UP, DOWN AND ALL AROUND

Like it or not, the S&P 500 has been moving higher. Despite some very weak price action early yesterday, the markets came flying back, only to fail, retest the lows and rally again. Volume in the CME's mini S&P was over 2.3mil contracts traded, so the day's trade had little to do with being “thin.”  The day started with 300k ESUs traded in Globex and a total of 6k SPUs traded. So what happened in the S&P? If we had one thing to say it would be despite the weak price action, the ESU and SPU did a big “back and fill.” The late-day selloff looked like they had the markets up against the ropes and then bam, in came the 2:30 buy program, right into the cash close. But that's not what I want to talk about. I want to go back to the volumes. Remember I said they were big, right? Indeed they were, and if you got stopped out at one of the highs or lows, it's really important to know that once the ESU is in motion and the algos lock on, the robots relentlessly chase the buy and sell stops, up and down and all around. So, let's do the math: 2.35mil ESUs trade total minus 300k from Globex (pre 8:30 open) = 2.05mil contracts, minus 70% for program and algorithmic trading and total ESU day trade volume drops down to around 600k.  It's important to know what you're up against. Maybe you think people are making too much of this and that it's good for the markets because it creates volume. I do not disagree with that but  I fully believe that the algos are stretching out the moves further than they would normally go. Something that would have been just a 5 or 6 handle move now turns into 10 or 12 in a matter of minutes. I hate to tell you, but that's not normal.

Years ago the Pit Bull was going to take out a full-page ad in the Wall Street Journal condemning program trading. That it was, as he said, “not real trading.” He is one of  a few in the world that can say that. His track record speaks for itself back then, as it does today. This was taken from page 258 of the Market Wizards no. 1:

Marty “The Pit Bull” Schwartz trades independently from his “war room” in his house. He is proud of that fact that he has no employees. Solitary traders of this type, no matter how successful, are usually unknown to the public. Schwartz, however, has attended a degree of fame through repeated entries in the US Trading Championships, run by Norm Zadeh, a Stanford University professor. His performance in these contests has been nothing short of astounding. In nine of ten four-month trading championships he entered (typically with a starting stake of $400,000), he made more money than all the other contestants combined.  His average return in these nine trading contests was 21%  non-annualized! ( In the one remaining  four-month contest he witnessed a  near break-even result.) In his single entry in a one-year contest he scored a 781% return. The Pit Bull's entries into these contest was his way of telling the world that he is the best trader around. In terms of risk/ reward ratios, he may well be. He is still on top of his game today. He has never let up and takes the fight to both the pits and the electronic platforms. He warned everyone years ago that the robots would take over and they have; there is no doubt about it. Things have changed a lot over the years. Buying and selling all day in your personal trading account is a lot harder to do. You have to be much more patient and expand your levels. In the man vs. machine contest the Pit Bull wins. He also says you get the algo trader to turn off his computer and tell the guy to trade, he wouldn't know how to. He constantly says program trading ruined the game but he also goes to battle every day  and beats the machines.  He time and time again has proved that you can't make the money without doing the work … but he also has adapted to the new world order; he trades options!

Our view:
The SPU has been up 9 out of the past 14 trading days.. The  5 down days equal -99.6 handles and the  9 positive days equal +87.00 handles. The SPU has has been up 8 out of the last 10 days or up 5 in a row. The way we see it is the markets have gone a long way and with most of the the big news out of the way and the markets up so much we lean to selling rallies. The news out of China is bad. Commodities have fallen to the lowest level in almost 19 months and crude has broken below $80, the markets can't overlook that forever. As always, keep an eye on the 10 handle rule and please use stops.

• June 1     SPU   -35.3 handles
• June 4     SPU   - .90 handles
• June 5     SPU   +12.1 handles
• June 6     SPU   -30.4 handles
• June 7     SPU   +1.2 handles
• June 8     SPU   +12 handles
• June 11   SPU   -21.8 handles
• June 12   SPU  +19.8 handles
• June 13   SPU  -11.2 handles
• June 14   SPU  +17.4 handles
• June 15   SPU  +11.3 handles
• June 18   SPU  +3.4 handles
• June 19   SPU  +9.7 handles
• June 20   SPU  + .10 handles

Federal Open Market Committee  Press Release http://www.federalreserve.gov/newsevents/press/monetary/20120620a.htm

For today:

• It's 5:30 am and the ESU is down 3.25 handles at 1347.50, crude is down 84 cents at 80.61 and the EC is trading  1.2603, down 73 ticks.
• In Asia 9 out of 11 markets closed lower (Hang Seng -1.30%,  Shanghai Composite -1.40%).
• In Europe 10 of 11 markets are trading lower.
• The main headline this morning: “China Manufacturing Activity Taps 7- Month Low.”
• Today's economic calendar: Jobless claims, PMI manufacturing index flash, existing home sales, Philadelphia Fed survey, FHFA home price index, leading indicators, Best Buy shareholders mtg, Google shareholders mtg; earnings from ConAgra, Rite Aid

• VOLUME:  2.35 mil ESU and 6k SPU traded
• SPREADS:  no SPU/Z spreads traded
• FAIR VALUE: S&P -2.00, Nasdaq -7.50

Wednesday's wrap-up from the S&P pit:

The chatter leading up to the FOMC decision has been an extension of Operation Twist… Twist lite it is, as the Fed action falls short of some of the more wishful and leaving the next move up to the Eurozone leaders and presidential hopeful Mitt Romney. The Eurozone financial crisis / contagion has no footing and lacking a sound coordinated plan of attack. Global growth has slowed reducing GDP, jobs, retail sales as confidence has softened. Apparently the economy(s) has not yet slowed enough, but the Fed does stand ready when, in the event that the global economies sour even more. The current administration should consider this a warning shot. At this time, the outlook must be within the Feds range and therefore the US economic engine required no quantitative easing action. The price action left traders optimistic in front of the overseas markets, but the economic calendar shows preliminary June PMIs from China (overnight), Europe (4amET) and the US tomorrow morning. In other news, the Greeks are working on their new government. Pro-euro parties in Greece agreed to form a coalition that will attempt to revise an International Monetary Fund-EU deal.

The S&P started with 252k ESM and 1.7k SPM traded on Globex, trading range 1354.50 – 1346.00 / Tuesdays range 1356.80-1344.00. The RTH's opening range was 1351.50 – 1352.50 as well as the pre FOMC decision high and traded down to 1348.00 before regaining some footing. mts2 (08:39:45): looking at 1348 area as pivotal. Two failed attempts at converting the opening range and traders hesitant to commit in front of Fed Chairman Bernanke led to some profit taking in very thin markets. A new low of 1347.80 was followed by a pop, but there was no follow through momentum and a series of lower lows followed. The bonds were trading off by more than a half of point, crude was sharply lower testing $82 area and gold broke 1600 down about $30. By 11:15CT the new low was 1346.80, 1344.90 by 11:25 and everything on our screens were red. At 11:30 the FOMC left interest rates on hold at 0.25%; no QE, but twist extended through the end of 2012. The initial reaction, the dollar shot higher as the spoos spiked lower to 1339.70, down 10.9 handles as the VIX traded back over 20 briefly – before the back and fill began. By 12:00 the VIX was trading 18 area and the spoos were retesting the opening range as the financials and the nazzy lead the charge as new highs of 1355.20 (shy of Tuesday's high 1356.80) printed at 12:00 when traders attention turned to Fed Chairman Ben Bernanke's press conference. In the VIX, through the day there was a large amount of call buying in july…buying protection on the 28 and 32.5 strikes, decent on the 27 and 40 strikes. 1351 (prev settle 1350.60) area was trading as Chairman Bernanke began his press conference and the equities gave up the gains as the bonds gained a half point, but still down a half as gold also halved its loss. By 2:00 the spoos were trading in 1343/44 area, crude was off $3 and the Saudis were almost as happy as the current administration and the retailers even cracked a smile as the savings at the pump may trickle into their pockets versus a savings account with so little interest. By 2:30 the spoos had bounced 5 handles off the LOD retest and were trading 1385-1386  when the closing imbalance showed 22 of the DOW 30 to buy and the broader market  showed MOC buy 250mil. The cash close traded 1348.81 before settling at 1350.70, up /10 handles on the day.

Major macro events to watch 6-21 thru 6-30:

• Thurs June 21 – Eurozone fin min meeting

• Thurs June 21 – US jobless claims (8:30amET)

• Thurs June 21 – US existing home sales, Philadelphia Fed, and leading indicators (10amET).

• Thurs June 21 – preliminary June PMIs from China (overnight), Europe (4amET), US.

• Thurs June 21 – ECB meeting (not a rate-setting event)

• ***************************************

• Fri June 22 – EU finance ministers meeting

• Fri June 22 – Europe's main leaders to hold informal meeting days before the big June 28-29 EU Leaders Summit – Merkel, Hollande, Monti, and Rajoy will all meet June 22

• ***************************************

• Mon June 25 – US Chicago Fed, new home sales

• ***************************************

• Tues June 26 – S&P CaseShiller home price index, consumer confidence

• ***************************************

• Wed June 27 – US durable goods, pending home sales

• ***************************************

• Thurs June 28 – Summit of EU heads of state and government in Brussels. June 28-29.

• ***************************************

• Fri June 29 – Summit of EU heads of state and government in Brussels. June 28-29.

• Fri June 29 – EC issues quarterly report on euro area

MTS video: http://www.mrtopstep.com/2012/06/6-20-12-dan-passarelli-covering-options/

May we suggest to visit http://www.mrtopstep.com and http://www.mrtopstep.com/trading-101/  Please read & reread….we talk about the content on that page in the room often.

FREE trial http://www.mrtopstep.com/FREE/ and our offer of a FREE month in the chat room with a quarterly signup is still good: http://www.mrtopstep.com/offera/

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CONTRIBUTORS' CORNER

SPX CHARTS

Roger Volz, BGC Partners

SP 500 futures 5 Min chart and indicator …. VST OB > 1356.50 /// VST OS < 1346.75 vs  1340.75

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