[steve46]

What I will attempt to do is to give folks a "look" at how institutional participants characterize markets. I don't suggest that institutions have a homegenous view or that my view represents all institutional participants. I suggest simply that my interpretation of the S&P futures market differs significantly from a retail view. Further I suggest that in a market dominated by professional interests, it may benefit the retail trader to learn how institutional participants view this market.

I will start by providing background, some of which I introduced in previous posts.

The attached chart displays price from late 2009, showing the 2010 open at 1113.75 and moving on into the year. Assuming some have read my previous posts, I will simply restate a previous comment, that in a "professional" market, it is common to see an end of year rally as institutions try to hit their bonus targets (item 1 on the attached chart shows the end of year rally).

Progressing further we see item 4, the open of 2010 at 1113.75. This open becomes one of the primary benchmarks by which institutions measure their (yearly) performance. In the process of moving from item 1 (the end of year rally) to item 4 (open of the new year), it is important to take note of items 2, 3, and 5 respectively. These areas are interpreted as demand, supply and "parked inventory". Because price moves towards volume, what we see in this chart are multiple examples of behavior that involves "tests" and "retests" In my opinion these tests provide two benefits to the primary participants. One is they allow participants to re-visit an area that might provide favorable entry at what is sometimes called "wholesale" prices, and "retests" offer institutional participants the opportunity to generate momentum by shaking out weak hands and activating both resting and discretionary orders from players who see these "retests" as a "second chance" to enter, to add to a favorable postion, to manage inventory or (as is often the case with retail participants) to minimize a losing postion by exiting at breakeven (or near to it) prices.

If we re-visit the chart we can see that price did in fact rally into the open of 2010, and in the process, created an area of demand (item 2) then an area of extended horizontal development that is characterized as "parked inventory" (item 3). As is typical of this kind of development, markets are "moved" to create an area of supply just above the open. This is natural as it punctuates a prolonged move up and provide a way for institutions to do two things. One is to generate first quarter profits, and the second is to retrace down to test an area of prior demand (item 2). At this point (usually on bad economic news), participants are able to "shake out" the weak hands, defend parked inventory, and initiate a move to take out the open at 1113.75...and in the process generate additional quarterly profits.

From February, on into mid April the market moves up steadily and then proceeds to develop horizontally (coincident with US tax season). As is usual, on bad economic news the next step is to move price down to retest prior lows. We can see the retest of supply at item 7 as markets get "marked down" into the slow summer season.

[steve46]

Moving on with our overview of the market, we see a chart displaying the balance of the year 2010 (or nearly so).

and the comment is perhaps obvious, The summer doldrums are marked by range bound activity as trading desks mark the market up and down. Notice the move down in July as again weak hands are shaken out ("shaking the tree") and then the retest as the players try to hit quarterly profit targets.

The end of year rally provides nice symmetry to the overview, and here again, it provides a way for insitutional players to hit end of year targets. At this point, even though we have not yet reached December, many professionals have secured performance based bonuses and are thus "motivated" not to take significant additional risk.

Incidentally if one were to scan left on that chart you would meet the lower boundary of supply at item 7 (probably just a coincidence lol).....

So what I suggest at this point, is that folks who read this take a moment to step back and simply consider what the implications might be. Although I used to use indicators (moving averages, channels, etc) I suggest that approaching the markets from a different angle might actually provide the basis for a tradeable edge.

[steve46]

So today lets go one step further in terms of characterizing the S&P futures market

Looking at the charts, one can make certain assumptions. First, one can observe that there is an agenda that explains market movement. That agenda is profit motive pure and simple, however there is also a time component, and for that reason, one can use the concept of "time and price" as a basis for action. Depending on the institution, incentives are offered based on the ability to produce alpha in the form of excess returns as measured against specific benchmarks. In terms of time, examples of "benchmarks" include the yearly, quarterly, monthly and weekly opens, highs and lows. Professionals are motivated to exceed these benchmarks and as we approach the end of each time period, if you are aware they exist, you can anticipate that participants will try to move markets in order to "defend" or to hit those marks.

This year the benchmarks include
Yearly open at 1113.75, high of 1224.75, low of 1002
Quarterly open at 1135.75, high of 1224.75, low of 1127
Monthly open at 1186, high of 1224.75, low of 1171
Weekly open at 1201, high of 1205.75, low of 1171

How is this useful, simple, if one were monitoring the charts on Friday, you would have seen that as we approached the close of regular trading hours, we were below the weekly open of 1201....As mentioned, these are areas that professional desks "target" and defend. Looking at the attached chart, you can see that in the last hour, we bounced off of support at 1195 and attempted to drive up to test that open (unsuccessfully). If one had known of this target and the motivation of players to exceed the number before the close of the week, you might have acted to enter at support and ride that move up. Its just one of many examples of how institutional traders (anyone for that matter) could use the principle of "time & price" to find a favorable entry. Actually we could go a bit further and suggest that after the open, where we saw a test drive down to 1187.50, the rest of the day was an attempt to defend and hit that benchmark. Clearly a skilled participant, aware of the motivation of institutions to defend and hit that benchmark, could have tried to obtain favorable position early, and then spent the rest of the day managing a profitable position.

[steve46]

So here we are its Sunday evening, and we are looking at the open of the S&P Globex market. What we see is a gap up off of friday's close. We know that participants were motivated to try to defend the previous week's open at 1201. We saw (if you read my previous post) that at the end of RTH, particpants tried to move it up to that level.

Here we are, and lo and behold the market gaps up on the Globex open, then retraces down to test that NUMBER (previous weeks open). Coincidence?....then it moves up right along side the Nikkei and the HangSeng.

Finally the DAX opens in Germany and (surprise) it also gaps up.....

Now....there is a LOT more to this than I am willing to offer on a public site, and I am definitely not here to put on a seminar, but what I will do is point in a direction and suggest to those who are thinking about it....that there are some real and significant edges out there, and they don't require Stochastic, MACD, Channels, Fibs...etc....

Where is price going from here? Depends on where the big boys decide to take it. My opinion is that they want to defend what they have earned so far this year (performance bonuses) and they want to do that, with as little risk as possible. One way of accomplishing that is to move markets north in the overnight, when a lot of folks are sleeping. As pointed out previously, I proposed that the S&P would try to find support early in Nov, then continue up from that support into the New Year. Could I be wrong, sure. Lets see what happens.

[steve46]

As mentioned previously, one of the differences between retail and professionals is the ability to read the tape.

In terms of success, this is critical I believe, because ultimately you have to accept and manage risk, and to obtain the confidence to do that, you need to develop confidence in your skills and your tools.

Attached is one example of a "time & sales strip". What I have done is to take a time & sales chart and adapt it so that it takes the form of a vertical "strip". I position that strip next to my chart and I use it to read the market....prior to entry in order to select a favorable point of entry....after entry to confirm that my decision was correct, or if I am wrong to tell me so, as early as possible so that I can mimimize my losses.

As mentioned previously I am not interested in teaching people to read the tape. That unfortunately is a difficult process that requires a lot of hand holding, hours of training and practice, and depending on the trader's aptitude, a lot of perseverance and patience.

What I will say is that it is very advantegeous to learn to read enough to determine whether you "see" a "held" bid or offer. Specifically that means that as price tests an important area, you want to be able to see if buyers or sellers are able to hold their ground (thats what a held bid or offer is in practical terms)..

Now I need to pay attention to what I am doing, so I will wish everyone good night.

[Nick1984]

Very nice write up Steve.

I used to trade on an institutional level for 2 years previously and you describe the thinking behind it very well.

When you are trading a long line you do not think about trading in the same way as the average retail plunger.

As an insto you generally try to sell on the way up in random sized blocks. You are creating the market for a lot of the retail people who you are selling your stocks to. It is a fine line to tread down as you want to ensure that your selling activity is not so big that you flood the market with inventory that you will water log a stock so you trade in very small blocks that will give the buyers what they want without decreasing the price.

When you buy you generally always try to see if you can shake out the weak hands in the market. A price shake out at "support" is always great to weed out weak hands and establish a better buying region. You want to buy up their panic and accumulate at the cheapest possible price.

As a retail trader you don't need to know how the insto's go about their business but you should always be cognisant of the thinking behind their actions.

[steve46]

Cheers Nick

Thanks for the kind words

I was going to hold off on this, but I think I have a few moments before I have to make a decision so here are a few additional and hopefully educational comments

First, what my employers want from me, it my analysis, to the extent that it provides a way of generating excess returns. In doing my analysis I look at data that experience tells me is predictive. This next chart is re-jiggered from the last one. I do this routinely (especially when I think there is a good chance that my initial "diagnosis" of the market is wrong)

As you can see from the chart, the best entry so far was "with" the primary trend up from a re-test of the previous week's open at 1201.50. In my judgement, this was a good entry because it resulted in a multi-point profit without a great deal of risk....As is typical of these low risk entries, they happen quickly, you have only a few seconds to decide and then the market runs away, leaving the rest of us behind. Now at the high, if one were to "scan left" you would (if you knew what to look for, see a "stopping point"). These stopping points are places were previously you have inventory or resting orders. Because I can't comment further on that I will just leave that point for now.

I show resistance as it is created in real time....I show support as it is created in real time and I show the probe down to find sellers. For retail traders, support develops by touching the same price (more than twice) and then failing to take it out. By the same token, resistance develops as price touches a price (more than twice) and fails to take it out. I use the terms support and resistance instead of supply and demand for good reason. Support and resistance are dynamic. That is to say, the nature of support and resistance changes in the (relatively) short term, while supply and demand levels, usually reflect the interest of players with a longer time horizon.

As you will see from this chart, I add a horizontal line at midnight (my time) and I use that as a pivot. I do this because from experience I have seen the market act use that time as a "line in the sand"...(notice the test of that line) and what that signifies in my opinion is a sea change from upward market bias to downward market bias. We will see. By the way, the confirmation (whether ultimately I am right or wrong) is forthcoming as the DAX and other European markets open for business. At this very important point in time, what we term a "global handshake" is in process and these markets take the lead (until the US markets open).

[steve46]

And here is the DAX during that time period, and as can be seen it seems to prefer heading south for the moment.