Closing imbalance a powerful trading tool

By Danny Riley

Opening and closing imbalances have always been part of our daily trading tool box. We didn’t just wake up one day and say, “Hey, you should look at this.” We have been looking at different opening and closing imbalances since 1980. Reading imbalance is a great way to read the markets on the opens and closes and the only way a trader can follow the money.

Before electronic trading, the big banks that made up most of the S&P program arbitrage space and OTC desk used the 3:00 cash close as to buy and sell futures to hedge their positions, similar to the way a S&P proprietary trader in the CME’s S&P 500 option pit would take the other side of an option trade and buy or sell futures to hedge his positions. The 3:00 cash close is the “net” of all buying and selling in the stock market.

So why is that important? With the S&P up 26% from this time last year following the money was key to the direction of the S&P in the beginning of 2013. Nearly every day for the first two months of the new year, was buy imbalances. It was the number one best way to stay on track of the direction and a great way to see what the institutions were doing.

We know that there are MiM haters out there. They say the meter does not depict the actual close and many times it is way off the market. I have to respectfully disagree. First, MrTopStep has always been honest. We have said time and time again that nothing works all the time or every day.

We have also said it works best on big volume days like the end of the month / quarter and the beginning of a new month / quarter.
In the world of saying it like it is, MrTopStep is always straight forward and admits when we are wrong. We don’t go into the next day without admitting, ‘Hey, we were off yesterday.’ That is why this particular Opening Print is so important.

Great examples of how the MiM works

Oct 31, 2013 MOC Sell $600mil to $1.2bil

On the close on Oct. 31 the MiM came out bog to the sell side and continued to that way into the 3:00 cash close. As you can see the ESZ13 did exactly the same thing. As the MrTopStep Imbalance meter moved further to the sell side the S&Ps went straight down.

If you were on top of the trade you could have sold 1763.00 to 1763.00 and by the close the ESZ13 was trading nearly 11 handles from where the first MiM reading came in at. One the close that day I said that we would be looking to see if the mutual funds put the money back to work one the first day of October and they did.

Nov. 1, 2013 MOC Buy $800mil to $1.6bil

On the close on Oct.31 I mentioned that it was a very good possibility that the mutual funds would come back in buying one the first day of the month and they did.

And if you’re asking why the S&P sold off so quickly one the 3:00 cash close the answer is simple… everyone was long the close, thats why!

MrTopStep has a couple trading rules we want to share with you:

• Get in , get out, don’t fall in love with your position
• A profit is a profit no matter how small it is !!