The Trend

by Larry Levin

What a rally! The market really moved out today when a housing report sounded good. The earlier worse-than-expected weekly jobless claims were ignored. Hmm, rallying on suspect news while ignoring bad news, eh? They both sound like trends to me. Regardless of the news, the trend is currently up and will continue to be until "something" knocks some sense into it. Until then, however, never fight the tape!

Speaking of "the tape," which is the trend, we went with it today in a big way. I believe there were only two short sales made in the VTR all day; one of them being profitable, the other break even. All of the other trades were buys. Taking the way floor traders read the price action and volume shifts in the pit and putting it into action on the screen has not only helped our student's order entries, but their exits as well; not to mention an incredible insight to the real auction process.

Let me give you an example of one of these trades from today's list. Near 2pm Central the market had pulled back to what was called out as clear support (972.00) in the VTR (virtual trading room). When the ES went to 972.25-bid by 972.50-offer, only 110 trades sold the bid while 1202 traders bought the offer. Hmm, good news if you want to get long. A few minutes later the market went back to the same price; this time selling only 145 on the bid, while 665 bought the offer. But 972.00 (evens) never traded even once. Moreover, between the times the ES traded at this level, much buying was witnessed. Hmm, good news if you want to get long.

From this double bottom the market started trading higher with heavy buying at the 972.75 offer. We hit the offer making us long there. Just seconds later the ES was 972.75 BID, with huge buying now hitting the 973.00 offer. This is nirvana: instant gratification. We were going with the overall trend - not fighting the tape.

The ES quickly ran up to a resistance level (973.75) that everyone in the VTR hoped would be breached. This is where the exit took place; not because it was a "potential" resistance level, but because we "read the tape." When the market was 973.50-bid by 973.75-offer, huge buying hit the 973.75-offer. Good news so far. But when the market went 973.75-bid, NOBODY reached up to buy a single offer at 974.00...not one. In fact, 23 trades hit the 973.75-bid instead. Uh-o.

But we wanted to give it a little more time to pop and not overreact. Moments later the market is still 973.75-bid (good news...come on baby go!) but again NOBODY takes out the 974.00-offer. Once again, people get nervous and start selling the 973.75-bid thus driving the market down a tick. This isn't good news, but it isn't horrible yet. As this is playing out, the moderator Dan tells the VTR students that this is now a critical moment; a real make or break (MOB) level. Get ready to bail.

The bid has dropped to 973.50 and now the offer is up at 973.75, which is where we get the "get the hell out of Dodge" signal. As it is trading here, very small buyers are hitting into the 973.75-offer (remember nobody bought 974.00) while larger orders start hitting the bid to sell out. When several hundred sellers were hitting the bid while only a few crummy buyers hit the higher offer, we covered the trade at 973.50. Once we were out - the market instantly plummeted back to 972.25. Seriously, in the blink of an eye!

It wasn't a huge winner but with the multiple positions it was worth it. More importantly, the VTR "read the tape" like a newspaper. To be sure, we read the tape, but not on the DOM, or order book, like you may think. In the VTR we have a special chart that plots all of these levels; trading without it may be a new definition of insanity.

Although we discuss the economic data daily, most of it quite bad, we still follow the trend. I still hear a lot of traders on the floor wondering how the market can keep going higher given the news, short the hell out of it, and then get upset when they're up the creek without a paddle.


Previous Day's Trading Room Results:

Trade Date: 7/23/09

E-Mini S&P Trades*
(before fees and commissions):

1) OTF buy @ 1:10pm at 972.75 = +.75 (1 lot)

2) Algorithm positions (5)

3) "Reading the Tape" positions (18) ...combined Secret's, Algo, & "Reading the Tape" total...+30.50



Electronic (YM) Mini-Dow:

1) None today



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