up through overnight high 6979.50 setting up a move to close the open gap at 6999.25 before two way trade ensues.

Hypo 2 sellers trade down through overnigh5t low 6948.50.  Look for buyers around 6917.75 and two way trade to ensue.

Hypo 3 stronger buyers work up to 7022.75 before two way trade ensues.

Levels:

Volume profiles, gaps, and measured moves:

NASDAQ futures are coming into Thursday gap up after an overnight session featuring normal range on elevated volume.  Price worked higher overnight, pausing briefly as we explored levels unseen since late-March, and ultimately spending the night campaigning higher.  At 8:30am Initial/Continuing jobless claims data came out better-than-expected and CPI data came out mixed.

Also on the economic docket today we have a big Treasury auction; at 1pm the US Treasury will auction off $17 billion in 30-year notes.  At 2pm there is a monthly budget statement, and after-market-close NVIDIA is set to report earnings.

Yesterday we printed a double distribution trend up.  The day began gap up, out-of-range.  Sellers worked into it and soon found a strong responsive bid.  Buyers became initiative ahead of lunch and pressed higher before coming into balance at the highs late in the afternoon.

Heading into today my primary expectation is for sellers to wok into overnight inventory but stall around 6907.75 setting up a move to take out overnight high 6823.50.  Look for sellers up at 6963.25 and two way trade to ensue.

Hypo 2 sellers work a gap fill down to 6896 and continue lower, down through overnight low 6888.75.  Look for buyers down at 6879 and two way trade to ensue.

Hypo 3 stronger sellers trade us down to 6832.50 effectively eliminating Wednesday’s rally.

Levels:

Volume profiles, gaps, and measured moves:

NASDAQ futures are coming into Wednesday gap up after an overnight session featuring normal range on elevated volume.  Price worked higher overnight, stalling just below the Monday cash high.  Overall the globex auction stayed contained in the balance that has been forming since Sunday.

On the economic calendar today we have crude oil inventories at 10:30am and a 10-year note auction at 1pm.

Yesterday we printed a neutral extreme up.  The day began gap down and sellers made the first move, pushing lower but failing to close the Friday gap.  Instead responsive buyers (responsive relative to the Tuesday open, initiative relative to the Friday close) stepped in and pushed higher, closing the overnight gap.  This put us range extension up.  Responsive sellers stepped in and formed a sharp excess high before we went range extension down, putting us neutral.  After closing the Friday gap we again traversed the entire range and closed near session high.

Neutral extreme.  Choppy.

Heading into today my primary expectation is fro sellers to work into the overnight inventory and close the gap down to 6821.50.  From here we continue lower, down though overnight low 6812.50 before two way trade ensues.

Hypo 2 buyers take out overnight (weak) high at 6850 setting up a move to target 6856.50 before two way trade ensues.

Hypo 3 stronger buyers sustain trade above 6864.25 setting up a move to target the open gap at 6883.75 before two way trade ensues.

Levels:

Volume profiles, gaps, and measured moves:

NASDAQ futures are coming into Tuesday gap down after an overnight session featuring elevated range and volume.  Price worked lower overnight, briefly probing below the Monday cash low before settling into balance.

The economic calendar is light today.  We have a 4-week T-bill auction at 11:30am then a 3-year Note auction at 1pm.

Yesterday we printed a normal variation up.  The day began with a gap up beyond the Friday range and morning drive higher from buyers.  There was a brief range extension but not by much, the rest of the day was spent chopping and in balance.

Heading into today my primary expectation is for buyers to work into the overnight inventory and close the gap up to 6824.50.  From here we continue higher, up through overnight high 6837.50.  Look for sellers up at 6856.50 and two way trade to ensue.

Hypo 2 sellers gap-and-go lower, down through overnight low 6791 setting up a move to target 6766.75 before two way trade ensues.

Hypo 3 stronger sellers press down into last Friday’s trend up, probing down to the naked VPOC at 6750 before two way trade ensues.

Levels:

Volume profiles, gaps, and measured moves: