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FulcrumTrader

MASSIVE Hedge in the "ES" Before Jan 22nd Sell Off!

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Friday trading in the "ES" had a very rare event that I only see a few times a year. The markets had traded lower in recent days off highs at the 1148.00 level in the S&P500 Emini. Friday pre-market action printed a new lower low to the 1104.75 level right into the +40 point Commercials profit target zone. Commercials who had accumulated heavy SHORT inventory over a several day period at the 1148.00 to 1144.00 zone of price now had price trading right into another zone for profit taking.

 

As the US cash session opened on Friday the "ES" was able to trade back up to the 1111's where it was then immediately sold. Within the first hour of the US cash session the "ES" printed another new low to the 1101.00 level of price (10 points off the 1111's). Trade to the 1101.00 level brought in immediate short covering into the order flow and then new initiating buyers.......next, we trade right back to the 1111's (10 points off the 1101's).

 

At this point, I was starting to notice that we were showing very large SHORT position accumulation at the 1110's/1111's taking place. With each price rotation back up to the 1111's I could see the SHORT position was growing in size.......very big size, like over 50,000 contracts!

 

What makes this type of inventory build very rare is the fact it was happening JUST ABOVE recent lows after a multi-day sell off. Usually this size of accumulated SHORT inventory takes place at fresh new highs, as Commercials start to load up in a small range of price (like they did at the 1144.00 to 1148.00 zone of price). As this very large SHORT inventory was building just above fresh new lows, I was thinking that Equities Funds/Institutions must be building up a very large hedge on the day before they start dumping into the closing hours. Since I knew that Commercials do not typically initiate large SHORT directional trades just above fresh new lows, the Equities hedge game seemed to be in effect.

 

As the markets traded into the final hours of the day, it is very easy to see that Equities Funds/Institutions transitioned into a full SELL PROGRAM dump mode......and the markets eventually printed 1086.25 LOD for the "ES" just before the end of the cash session. BTW, the 1088.00 to 1084.00 zone of price is the +60 point profit target area for those Commercials who sold the 1148.00 to 1144.00 Delta Zone of resting SHORT inventory.

 

We ended the last portion of the Globex futures session Friday with a small SHORT covering rally to the 1091's (20 points off the 1111's). It looks like Equities participants on Friday decided to start locking in profits near recent highs for the held LONG positions they have been building up since the March 2009 lows. I am glad we are getting volatility back into this market and I look forward to next weeks action.....should be VERY INTERESTING! :cool:

 

http://www.charthub.com/images/2010/01/23/FulcrumTrader_CD

 

Equities late day SELL PROGRAM dump........

 

http://www.charthub.com/images/2010/01/22/FT_NYSE_TICK

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Interesting - any thoughts on the fact that now there are a lot more CTA/momentum/trend type traders around whereby they sell more aggressively at new lows. Whilst previous years may have seen institutional buying coming into the market, providing support on a succession of down days, now the sellers at new lows (particularly after 2008) might have more influence.

(I agree - love the vol - I have closed all long term trades and looking to job, duck and weave)

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At this point, I was starting to notice that we were showing very large SHORT position accumulation at the 1110's/1111's taking place. With each price rotation back up to the 1111's I could see the SHORT position was growing in size.......very big size, like over 50,000 contracts!

 

How can you see the short position accumulation?

Maybe it is a long position accumulation?

 

Isn't there a buyer for every seller?

 

When 50K were sold, didn't someone buy them? :confused:

 

Gabe

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How can you see the short position accumulation?

Maybe it is a long position accumulation?

 

Isn't there a buyer for every seller?

 

When 50K were sold, didn't someone buy them? :confused:

 

Gabe

It is actually very simple to spot these zones of accumulation in the various futures markets using the Cumulative Delta, and tracking the Delta Volume Distributions going forward from the first day a contract trades. To get to your question you have to remember first, every buyer on the other side of that 50,000 contract accumulation was not necessarily a newly initiating buyer (trade entered to start a new directional LONG position).

 

Some of the buyers in the 1110's/1111's on Friday were those entering newly initiated LONG positions looking for the breakout back above the 1111's. This group was looking for price to finally trade back north out of that lower range of price and to start advancing back into the previous upper range. This was definitely the case after the market traded down to the new low at the 1101.00 level, and then was able to work all the way back to the 1111's of the day's cash session highs.

 

The ability of the market after making a new low and then trading all the way back to the cash session highs had new buyers thinking the "bottom" was potentially in. We also had many then covering SHORT positions (BUYING to cover) with this market activity. Those covering SHORT positions very much "in the money" were looking to lock in profits before the market trades back up into the previous upper range of price. With several rotations Friday back up to the 1110's/1111's area of price, we had plenty of newly initiated buying and SHORT covering (BUYING to cover) to take the other side of those accumulating over 50,000 contracts SHORT.

 

I have been tracking Cumulative Delta and Delta Volume Distributions for 7 years now, and what I observed on Friday was a pattern of the order flow distribution that I usually see as the market transitions directionally from a macro view.

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Interesting - any thoughts on the fact that now there are a lot more CTA/momentum/trend type traders around whereby they sell more aggressively at new lows. Whilst previous years may have seen institutional buying coming into the market, providing support on a succession of down days, now the sellers at new lows (particularly after 2008) might have more influence.

(I agree - love the vol - I have closed all long term trades and looking to job, duck and weave)

So far the patterns I have tracked in the order flow distributions these past 7 years have all stayed the same......the only aspect that flucuates on occasion is the total amounts of contracts accumulated or distributed in various ranges of price. For instance, in November of 2007 I saw MASSIVE amounts of SHORT inventory accumulation by Commercials at the recent highs. Now those patterns of price rotational accumulation look exactly the same as how they look today.....it is just the total amount of contracts accumulated will varry with each new accumulation event.

 

The Commercials still dominate the order flow in most futures instruments and their trade entry and management behaviors have for the most part stayed the same all these years. I have not yet seen any shifts in the order flow patterns I constantly track for with the possible changes from various market participants. For the most part, Commercials are still doing a very fine job of turning MANY on a daily basis in the weaker hand! :o

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I saw MASSIVE amounts of SHORT inventory accumulation by Commercials at the recent highs. Now those patterns of price rotational accumulation look exactly the same as how they look today

 

Thank you for your answer.

Unfortunatelly I don't understand how can you tell if someone is accumulating shorts or longs for that matter.

 

Gabe

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Thank you for your answer.

Unfortunatelly I don't understand how can you tell if someone is accumulating shorts or longs for that matter.

 

Gabe

If you track the byproduct of the traded order flow with Cumulative Delta (the differential of those entering "market" order trades at the bid/ask) you will easily be able to see accumualtion take place. If you fully understand order flow dynamics in relation to price action, it is very logical and easy to spot on a realtime basis intraday.

 

Maybe I will make a video for you to understand how a person can watch and track this activity.....I will post it up here latter today. :)

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Very Interesting observation, can you please elaborate on Commercials behavior regarding the +40 points profit target zone.

Thanks

 

Sure, this should help explain what played out on Friday better......

 

[ame=http://www.youtube.com/watch?v=s0pODbiPnLo]YouTube - January 22nd, 2010 Equities Hedging in "ES" before SELL-OFF[/ame]

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Hey Fulcrum,

Thanks for video. Quick question: You said that 70% of commercial trade is instituted via market order, do you mind sharing where you came across this figure?

 

Thanks,

JD

I have good friends and various contacts in the Chicago futures industry, so my initial and forward going research as I developed a way to track the Delta Volume Distributions lead me to that information.

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Fulcrum,

 

What type of candlestick chart are you using again? I'm sure you have mentioned it before, but I have missed it along the way.

 

I have a chart setup with 5 tick range bars, and I have really begun to notice that CD has it's own support and resistance, and that this support and resistance will break just before decent sized runs on price. I guess the key is identifying this break, and then being patient enough after that break to wait for a proper entry price. If I may ask, what is your entry criteria after a CD line of support or resistance breaks? You may have answered this very question in the video you posted, but I can't currently view it at my location. Thanks for the insight. :)

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Fulcrum,

 

What type of candlestick chart are you using again? I'm sure you have mentioned it before, but I have missed it along the way.

 

I have a chart setup with 5 tick range bars, and I have really begun to notice that CD has it's own support and resistance, and that this support and resistance will break just before decent sized runs on price. I guess the key is identifying this break, and then being patient enough after that break to wait for a proper entry price. If I may ask, what is your entry criteria after a CD line of support or resistance breaks? You may have answered this very question in the video you posted, but I can't currently view it at my location. Thanks for the insight. :)

The chart shown is a .75 Renko chart.....most of my charts are .50 or .75 Renko charts for my "ES" trading. 3, 5, or 7 tick Range candlestick charts work fine too imo......for scalping up to bigger picture analysis in the "ES" S&P Emini.

 

Delta Volume Distributions DO SHOW true support and resistance levels.......where zones of resting inventory are at various pricing levels. True support and resistance in the markets are at areas where those holding significant quantities of real inventory have their butts on the line. I trade a variation of three primary set ups according to what I see at the time in the Delta Volume Distribution.....after a break through and neutralization of a zone of resting inventory I may entry off an "Inventory Grab" set up.

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Meaning a retest of that same line of support and resistance from the opposing direction?

 

No.....I was talking about when all the inventory that was accumulated in a zone of price goes to neutral (the inventory was covered and no longer remains held). When significant held inventory unwinds and goes neutral (holders of that resting inventory capitulate) I call that an "Inventory Grab" event.

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Hey Fulcrum,

Thanks for video. Quick question: You said that 70% of commercial trade is instituted via market order, do you mind sharing where you came across this figure?

 

Thanks,

JD

 

There has been a lot of research on this subject. What can be shown is that the Lee and Ready algorithm (which is essentially using volume@bid/ask to classify trade direction) is about 70-80% accurate. It can be shown that the most inaccuracies creep in when trades are between best bid best ask, or outside best bid best ask. Ellis, O’Hara, and Michaely proposed some modifications and the accuracy rises a few percent. Most studies use the NYSE TORQ database for research as it has an audit trail that can be used to establish trade direction. A positive side effect of the old specialist system! Ellis, O’Hara, and Michaely did some work on the NASDAQ based on a proprietary data set provided by NASD.

 

If you search around you can find several papers on the subject.

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Thanks Blowfish. I think their may be a bit of confusion. I was actually referring to Fulcrum's claim that commercials (JPM, GS, etc.) conduct 70% of their business via market orders (as opposed to limit).

 

However, I spent some time reading through some of the information/reports you suggested and definitely found value in the readings, so thanks for the info. I would be curious to know how Goldman's SLP status has affected (if at all) their findings.

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Thanks Blowfish. I think their may be a bit of confusion. I was actually referring to Fulcrum's claim that commercials (JPM, GS, etc.) conduct 70% of their business via market orders (as opposed to limit).

 

However, I spent some time reading through some of the information/reports you suggested and definitely found value in the readings, so thanks for the info. I would be curious to know how Goldman's SLP status has affected (if at all) their findings.

 

Your right the studies suggest that the algorithms are 70% accurate detecting order flow (nearer 80 actually) that is subtly different to saying that 70% of commercials order flow is at market. I will have the opportunity to do my own straw poll over drinks next week.

 

Actually talk of 'commercials' can confuse the issue, order flow is order flow at the end of day and as the 'commercials' are by far the largest participants there is a good chance there will be a 'commercial' on both sides of the trade.

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Interesting stuff. Any chance those straw poll results might make there way onto TL? It's too bad this type of information isnt in the public realm more.

 

Side note: Does anyone know where one can find recent figures pertaining to how much ES volume each type of market participant does (Commercials do "X%," Prop Firms do "Y%," etc.)? I would be curious to compare today's breakdowns to pre-2007 breakdowns.

 

Thanks

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Interesting stuff. Any chance those straw poll results might make there way onto TL? It's too bad this type of information isnt in the public realm more.

 

Side note: Does anyone know where one can find recent figures pertaining to how much ES volume each type of market participant does (Commercials do "X%," Prop Firms do "Y%," etc.)? I would be curious to compare today's breakdowns to pre-2007 breakdowns.

 

Thanks

 

The commitment of traders is about as good as it gets CFTC Commitments of Traders Long Report - CME (Futures Only)

 

Edit worth mentioning that the categories of traders in the report as defined by the CFTC are somewhat different to what FT means by 'commercials'. Commercials would actually be reporting non-commercials in the report.

 

Non-Commercial (”Large Speculators”)

These large speculators are mainly hedge funds, banks etc who trade futures just for speculation.

 

Commercial (”Hedgers, Exporters, Importers”)

These are people who use the futures contracts for hedging purposes, and these commercial participants are generally producers, farmers, factoris, exporters and importers etc. They use the commodity or futures markets to take a position that will reduce the risk of financial loss in their assets due to a change in price.

 

Non-Reportable (”Small Traders”)

Edited by BlowFish

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I am sure technology and reports have moved on from the day I was an equity option market maker. Then without being able to get information from every broker separately it was impossible even for the exchanges to tell exactly who was doing what, if they were a market maker, prop trader, actual client, facilitator etc; there were days where I know as market makers we were the market, and dominated the trading, other days no where near it, and the theories put forward as to why where so far from reality.

The exchange could get info regards who sat on the bid and offer waiting to get hit, and who actually crossed the spread but that was about it.

 

While the discussions are good, the stats interesting etc;

The point being that everyone should be careful about placing too much emphasis on straw poles and measurements that are really about fudging numbers.

 

Please take this in the manner of a surgeon generals health warning to those not of critical mind not as a criticism of the good thoughts and intentions involved.

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While the discussions are good, the stats interesting etc;

The point being that everyone should be careful about placing too much emphasis on straw poles and measurements that are really about fudging numbers.

 

Exactly! Though I still plan to conduct my own straw pole next week, just for fun. Whilst I find the work of people like FT pretty intresting, I did have some difficulty with the core assumption. (That 'delta' is an adequate proxy for order flow) In fact that was what prompted me to look further into the mater.

 

I should point out most of the work that is published has been done by 'academics' rather than industry pundits. (Somehow I can't imagine GS publishing things like this)! Now I have to say I am equally as suspicious of 'academics' but the reports are thorough with detailed notes on the numbers and the methodology used to process them. There are also numerous independent reports with (slightly) varying results but similar conclusions. There is one particular conclusions that I have made (your mileage may vary).

 

In a nutshell I have to concede that market delta type calculations are a reasonable proxy for order flow. I don't think I was wrong be be sceptical, I now have a firmer view based on what I consider an acceptable body of evidence.

 

With regard to this thread, I would now accept that there was sell side order flow, however I remain sceptical that you can detect that a) it was a hedge and b) whether it was speculators (or what FT would call commercials). I am not saying it was or was not just that I remain sceptical that you can detect that :D. What is more important of course was whether it provided a quantifiable trading opportunity.

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BF - 100% - you are better at I in explaining things and the use of a proxy is the right word.

 

I am an old sceptic, I have seen way too many stats being fudged based on assumptions and rubbish. eg; the one that gets me all the time is when people quote that

"80% of options expire out of the money - hence you should sell options as a great way to make money."

Reality: What about all the options that were in the money that people rolled rather than exercised?

What about the times when those 20% of options kill you?

 

I think Fulcrum and the post are great, I just get nervous when people might take something as being gospel. - thats all

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Nothing wrong with being a sceptic! It boggles my mind that people expect to trade consistently based on something that they have been told is the 'truth'. With little or no verification for themselves. My next step is looking at the tools and data I use. Last last time round I was not entirely satisfied with their integrity. That's probably a topic for another thread though.Actually I wonder whether there might have been bias on my part precisely because I was wary of the core assumption!!

Edited by BlowFish

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With regard to this thread, I would now accept that there was sell side order flow, however I remain sceptical that you can detect that a) it was a hedge and b) whether it was speculators (or what FT would call commercials). I am not saying it was or was not just that I remain sceptical that you can detect that :D. What is more important of course was whether it provided a quantifiable trading opportunity.

The day the Equities hedge was built up (which I have now confirmed was hedging order flow through my Chicago based contacts) there was several Cumulative Delta based SHORT trade set ups intraday in the small zone of price where the hedge was initialized and developed....so there was definitely good trading opportunities in the 1111's/1110's Friday.

 

Now again Wednesday there was another decent sized hedge built up at pricing levels above recent lows. As a result of the hedge position being held into Wednesday's close, I was an aggressive seller of Cumulative Delta based after hours session SHORT trade set ups with the ES move to the 1103.50's......that price movement beyond the cost basis of the hedge position was an excellent trade opportunity in the after hours session imo (patterns I have seen many times before). By the time we rang the bell for the open, any sellers of the 1100's area or higher were already well in the money with any remaining held SHORT positions from the after hours session trade. Soon after the open, Commercials right away worked the order flow as the market was driven to much lower pricing levels (and eventual fresh new lows in the ES of 1074.25's......right down into the +70 point profit targets zone for those who sold 1148.00's to the 1144.00's area of significant SHORT accumulation). Those who had the hedge in place to this point have again done exceptionally well with their positions.....and with fresh trade to new lows of 1070.50's in tonights after hours session offered, covering portions out well over 20 points in the money was available.

 

It is the repeating patterns within the actual traded order flow of the bid/ask differential (Delta Volume Distributions) that has many very profitable groups paying attention to and tracking this information.

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