I've Noticed a New Trading Pattern

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When I used to do the S&P index program trading for UBS, I learned a lot about how the futures reacted after 3 to 5 sell programs in one sequence. 

Because the bank had a cheaper fair value, it was easy to get the first 2 sell programs off. But once the S&P cash started dropping and the 15 other desk clerks in the S&P jumped on the phones and started quoting the arbs, the futures fell as more bids piled into the pit and subsequently, the third program and fourth programs were not as easy to get off as the first two. However, going into the fifth and sixth programs the amount of bids flooded the pit made it extremely hard to get the cash lines up. 

When I saw 500 to 600 big SPUs bid for and the program levels moved away, I knew the SPU was going to pop — the levels were way off and some of the program desks sold the S&P cash and got hung on the futures and the futures would go straight up. 

I told the PitBull about the 5-6 Program rule and he said it worked perfectly. To do an index arb sell program, you buy the ES futures at a discount to the S&P cash. It's a spread, so obviously you want to buy as cheaply as possible. 

So why are we talking about this? Because I have picked out a new pattern that works the same way and it also has to do with the algo sell programs and when they tire out. 

The ES makes a high ~16 points above the VWAP and some selling starts to show up. The ES falls and breaks through the VWAP and falls exactly 10 to 12 points and this is where I buy it. I have seen countless pops and then sometimes these lows are worth a quick 10 points, and sometimes  — not all the time — they end up as the low of the day/move. 

Bottom line: I do not know the reason for it, but I think it's some type of algo/HFT selling threshold. In most cases if I buy the ES 10 to 12 below from the VWAP, I use a tight stop, like 5 points.

As for yesterday, the “selling the open” trade worked perfectly. I sold the ES and NQ, but like a good story I got in and out, selling the pops until late in the day when I started saying this in the chat. 

• IMPRO : Dboy : (1:12:37 PM) : something tells me they don't want them to go down

• IMPRO : Dboy : (1:13:02 PM) : big quick drops then buy’em again

• IMPRO : Dboy : (1:33:03 PM) : someone buying this shit all day

• IMPRO : Dboy : (1:34:15 PM) : stops

• IMPRO : Dboy : (1:34:52 PM) : someone doesn't want this down

• IMPRO : Dboy : (1:38:15 PM) : more buy imbalances and buy stops

• IMPRO : Dboy : (1:41:02 PM) : they want to close in the direction they started out

• IMPRO : Dboy : (2:21:50 PM) : NHOTC?

Check out the times and prices on your charts. At 2:20 the ES was trading around 4988.50…the rest is history. 

This is what trading flow is all about.