PROFITING FROM THE BUY/SELL PROGRAMS THE MTS WAY

When you read my morning piece about yesterday's trade, it won't be your regular read. You see, most of the stories people read online about yesterday's trade were about Boehner saying this and President Obama saying that. So if you think the headlines had something to do with yesterday's rally, they did, but only to an extent.

      Chart by Keystone Speculator

Because my background is in doing S&P 500 index arbitrage and having seen all the different types of orders our desk has executed, I know exactly when the programs are gearing up. Once the index arb sell programs kick in, the algorithmic trading programs do the rest. If you are reading this and saying that you hear it all the time, you should. Because anyone who trades futures for a living that isn't educating themselves on the ins and outs of program trading is going to find themselves face down, losing a lot of money.

Run the sell stops / run the buy stops: One of the long-term effects of the credit crisis is lower volumes. Plain and simple, there are fewer people trading due to the economic downturn. If you can't pay your mortgage or your electric bill, it's unlikely you're trading futures. This applies across all financial futures and options and all the stock exchanges. The net effect of the crisis is lower volumes across the board. While some people say the lower volumes do not matter, they actually do. The lower volumes have made it easier for the program traders to target the buy and sell stops. It's evident in the price action of the S&P futures almost every day of the week. Only on days before or after a holiday do the algos become less active.

Yesterday on the MrTopStep chat we called out the sell stop levels and sell programs down to the low of the day. After the sell program ran its course and right off the low of the day, we said we thought the sell program was over and then we started quoting out the buy programs and buy stops. We think there is a lot of truth in the idea that if you're patient and buy into the sell stops and sell into the buy stops you will capture most of the day's range. Yesterday was another perfect example. …

Danny Riley is a 34-year veteran of the trading floor. He has helped run one of the largest S&P desks on the floor of the CME Group since 1985.

Our view:
Our government is trying to get its act together. My question is, why does it always have to come down to the wire? Yesterday our view was to sell the SPZ, and it did have a nice selloff. I quoted the sell programs and sell stops all the way down to the low of the day. Then I came out saying it felt like the sell program was over and up the SPZ went (with a lot of help from the government). The SPZ had to do a washout first. This morning the ESZ traded all the way up to 1416.75 (up 9.75 handles). That is the good part; the bad part is the resistance at the 1419-1421 level. We lean to selling the gap-up open or the first 2 -3 handle rally above. If that works we will be looking to buy the pullback. See you on the IM, and as always, keep an eye on the 10-handle rule and please use stops.  

Today's data:

• It's 7 a.m. and the SPZ is trading 1416, up 8.9 handles; crude is at $87.98, up $1.49, and the EC is at 1.2996, up 62 pips.
• In Asia 10 of 11 markets closed higher (Shanghai Comp -0.51%, Hang Seng +0.99%).
• In Europe 11 out of 12 markets are trading higher(CAC +1.03%, DAX +0.73%)
• Today's headline: “S&P 500 Futures Higher as White House and Congress Talk as Fiscal Cliff Nears”
• Economic calendar: Today: GDP, jobless claims, corporate profits, pending home sales, 7-yr note auction, chain-store sales; Earnings from Kroger, Tiffany, Barnes & Noble. FRIDAY: Personal income & outlays, Chicago PMI, farm prices
• Globex volume: 2.12mil ESZ and 12.6k SPZ trade
• Fair value: S&P +7, NASDAQ +14.5

MrTopStep Closing Print Video: http://www.mrtopstep.com/videos/?id=35173
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DISCLAIMER: The information and data in the following report(s) were obtained from sources considered reliable. Opinions, market data, and recommendations are subject to change at any time. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any commodities or securities. MrTopStep, its officers, directors and its contributors may, in the normal course of business, have position(s) which may or may not agree with the opinions expressed in this report.