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.

Our Lean — Danny’s Trade

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MiM and Daily Recap

ES Recap

The ES traded all the way up to 5000.75 on Globex and opened Wednesday's regular session at 4997.00. After the open, the ES rallied up to 5002.25, sold off down to 4986.75 at 9:40 and then started a sideways-to-up back-and-fill that pushed the ES up to 5000.50 at 10:01, pulled back to 4994.75 and then rallied up to 5009.00 at 10:29. After the high, the ES sold off ~30 points down to 4980.50 and then rallied above the VWAP to a 4992.25 double top at 11:42, sold off down to 4972.75 at 12:06 and then rallied back up to 4992.25 at 1:02. From there, it dropped down to 4983.00 at 1:15, rallied 13.5 points up to 5000.50 at 1:41, traded down to 4981.25 at 2:09 and then rallied up to 5000.00 at 2:40. 

After the high, the ES sold off down to 4993.50, rallied up to 5005.00 at 3:24, pulled back to 4993.50 at 2:56 and then blasted up to 5020.25 at 3:47 as the early imbalance showed $205 million to buy. The ES traded 5013.25 as the 3:50 cash imbalance grew to $529 million to buy, traded up to 5016.25, and traded 5014.00 on the 4:00 cash close. After 4:00, the ES rallied up to 5021.25 and settled at 5017.50 on the 5:00 futures close, up 46.25  points or +0.93%. The NQ settled at 17,873.50, up 196.75 points or +1.11%, and the real winner was the RTY, which closed at 2,018.20, up 48.90 points or up a whopping 2.48% on the day. 

In the end, the two-day sell-off ended with a big rip, and short squeeze higher. In terms of the ES's overall tone, it was firm. In terms of the ES's overall trade, volume was steady, with a total of 1.558 million contracts traded.

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Disclaimer: Charts and analysis are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.
Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!

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