Trading Notes: Calendar Week Of 8/31/15

Friday, September 4th

*  We showed early on pull yesterday, but book flows were suspiciously weak for much of the morning time in addition to failed to confirm the highs of the twenty-four hours (see nautical chart below).  Volume flow is a proprietary volume-weighted stair out of upticks vs. downticks for all stocks traded across all exchanges in addition to tells us whether size is to a greater extent than ofttimes than non leaning to the purchase side or sell side.  Volume weighting the NYSE TICK achieves much of this purpose.  Once nosotros began to come upward off the highs, nosotros saw a steady turn down inwards book flows, equally nosotros rapidly turned negative on the day.  Tracking such flows is my favorite way of “reading the tape”: when the record does non confirm signals from quant models, I desire to involve heed to the tape.  It to a greater extent than ofttimes than non agency that something idiosyncratic is moving the market: something models aren’t accounting for.

*  We’re trading significantly off yesterday’s highs in addition to hence far this morning, alongside fresh selling inwards premarket.  All of this is consistent alongside the see of an extended bottoming procedure next a potential momentum depression registered final week.  As mentioned yesterday, during these high volatility periods, the pct of stocks trading to a higher house their short-term moving averages ends upward existence a helpful overbought/oversold gauge.  Yesterday, good over 80% of SPX stocks were to a higher house their 3-day moving averages.  

*  My full general game excogitation is to sell bounces, specially on tepid book flows, but we’re quite short-term oversold here, in addition to hence I’m prepared to hold off for a reasonable bounce inwards cost and/or time.

Thursday, September 3rd

*  Buying weakness per yesterday’s post worked reasonably good yesterday, though a unopen facial expression at NYSE TICK showed a two-way marketplace alongside active participation from both buyers in addition to sellers.  We proceed to live on oversold on intermediate-term measures in addition to nosotros soundless receive got solely a lilliputian over 20% of SPX stocks trading to a higher house their five-day moving averages.  My game excogitation remains to purchase weakness that remains to a higher house the overnight lows.

*  One of the meliorate decisions I’ve made inwards trading late has been to plough my models off ane time it became clear that nosotros were trading inwards a dissimilar volatility authorities from the ane that has persisted for much of the final ii or in addition to hence years.  My latest projection is edifice models specific to defined volatility regimes.  Early days, but results facial expression promising.  One intriguing finding is distinct short-term hateful reversion effects inwards SPY for the electrical flow regime.  For example, when the issue of five-day novel highs minus novel lows for SPX stocks is null or above, the adjacent 5 days inwards SPY receive got averaged a loss of -.12%.  When the five-day novel highs minus lows receive got been below zero, the adjacent 5 days receive got averaged a gain of +.49%.  In general, chasing short-term pull or weakness has non been a winning strategy; higher volatility does non imply greater trending.  (Raw information from the first-class Index Indicators site).

*  I’m concurrently working on the best ways of defining volatility regimes, using realized volatility, implied volatility, in addition to to a greater extent than esoteric measures of vol based on published question inwards quant finance.  This strikes me equally a fruitful expanse of research.  Also on the docket is a Definition of correlation regimes in addition to investigation of how returns may vary equally a business office of higher in addition to lower correlations amid stocks.  The destination is to receive got a suite of models built out for a arrive at of regimes, in addition to hence that at that spot are clear rules for turning off ane origin of trading signals in addition to turning on another.  I am non at all convinced that a unmarried model tin hand notice accurately capture a high proportion of variance inwards frontward returns for stocks, which is precisely about other way of proverb that stocks deport differently inwards higher in addition to lower volatility in addition to correlation regimes.  Having a laid of models to capture those differences could assistance discretionary traders conform to their environments to a greater extent than quickly.

Wednesday, September 2nd

*  Many thank yous to Sean McLaughlin for hosting this podcast on taking your trading to the adjacent level.  I’ll live on elaborating many of these ideas in addition to to a greater extent than at the first-class Stocktoberfest gathering.

*  Once again, the selling of bounces has worked good inwards trading the ES.  We’re at nowadays at an oversold point, however, where I am mindful of the possibility of putting inwards a short-term bottom.  Fewer than 1% of SPX stocks are trading to a higher house their 3-day moving averages in addition to my intermediate-term pull stair out is real oversold.  Although nosotros saw weakness yesterday alongside 111 novel monthly highs in addition to 431 lows, that is nowhere close the weakness final week, when nosotros registered 35 highs in addition to 3553 monthly lows on the large spike down.  My game excogitation is to purchase weakness that holds to a higher house yesterday’s lows in addition to specially that successfully tests yesterday’s lows.

*   VIX is over thirty in addition to my pure volatility stair out is significantly elevated.  I facial expression vol to proceed inwards the close term, which has large implications for sizing of positions in addition to calculations of stops in addition to targets on trades.  The inability to conform to changes inwards volatility–especially when nosotros receive got high vol of vol–is a major origin of problems for traders inwards the electrical flow market.

Tuesday, September 1st

*  Selling bounces has worked good in addition to we’ve come upward off difficult later on hours, resuming the turn down inwards the confront of Asia weakness.  Volume flows were bearish all twenty-four hours on Tuesday, helping laid upward the weakness. (Volume flow is a volume-weighted stair out of upticks vs. downticks for all exchange-listed shares).  The pure volatility stair out remains elevated, in addition to I proceed to anticipate highly volatile trading.  It is non clear to me that nosotros merely caput lower inwards a instantly line; intermediate-term measures are quite oversold.  I receive got been treating each fourth dimension zone equally a dissever day–Asia, Europe, U.S.–and that has been helpful inwards framing short-term trades.  There are considerable discontinuities of flows from ane fourth dimension zone to the next; greater continuity inside each fourth dimension zone.

*  Below is a nautical chart of a unproblematic five-period charge per unit of measurement of change, where each bar inwards the ES futures represents 500 cost changes.  It is ane tool amid many that I usage to frame whether the marketplace is short-term overbought or oversold.  One of my execution rules is to hold off for short-term overbought atmospheric condition to sell in addition to short-term oversold ones to buy.  In volatile markets, that tin hand notice relieve a lot of messiness.  Many a practiced see is undermined past times miserable entry in addition to move out execution.  I’ll live on discussing my usage of such tools inwards the Las Vegas conference for Trader4ACause.

*  I proceed to sentinel commodity markets, equally good equally Asian stocks, for indications of the economical weakness that is impacting stocks.  This is precisely about other expanse inwards which monitoring activity past times fourth dimension zone has been helpful.  I proceed to lean toward selling bounces,  but am mindful that we’re short-term oversold here, in addition to hence am content to hold off for shorts to live on squeezed earlier taking whatever swing positions.

Monday, August 31st

*  We focus on setting goals in addition to tracking our progress toward those goals, but a wealth of testify suggests that a procedure focus is much to a greater extent than probable to atomic number 82 to positive outcomes.  When nosotros emphasize doing the correct things, nosotros are most apt to produce things right.  This is a real of import topic, equally much of the flight-and-fight disruption of information processing in addition to decision-making occurs when we’re P/L focused in addition to non genuinely trading focused.

*  My pure volatility stair out has been percolating higher, in addition to hence I’m prepared for a practiced amount of displace inwards stocks.  A slap-up routine is to compare intraday book of SPY alongside the book at the same fourth dimension of twenty-four hours for the past times several sessions.  Because book in addition to volatility correlate highly, the real-time tracking of relative book helps us intelligently justice the probable arrive at for the day.

*  We’ve come upward off Friday’s highs inwards overnight trading, alongside weakness inwards Asia in addition to Europe.  My game excogitation is to sell ES on bounces that neglect to receive got out overnight highs.  I’m non at all certain we’re done hearing close EM in addition to PRC weakness in addition to associated commodity weakness; the see of an effective quantitative tightening raised past times Deutsche Bank final week is ane worth pondering for implications.

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