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ES and the Great POMO Rally
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ES and the Great POMO Rally

  #791 (permalink)
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For some unknown reason, investors and the markets not only breathed a sigh of relief, but went on a buying spree today, as the the major averages posted their first weekly gains since July. For the week, the Dow Jones Industrial Average was up +4.3%, S&P 500 Index rose +4.7%, and Nasdaq Composite Index tallied a +5.9% gain. The indices finished Friday near their session highs after getting hit for a 2% loss on the announcement out of Jackson Hole. In fact everything with the exception of the U.S. dollar and the Swiss Franc closed higher on the day. Bernanke did not launch any new extraordinary policies, but the markets took his comments, that the FOMC would consider additional measures at its September meeting, as a signal more easing might be on tap. However, ECB President Trichet is also speaking on Saturday, which is certainly just as important as Bernanke's speech today, and more likely to produce something more shocking.

While a sense of calm has certainly settled in after the ES held the 1120 area, and bounced back up to the 1185 break-even area for the longs, the lack of leadership in the market should be of great concern to the bulls. On the NYSE and on the Nasdaq exchange new 52-week lows totals still solidly outnumbered the new 52-week highs totals. A rally that is sustainable should be accompanied by stocks hitting new 52 week highs. There has been much talk about the fact that the market experienced a distribution day soon after Tuesday’s follow-through-day. Historically, when a distribution day occurs on the first or second day after a follow-through day, the "uptrend" reportedly has failed 95% of the time.

On a day when the appetite for risk appeared to have returned, the gold and bond markets both came roaring back today, and appear poised to trade higher, while crude oil showed relative weakness to equities, and the DAX seemed ready to make new lows. The VIX continues to remain in it’s uptrend, even though the market rallied from 1110-1188, and may be forming a bull pennant, adding further evidence of bearish divergences. Whether the continued high volatility is caused by a lack of liquidity, or uncertainty about rapidly changing market fundamentals, or the lack of liquidity is caused by the high volatility, this negative feedback loop is sure to continue off-and-on, unless the Volker Act is repealed and the handcuffs are removed from Wall Street’s banks.

Attached Thumbnails
ES and the Great POMO Rally-fdax-09-11-daily-1_10_2011-8_26_2011.jpg   ES and the Great POMO Rally-fdax-09-11-weekly-week-29_2008-week-34_2011.jpg   ES and the Great POMO Rally-vix-daily-1_4_2011-8_26_2011.jpg   ES and the Great POMO Rally-es-09-11-daily-1_11_2011-8_26_2011.jpg   ES and the Great POMO Rally-es-09-11-135-min-8_26_2011.jpg   ES and the Great POMO Rally-es-09-11-60-min-8_26_2011.jpg   ES and the Great POMO Rally-fut_image.ashx.png  

Last edited by tigertrader; August 26th, 2011 at 10:16 PM.
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  #792 (permalink)
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Does anyone believe that we might actually see S&P at 1400 by year end? No?

I actually think there is a possibility

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  #793 (permalink)
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Lornz View Post
@Private Banker

Have you retired?

Lol! No, just been busy trading and some other projects. Yesterday was incredible in fact, this month has been unbelievable! Still just intra-day trading the ES. Not sure if anyone referenced this already but the big picture has formed a massive bear flag through this huge swings. Pretty wild.

Cheers,
PB

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ES and the Great POMO Rally-2011-08-27-es.jpg  
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  #794 (permalink)
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Lol! No, just been busy trading and some other projects. Yesterday was incredible in fact, this month has been unbelievable! Still just intra-day trading the ES. Not sure if anyone referenced this already but the big picture has formed a massive bear flag through this huge swings. Pretty wild.

Cheers,
PB


The problem with technical analysis is that it can be very subjective and open to interpretation, which is a critical factor to keep in mind. It is the technicians and not the market itself, that perceives these abstract formations, assign significance to them, and then base their decisions upon this analysis, thereby fulfilling their prophecy.

In the first 2 charts, we can see a classic bear flag, followed by a bear pennant, both of which carry a strong implication of a bearish continuation in price. In the 3rd chart we see an interpretation of a diamond formation.

Diamond formations turn out to be continuation patterns the majority of the time, but can also be a reversal pattern, albeit less frequently than they are a continuation pattern, and more often as tops than bottoms.

Nevertheless, the market appears to be headed lower, unless of course - it goes higher, in which case the technicians will be calling the pattern, a diamond reversal formation.

Attached Thumbnails
ES and the Great POMO Rally-spy-daily-1_5_2011-8_26_2011-3.jpg   ES and the Great POMO Rally-spy-daily-1_5_2011-8_26_2011-2.jpg   ES and the Great POMO Rally-spy-daily-1_5_2011-8_26_2011.jpg  

Last edited by tigertrader; August 27th, 2011 at 12:29 PM.
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  #795 (permalink)
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tigertrader View Post
The problem with technical analysis is that it cam be very subjective and open to interpretation, which is a critical factor to keep in mind. It is the technicians and not the market itself, that perceives these abstract formations, assign significance to them, and then base their decisions upon this analysis, thereby fulfilling their prophecy.

In the first 2 charts, we can see a classic bear flag, followed by a bear pennant, both of which carry a strong implication of a bearish continuation in price. In the 3rd chart we see an interpretation of a diamond formation.

Diamond formations turn out to be continuation patterns the majority of the time, but can also be a reversal pattern, albeit less frequently than they are a continuation pattern, and more often as tops than bottoms.

Nevertheless, the market appears to be headed lower, unless of course - it goes higher, in which case the technicians will be calling the pattern, a diamond reversal formation.

TA is in the eye of the beholder for sure. I've been trading and managing money (screen based) for a long time and understand the many perspectives TA can provide with each day's PA. There is no problem with TA it's how it's perceived/interpreted that becomes problematic. This is what I've observed thus far but with each new trading day comes the potential for a change in pattern, etc. I'm not biased in which way it will break as I'm trading the intra-day opportunities but I do think this giant formation is incredible.

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  #796 (permalink)
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jonc View Post
Does anyone believe that we might actually see S&P at 1400 by year end? No?

I actually think there is a possibility

Based upon the the S&P's current price, and volatility, the probability that we will see 1400 by the end of the year is relatively low (~17%)

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ES and the Great POMO Rally-untitleddocument-1.pdf  

Last edited by tigertrader; August 27th, 2011 at 10:12 PM.
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  #797 (permalink)
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Private Banker View Post
TA is in the eye of the beholder for sure. I've been trading and managing money (screen based) for a long time and understand the many perspectives TA can provide with each day's PA. There is no problem with TA it's how it's perceived/interpreted that becomes problematic. This is what I've observed thus far but with each new trading day comes the potential for a change in pattern, etc. I'm not biased in which way it will break as I'm trading the intra-day opportunities but I do think this giant formation is incredible.


It's really more than the fact that TA is dynamic and open to interpretation.

The very significance and useful application of technical analysis (TA) in the traditional Magee and Edwards sense, may no longer be as effective, or even work at all. HFTs and quantitative analysis (QA) may have rendered TA obsolete, or it may just be that this is a cyclical phenomena, and QA is the “A” du jour.


QA in of itself, is not perfect, because one of the weakness of statistics is the problem of changing distributions, and unknown variables in a data series. Though QA is forward looking, it still relies on historical data. Nevertheless, QA is certainly more prevalent among Wall Street and professional traders, which of course, plays right into the self-fulling prophecy theory of why it may be effective.


That being said, this may be just another example of the competitive exclusion principle, working itself out in the markets. We may be seeing two competitive schools of thought that cannot co-exist. When one technique has even the slightest advantage or edge over another, then the one with the advantage will dominate in the long term. One of the two competitors will always overcome the other, leading to either the extinction of the competitor, or an evolutionary or behavioral shift towards a different niche.


While short- term, mean-reversion trading is not a new strategy, it has assumed a dominant role, at this point in history, as the methodology de rigeur, because of it’s effectiveness in a HFT and AT dominated environment. Whether HFTs have an affect on long term time-frames is debatable, but there is no denying what drives markets over the short-term, when directional institutional traders are not active.


Currently, the implementation of the Volker Rule may also be altering the behavior of the markets. Limiting dealers’ ability to position speculatively, is going to have a long term affect on (implied liquidity) the b/a depth, and consequently on realized liquidity. As liquidity shrinks, volatility rises as it takes less size to move the market. Liquidity is often pulled intentionally to allow the market to “run,” but it is often diminished in response to risk.


When realized volatility rises, the risk management function at Wall Street dealer firms reads it as an increase in the firm’s VaR, and immediately adjusts it’s risk profile. The longer a period of volatility lasts, the bigger the effect on the market, because more and more of the “VaR window” represents volatile market conditions


Last edited by tigertrader; August 27th, 2011 at 04:40 PM.
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tigertrader View Post

It's really more than the fact that TA is dynamic and open to interpretation.

The very significance and useful application of technical analysis (TA) in the traditional Magee and Edwards sense, may no longer be as effective, or even work at all. HFTs and quantitative analysis (QA) may have rendered TA obsolete, or it may just be that this is a cyclical phenomena, and QA is the “A” du jour.


QA in of itself, is not perfect, because one of the weakness of statistics is the problem of changing distributions, and unknown variables in a data series. Though QA is forward looking, it still relies on historical data. Nevertheless, QA is certainly more prevalent among Wall Street and professional traders, which of course, plays right into the self-fulling prophecy theory of why it may be effective.


That being said, this may be just another example of the competitive exclusion principle, working itself out in the markets. We may be seeing two competitive schools of thought that cannot co-exist. When one technique has even the slightest advantage or edge over another, then the one with the advantage will dominate in the long term. One of the two competitors will always overcome the other, leading to either the extinction of the competitor, or an evolutionary or behavioral shift towards a different niche.


While short- term, mean-reversion trading is not a new strategy, it has assumed a dominant role, at this point in history, as the methodology de rigeur, because of it’s effectiveness in a HFT and AT dominated environment. Whether HFTs have an affect on long term time-frames is debatable, but there is no denying what drives markets over the short-term, when directional institutional traders are not active.


Currently, the implementation of the Volker Rule may also be altering the behavior of the markets. Limiting dealers’ ability to position speculatively, is going to have a long term affect on (implied liquidity) the b/a depth, and consequently on realized liquidity. As liquidity shrinks, volatility rises as it takes less size to move the market. Liquidity is often pulled intentionally to allow the market to “run,” but it is often diminished in response to risk.


When realized volatility rises, the risk management function at Wall Street dealer firms reads it as an increase in the firm’s VaR, and immediately adjusts it’s risk profile. The longer a period of volatility lasts, the bigger the effect on the market, because more and more of the “VaR window” represents volatile market conditions

Patterns will still be there to exploit, though... However, they might be more difficult to find.

Some concepts are as old as the markets themselves, and they are needed to facilitate trades.

I predict that squinting will be the best way to read charts....

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  #799 (permalink)
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tigertrader View Post

It's really more than the fact that TA is dynamic and open to interpretation.

The very significance and useful application of technical analysis (TA) in the traditional Magee and Edwards sense, may no longer be as effective, or even work at all. HFTs and quantitative analysis (QA) may have rendered TA obsolete, or it may just be that this is a cyclical phenomena, and QA is the “A” du jour.


QA in of itself, is not perfect, because one of the weakness of statistics is the problem of changing distributions, and unknown variables in a data series. Though QA is forward looking, it still relies on historical data. Nevertheless, QA is certainly more prevalent among Wall Street and professional traders, which of course, plays right into the self-fulling prophecy theory of why it may be effective.


That being said, this may be just another example of the competitive exclusion principle, working itself out in the markets. We may be seeing two competitive schools of thought that cannot co-exist. When one technique has even the slightest advantage or edge over another, then the one with the advantage will dominate in the long term. One of the two competitors will always overcome the other, leading to either the extinction of the competitor, or an evolutionary or behavioral shift towards a different niche.


While short- term, mean-reversion trading is not a new strategy, it has assumed a dominant role, at this point in history, as the methodology de rigeur, because of it’s effectiveness in a HFT and AT dominated environment. Whether HFTs have an affect on long term time-frames is debatable, but there is no denying what drives markets over the short-term, when directional institutional traders are not active.


Currently, the implementation of the Volker Rule may also be altering the behavior of the markets. Limiting dealers’ ability to position speculatively, is going to have a long term affect on (implied liquidity) the b/a depth, and consequently on realized liquidity. As liquidity shrinks, volatility rises as it takes less size to move the market. Liquidity is often pulled intentionally to allow the market to “run,” but it is often diminished in response to risk.


When realized volatility rises, the risk management function at Wall Street dealer firms reads it as an increase in the firm’s VaR, and immediately adjusts it’s risk profile. The longer a period of volatility lasts, the bigger the effect on the market, because more and more of the “VaR window” represents volatile market conditions

Lol! Sounds like you're over thinking this a little don't you think?

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  #800 (permalink)
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Private Banker View Post
Lol! Sounds like you're over thinking this a little don't you think?

As far as I'm concerned, the market is my enemy - it exists to fool me and take my money.

The more I understand and know about my enemy, the easier it will be to gain the advantage and defeat him.

It is said that if you know your enemies and know yourself, you will not be imperiled in a hundred battles; if you do not know your enemies but do know yourself, you will win one and lose one; if you do not know your enemies nor yourself, you will be imperiled in every single battle.

Besides, I'm house bound on the East coast, stuck in the periphery of Irene...

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