Stock rally mainly powered by algorithms, programs

By: Danny Riley

 

Global stocks, shares, bonds, and currencies all surged, with algorithm and program trading driving the orders, after yesterday’s surprise decision by the U.S. Federal Reserve not to curtail its asset-buying program. As the Federal Reserve headlines hit the tape, the trading pits of the CME Group’s financial room exploded, hitting out buy stops in both the index and interest rate futures and options.

In the last few days I have geared my writing more toward my feel of the price action moment by moment than the technical side of the markets. Sure I can pull the moving averages, put/call ratios, overbought and oversold indicators, draw lines on charts but at the end of the day I am not here for that.

I provide flow and a feel for direction. I read premium levels between the S&P cash and S&P futures. I read algorithmic volume jumps. I look at the futures ladder and I read the boards. I pay attention to daily, weekly and monthly highs and lows. I pay attention to volume and net change and I pay attention to the global markets. So where am I going with this? I am going back to yesterday’s Morning Call where I wrote:

• As unpredictable as the stock markets are, the Fed can be even more unpredictable.
• In the end, we feel confident that the indices are setting up to make new highs, but we also think today could and will be a two-way street.
• If the Fed decides to do nothing the S&P will rally to 1725.

Algorithmic and program trading takes up so much space in the futures markets that tools that used to work don’t anymore. The program writers have figured out every tool we use — even the plus or minus 1000 -1300 ticks and the new indicators (if they work) don’t last very long. If it’s not tied to an algorithm you can forget it .That means traders have to constantly be looking for a new edge, whether it’s learning “pivots and vol windows” or learning how to read the program levels in the S&P.

As for today we have 8 economic numbers , some Fed speak and the last day of the September rollover. With all the talk about the Fed, most people have not paid much attention to this Friday’s September quadruple witching. While it is in no way the event that it used to be it, still needs to be on your radar.

Accordingly, the Ned Davis S&P cash study shows pre-expiration Thursday was up 16 and down 13 of the last 29 occasions; expiration Friday up 17 / down 12 of the last 29 occasions and next Monday (or the first trading day after the expiration ) up 9 / down 20 of the last 29.

Our view

The S&P futures have rallied to 1725, a full 100 handles from their 1625 taper low. Additionally, the S&P futures have closed higher 8 out of the last 9 sessions or up 4 in a row. Provided the economic reports don’t surprise and knowing the S&P is the global leader, it may be rest time for it. As firm as the S&P acts, the futures have gone 85 handles in the last 11 days. After a big day up like yesterday and knowing the news is out we lean to a sideways to lower S&P today. Not saying the S&P can’t or won’t rally, but we think it will sell off a bit today.

As always, keep an eye on the 10-handle rule and use stops when trading futures and options.

Ned Davis S&P Cash Study

• In Asia, 9 of 11 markets closed higher: Shanghai Comp. +0.29, Hang Seng +1.67, Nikkei +1.80%.
• In Europe, 11 out of 12 markets are trading higher: DAX +1.00%, FTSE +1.41%.
• Morning headline: Fed’s Taperless View Sparks Global Rally; Bonds Surge
• Total volume: 666k ESU, 2.33mil ESZ, 39k SPU and 32k SPZ traded
• Economic calendar: Jobless claims, current account, existing home sales, Philadelphia Fed survey, leading indicators, natural gas inventories, Fed’s Pianalto speaks, Fed balance sheet/money supply
• MrTopStep Closing Print Video