MASSIVE Hedge in the "ES" Before Jan 22nd Sell Off!

[FulcrumTrader 10]

BF - 100% - you are better at I in explaining things and the use of a proxy is the right word.

 

I am an old sceptic, I have seen way too many stats being fudged based on assumptions and rubbish. eg; the one that gets me all the time is when people quote that

"80% of options expire out of the money - hence you should sell options as a great way to make money."

Reality: What about all the options that were in the money that people rolled rather than exercised?

What about the times when those 20% of options kill you?

 

I think Fulcrum and the post are great, I just get nervous when people might take something as being gospel. - thats all

I agree with much of what you say......there are not many absolutes that you can cling to in attempting trade entry determinations. At some point though, you have to imo find for yourself an ability to determine probabilities as you develop a trading strategy......since we all should know there are no perfect holy grail methodologies. For myself, I have found trading off repeating patterns within the traded bid/ask order flow much more robust than other methods I have previously used......tracking supply & demand just makes sense to me.

[uexkuell 10]

Friday trading in the "ES" had a very rare event that I only see a few times a year. ...

 

At this point, I was starting to notice that we were showing very large SHORT position accumulation at the 1110's/1111's taking place. With each price rotation back up to the 1111's I could see the SHORT position was growing in size.......very big size, like over 50,000 contracts!

 

I look forward to next weeks action.....should be VERY INTERESTING!

 

 

Please elaborate what should be expected on the observations cited:

 

Up or down for the week?

[BlowFish 10]

FT thank you for your reply (and your ongoing interesting input). For me it is important to separate the quantitative from the qualitative. Personally I attach much more significance to the former, seems like the only prudent course of action to me

[enochbenjamin 10]

thought this might be related: Trading Day : January 8, 2010

 

a discussion on who is buying?

[FulcrumTrader 10]

Please elaborate what should be expected on the observations cited:

 

Up or down for the week?

Delta Volume Distributions change constantly throughout the trade day, but at this time we had portions of the recent hedge remain even with the trade in the ES to the 1093's today. That area of price traded offered sell set ups followed by heavy selling hitting the order flow with 1093's traded. From that point we have traded low enough to have caused ALL the significant held LONG inventory left in this market to go neutral (with the trade back down to the 1080's).

 

At this point, the market is now in the typical process of after a major Inventory Grab event trying to find NEW buy support.......sometimes that takes a while. A market vacant of those willing to accumulate LONG inventory leaves us with a very weak market at the point of time I type this information....so we currently have no REAL support holding current pricing levels in the ES (no significant held LONG inventory......yet). As a result, I still remain SHORT with my remaining longer term postions held in the ES.

[FulcrumTrader 10]

FT thank you for your reply (and your ongoing interesting input). For me it is important to separate the quantitative from the qualitative. Personally I attach much more significance to the former, seems like the only prudent course of action to me

No problem sir.....I fully understand where you are coming from......our differences of observations makes this an excellent game!

[FulcrumTrader 10]

So what did we get Friday? The ES was able to trade right up to the cost basis zone for the remaining SHORT hedge position (1093's) and then it was all down from there to new lows on the day.....that was an excellent day.

 

What we are left with going into the Sunday night Globex re-open is a sick market VACANT of any real held LONG inventory (so no REAL support yet in the ES). We ended the last few minutes of the ES Globex session with about 10,000 SHORT contracts unwinding for the week well in the green.....they did very good with their held positions (again).

 

That new low for the day just happened to be right into the 1068.00 to 1064.00 + 80 point profit targets zone for those Commercials who had sold heavily the 1144.00 to 1148.00 Delta Zone of SHORT inventory.......they also did very good Friday (and any of those who also had sold the 1144.00 to 1148.00 zone of price as a longer term trade).

[BlowFish 10]

Just going back to flog the dead hedge horse some more:) To those not interested who was at work and why skip to the next post.BTW I am certainly not questioning that someone was getting busy.

 

FT, I wonder if it might be that we have different definitions of what a hedge is. It is my understanding that by definition a hedge is taking a position in an instrument to offset risk. That risk might be in physical goods (or lack of them), another instrument, or even a basket of stocks. In the case of the latter the bet is that the basket will go up. If yo suspect the broad market might not go up you can hedge the position, now you can make make money whichever direction the market goes (providing your basket out performs the broad market). The money is still made on the basket not on the hedge, it can now be made in down markets too. The key thing is not the market dropping its that your stocks don't drop as far.

 

From what you have said it sounds to me that it was essentially a speculative position on the broad market dropping. Maybe I am being pedantic (my girlfriend tells me I am getting increasingly *n*l) but if they are making money on the 'hedge' part of the position its not a simple hedge any more.

 

As an aside If you wanted to hedge your basket (still betting it will outperform) and speculate on the general market dropping then a non linear hedge (buy calls) would be a better option (if you pardon the pun) than a linear hedge(futures).

[FulcrumTrader 10]

Just going back to flog the dead hedge horse some more:) To those not interested who was at work and why skip to the next post.BTW I am certainly not questioning that someone was getting busy.

 

FT, I wonder if it might be that we have different definitions of what a hedge is. It is my understanding that by definition a hedge is taking a position in an instrument to offset risk. That risk might be in physical goods (or lack of them), another instrument, or even a basket of stocks. In the case of the latter the bet is that the basket will go up. If yo suspect the broad market might not go up you can hedge the position, now you can make make money whichever direction the market goes (providing your basket out performs the broad market). The money is still made on the basket not on the hedge, it can now be made in down markets too. The key thing is not the market dropping its that your stocks don't drop as far.

 

From what you have said it sounds to me that it was essentially a speculative position on the broad market dropping. Maybe I am being pedantic (my girlfriend tells me I am getting increasingly *n*l) but if they are making money on the 'hedge' part of the position its not a simple hedge any more.

 

As an aside If you wanted to hedge your basket (still betting it will outperform) and speculate on the general market dropping then a non linear hedge (buy calls) would be a better option (if you pardon the pun) than a linear hedge(futures).

 

Who and why put on all those positions twice in the last week is not all that important to me for the most part. The part that was of interest to me was that so many positions where accumulated so near recent lows. In past years when I have seen this market activity it was apparently hedging from the contacts I have in Chicago. I am not at all of thought there is ONLY hedging of other held LONG equities positions in mind for those who are conducting these hedging operations......I definitely think there is a stand alone directional trade component to this heavy position activity.

[BlowFish 10]

Who and why put on all those positions twice in the last week is not all that important to me for the most part..

 

Absolutely agree with you there:) Identifying the event and being confident to act on it is all that is important! The rest is idle banter really.

[MiniFlowTrader 10]

FT,

 

The behavior you describe I've observed several times. Not only on a macro level but even on a micro level i.e. in a true pullback. If one follows CD, they will notice that when the market pulls back, it will eventually resume the intermediate trend once price and delta diverge to a level that is within a 1-5k contracts on the previous swing high or low (on RARE occasions, I've seen delta continually become increasingly negative yet price continued to move up). Your claim of 70% of orders being @ market is bold, but I will say that CD is not nearly as useful in markets that are not as liquid as the ES, such as the 6E so with that said, I can see truth to this statement purely based on my observations that I have seen CD work time and time again on the ES where as it's utility on the 6E is not nearly as strong.

 

I appreciate your macro outlook on this data and truthfully, I've never been concerned with it beyond the day time frame since I usually go home without any positions. Previously I have only been concerned with the volume profile in determining my support/resistance levels and as it stands, I have around 60 days worth of tick data, so going forward I'm going to monitor how price reacts in these areas.

 

I recall you mentioning terms such as "Delta Zones" previously. Could you please define what you mean by this terminology.

Edited January 31, 2010 by MiniFlowTrader

[MiniFlowTrader 10]

Please elaborate what should be expected on the observations cited:

 

Up or down for the week?

 

Amazes me, you always find someone who thinks that someone can predict the future. Shame on you.

[FulcrumTrader 10]

FT,

 

The behavior you describe I've observed several times. Not only on a macro level but even on a micro level i.e. in a true pullback. If one follows CD, they will notice that when the market pulls back, it will eventually resume the intermediate trend once price and delta diverge to a level that is within a 1-5k contracts on the previous swing high or low (on RARE occasions, I've seen delta continually become increasingly negative yet price continued to move up). Your claim of 70% of orders being @ market is bold, but I will say that CD is not nearly as useful in markets that are not as liquid as the ES, such as the 6E so with that said, I can see truth to this statement purely based on my observations that I have seen CD work time and time again on the ES where as it's utility on the 6E is not nearly as strong.

 

I appreciate your macro outlook on this data and truthfully, I've never been concerned with it beyond the day time frame since I usually go home without any positions. Previously I have only been concerned with the volume profile in determining my support/resistance levels and as it stands, I have around 60 days worth of tick data, so going forward I'm going to monitor how price reacts in these areas.

 

I recall you mentioning terms such as "Delta Zones" previously. Could you please define what you mean by this terminology.

Cumulative Delta works BEST on those futures instruments that have a large percentage of the total overall volumes traded by smarter money (Commercials). I myself trade the following futures instruments throughout the year all based on my Cumulative Delta tracking/set ups; ES, ZB, CL/QM, NG, FDAX, FESX, to name a few. I am also starting to build up my order flow transition reference benchmarks for the Kospi 200 and the Hang Seng so I can trade those indexes this year. I know many other Cumulative Delta based traders that are trading other types of futures instruments like the 6E, ZC, ZS, etc.

 

You mentioned above, "on RARE occasions, I've seen delta continually become increasingly negative yet price continued to move up" and as you see this you are watching realtime accumulation taking place. Smarter money frequently sells into ascending price and buys into descending price......they love the price improvement as they fire off orders into the counter movement of price at those moments. Even over multi-day periods, Commercials frequently sell into multiple new rotational highs in price as they build up a bigger position. They take full advantage of the new price improvement offered with each new high (as they dynamically upwardly adjust their held position cost basis). With each rotation of price back down off a new high, they will then cover out small portions of their overall held position which had previously been entered from lower pricing levels (I call this cycling of price). Commercials profitably cycle positions in and out to dynamically adjust their overall held inventory cost basis with rotations of price off each new high.....or price returning back near a previous high. When you see price diverge from the Cumulative Delta whether in a 5 minute period of time or a multi-day period of time, some group is accumulating.

[BlowFish 10]

Slightly off topic. I see you mention FDAX which is one of my favourite instruments. I have had problems with DAX in the past. In a nutshell I think it is to do with block trades.Every now and then you will see a trade go off for 1k or even 10k contracts. The depth of the DAX is usulally lower double digits. Eurex has a mechanism where participants can negotiate large blocks outside the auction though they are still reported on the tape, I am pretty sure that is what these are. After all if best ask has 28 offered and 1500 goes off and there is still 28 offered......well makes sense to me.

 

Actually I think I have answered my own question. (what to do about these blocks) It is impossible to tell the direction of these trades (from a delta point of view). So the only sensible solution is to exclude them from delta accumulation? I hate filtering valid data but assigning them incorrectly would not be desirable. Of course not assigning them has implications two. Actually the fact the trade was negotiated suggests that neither participant required immediacy.

[FulcrumTrader 10]

Slightly off topic. I see you mention FDAX which is one of my favourite instruments. I have had problems with DAX in the past. In a nutshell I think it is to do with block trades.Every now and then you will see a trade go off for 1k or even 10k contracts. The depth of the DAX is usulally lower double digits. Eurex has a mechanism where participants can negotiate large blocks outside the auction though they are still reported on the tape, I am pretty sure that is what these are. After all if best ask has 28 offered and 1500 goes off and there is still 28 offered......well makes sense to me.

 

Actually I think I have answered my own question. (what to do about these blocks) It is impossible to tell the direction of these trades (from a delta point of view). So the only sensible solution is to exclude them from delta accumulation? I hate filtering valid data but assigning them incorrectly would not be desirable. Of course not assigning them has implications two. Actually the fact the trade was negotiated suggests that neither participant required immediacy.

I myself do not filter out any of these trades but if you wanted to you could put a > 999 trade filter on for the bid/ask data. Many times when I see these big trades go off it is at levels where someone is getting turned into a weaker hand (capitulating some positions). I do not filter the trades out, but I always do pay attention to the recent context of Price/Delta Volume action as I see what was taking place at the time the trades executed.

[MiniFlowTrader 10]

Cumulative Delta works BEST on those futures instruments that have a large percentage of the total overall volumes traded by smarter money (Commercials). I myself trade the following futures instruments throughout the year all based on my Cumulative Delta tracking/set ups; ES, ZB, CL/QM, NG, FDAX, FESX, to name a few. I am also starting to build up my order flow transition reference benchmarks for the Kospi 200 and the Hang Seng so I can trade those indexes this year. I know many other Cumulative Delta based traders that are trading other types of futures instruments like the 6E, ZC, ZS, etc.

 

You mentioned above, "on RARE occasions, I've seen delta continually become increasingly negative yet price continued to move up" and as you see this you are watching realtime accumulation taking place. Smarter money frequently sells into ascending price and buys into descending price......they love the price improvement as they fire off orders into the counter movement of price at those moments. Even over multi-day periods, Commercials frequently sell into multiple new rotational highs in price as they build up a bigger position. They take full advantage of the new price improvement offered with each new high (as they dynamically upwardly adjust their held position cost basis). With each rotation of price back down off a new high, they will then cover out small portions of their overall held position which had previously been entered from lower pricing levels (I call this cycling of price). Commercials profitably cycle positions in and out to dynamically adjust their overall held inventory cost basis with rotations of price off each new high.....or price returning back near a previous high. When you see price diverge from the Cumulative Delta whether in a 5 minute period of time or a multi-day period of time, some group is accumulating.

 

Would still like to know what your definition of delta zone implies.

[FulcrumTrader 10]

Would still like to know what your definition of delta zone implies.

Delta Zone is a very small zone of price where there is a statistical amount of inventory that initiated trade in that small zone of price......buyers or sellers initiated their activity in a small zone of price up to a statistical threshold that I track.

[enochbenjamin 10]

can you tell me if I am reading cumulative delta correctly?

 

 

thanks in advance!

[FulcrumTrader 10]

Yes indeed, the trade back up to the 1099.50 level was again sold while there was on going SHORT accumulation building during all those rotational price highs. Your CVD line from XStudy was showing the correct information at the time........

 

Images | ChartHub.com

[enochbenjamin 10]

Your CVD line from XStudy was showing the correct information at the time........

 

Thanks so much. I have been looking CVD for a couple of months but it was not until your post that I figured out how to use it. You have really helped me stay OUT of some CL trades the past couple of days as CVD kept making new highs at resistance levels.

 

Too bad I hesitated on that 9950 trade - it turned out to be a pretty good deal.

[FulcrumTrader 10]

Thanks so much. I have been looking CVD for a couple of months but it was not until your post that I figured out how to use it. You have really helped me stay OUT of some CL trades the past couple of days as CVD kept making new highs at resistance levels.

 

Too bad I hesitated on that 9950 trade - it turned out to be a pretty good deal.

No problem sir! I track the CL for my Cumulative Delta based entries but I trade the QM's myself.....Crude Oil has many very good set ups to trade week after week.

[enochbenjamin 10]

Man! You see that cumulative delta today! Some serious accumulation at the LOWS!

[FulcrumTrader 10]

Man! You see that cumulative delta today! Some serious accumulation at the LOWS!

Only at the very end of the day as all those holding heavy SHORT positions from much higher pricing levels covered out into the last portion of the Globex session (for the ES that is). CL/QM had a heck of a nice move again today......that was excellent!

[kuky969 10]

Fulcrum you mean this situation ???

http://www.sierrachart.com/userimages/upload_2/1265379523_97_UploadImage.png

Thank you

[FulcrumTrader 10]

Fulcrum you mean this situation ???

http://www.sierrachart.com/userimages/upload_2/1265379523_97_UploadImage.png

Thank you

 

Hello......unless you are using DTN.IQ feed connected to your Sierra charts I would not trust your Cumulative Delta bid/ask differential plot.

 

Here was the look of the latter portion of the day on Friday in the ES.........

 

Images | ChartHub.com

 

The overall market was so overly saturated with SHORT inventory the past days/weeks (with several SHORT hedges built up on the way down) that I actually covered out my final longer term SHORT trade positions Friday. I was telling everyone that the Delta Volume Distribution, after several very significant Inventory Grab events intraday, was extremely ripe for imbalances to soon shake out (significant SHORT covering rally). On a Friday after an extended multi-week down move (over 100 points) the market was TOTALLY vacant of any significant held LONG inventory in the March contract (market VOID of LONG participants embedded at lower pricing levels......no one left that can be forced into LONG covering in a hard down trending market).

 

Seeing this important major inventory grab Delta Volume Distribution situation (a key "supply & demand" driven market event) put me into the LONG side mode for the day. I initiated a longer term LONG trade Friday that I will work until I see Commercials start loading up SHORT accumulation again at various pricing levels. MANY that were holding very significant SHORT positions finally started to cover out into the powerful SHORT covering rally into the end of Friday......there we go, imbalances playing out!