YEAR END: S&P 500 SHAKE AND BAKE

The markets don't normally do what they are doing at year end, but then again, these are anything but normal times. 

When the S&P started selling off again yesterday as the “no deal” fiscal cliff headlines were hitting, things could not have looked worse. After opening higher and upticking, the SPH and ESH started fading. As the S&P tumbled, more and more sell programs hit and the algorithms kept searching for sell stops.

It's important to remember that while the S&P futures have been on the defensive, there have also been some big bounces. It's also important to know that no one can say for sure what's going to happen. Things are just too unbalanced, and despite the S&P holding, it also has the feel that if anything bad did happen, the “bids” would disappear and down the market would go. The current tone remains stuck in uncertainty mode. When the headlines are bad, the S&P is going down. Once it stops going down and levels off,  in comes a positive headline and up the S&P goes.

Things can change fast: With algorithmic and program trading making up 75% of the volume, we already know how fast the ES can move from buy stops to sell stops. The two-way fiscal cliff headlines and the lower volumes only exacerbate the problem. Over the last several weeks, whenever the S&P got short-term oversold it bounced, and when everyone got long into the rally it reversed. Being a contrarian has been the only way to make any money trading.

Learning to own up to your trades: The Pit Bull has taught me a lot over the years, and while we are always looking for winning trades, it was the Pit Bull who taught me that a good exit of a losing position can be just as good as a winner. Over the years of watching how he trades I have learned that the most important part of trading is self-preservation. If you're in a bad trade and you're risking x, why? If you have a bad position on, get out, don't sit. What he taught me was that 1) the markets are here every day; 2) if you hold on to losers, the first rule will not matter because you will be out of the game. He also taught me to leave my ego at home.

Yesterday Chris C from the room hit me up to thank Eubie and me for a great year. It's important for us to know when people are doing well — it confirms that what we are trying to teach works. That doesn't mean Chris C only uses our stuff, it means he has adapted, by incorporating the things we've taught him. Chris shot me back a text message that the Pit Bull sent me last summer. It read: “PITBULL: I HAVE A MOTTO — THERE ARE THOSE WHO TELL YOU WHAT TO DO AND THOSE THAT DO — GO DO YOUR OWN THING AND BE RESPONSIBLE FOR YOUR OWN DESTINY”

Things are not like they used to be. There is no free money flying around in the futures markets anymore. Only hard work and perseverance will lead to success.  

Our view: The cliff is going to keep people dangling right up to the last day of the year. It's not right, but that doesn't seem to matter. This morning Obama is going to make a last-ditch effort by calling lawmakers back to the White House. I have always thought the government would come together for the good of the people, but as we go into the final four days of the year I have to admit that falling off the cliff is a real possibility. Keep an eye on the 10-handle rule and please make sure to use stops.

• It's 7 a.m. and the ESH is trading 1404.50, down 6.5 handles; crude is up 10 cents at 90.97; and the euro is down 46 pips at 1.3203.
• In Asia, 11 out of 11 markets closed higher (Shanghai Comp. +1.24%, Hang Seng +0.21%).
• In Europe, 9 out of 12 markets are trading lower (CAC-0.76%, DAX -0.40%).
• Today's headline: “S&P Futures Seen Lower; Budget Talks Eyed”
• Economic calendar: Chicago PMI, pending home sales, EIA nat gas report. Monday: Dallas Fed mfg survey, early close and farm prices.
• Globex volume: 1.46mil ESH and 8.9k SPH traded
• Fair value: S&P -9.50, NASDAQ -18

MrTopStep Closing Print Video:  http://www.mrtopstep.com/closing-print-12-27-2012/

TRADER OF THE YEAR:  ALGORITHMIC TRADING

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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.