How Do You Determine Your Direction at the Start of the Day?

[suby 10]

You know as I was writing this I had a change of heart....by all means keep on with what you are all doing....

 

Steve,

 

I know your a vetern ES Trader, what are your thoughts on trading the ES based on the 30 year Treasury Correlations?

[suby 10]

Everyones talking about the correlations next to bonds and coppers (without any statistical evidence to really back it no offense). Granted I do understand that the relationship does exist but i'm extremely surprised no one has mention the VIX and its inverse relationship to the S&P

[SunTrader 10]

VIX measures volatility.

 

And volatility moves irrespective of price direction.

[steve46 12]

Steve,

 

I know your a vetern ES Trader, what are your thoughts on trading the ES based on the 30 year Treasury Correlations?

 

Suby, the only reason I can post at all, is because my former employer asked me not to post on this subject and I agreed.....sometimes I forget...but for bonds and currencies...thats what agreed to...

 

So as I said before, "continue as you were"..

[ForexTraderX 10]

ForexTraderx.

 

Every rally in the last 7 days has been sold off and produced a lower low.=bullish?

Strong support on the way up will either be temporary support or get blown straight thru the positions of those who are bullish if the path of least resistance is down (support becomes resistance in a down trend)=Bullish?

The probability of the recent high gettiing taken out v new lows printed first= bullish?

However.the thread is about trading bias for the start of next day.So are you saying you are bullish for Monday only?

 

Ah man... sorry Mitsu, I would have liked to respond to this in real time... cuz any schmuck with a demo account and 2 eyeballs can look back and give really clever sounding post-move analysis, but I like to do things in real time for the obvious reason: that's where the money is.

 

my bias was more based on a greater chance of the ES first hitting, say 1416 than it would of, say 1390. So it wasn't so much set for monday exclusivly, rather, a particular upswing with a particular magnitude would be the qualifying factor. Once that move was hit, my bias would have been "resolved", and I'd reanalyze.

 

If you had asked me for the next 2 weeks, i would have said bearish (and am at this point, daily, weekly, monthly... all TF's i'm bearish biased right now)... but for monday/tuesday? more bullish than bearish.

 

I'll try to post up something later here for what I'm seeing, and how i'm measuring it, and why, specifically regarding the ES... so we can keep a theme of real time calls here. otherwise, i mean, i can say what I thought and mentioned to an associate or 2, but really, hindsight analysis is not worth the trade one can place on it, when it comes to explaining a methodology IMO. It's fantastic to learn from mistakes of course, but that's not really the intention here, so i'll stick with analysis of future outlook regarding daily bias.

 

FTX

Edited November 3, 2012 by ForexTraderX

[ForexTraderX 10]

I thought copper would be correlated with gold and silver.. Curious why copper is singled out as correlated to the ES?

 

It is correlated with gold and silver, but gold and silver are not really "industrial" metals. However, copper is very much so. demand for copper futures often will start to tick up as businesses make more semi conductors, electrical appliances, etc. In fact, nearly anything tech related uses copper as a raw material to at least some degree... so for these reasons, copper is frequently viewed as sort of "leading indicator". At very least, it's more correlated to the S&P than probably any other raw good or raw commodity.

 

Here is a link to a few graphs that show the degree of correlation between various markets. As you can see, of the various commodities that have some statistically relevent positive correlation to the movement of the S&P, it's actually copper that has the highest and most consistent degree of correlation, when compared to gold, the U.S. dollar index, crude oil...etc.

 

S&P 500 Relationships & Correlations - TheArmoTrader | TheArmoTrader

[ForexTraderX 10]

Everyones talking about the correlations next to bonds and coppers (without any statistical evidence to really back it no offense). Granted I do understand that the relationship does exist but i'm extremely surprised no one has mention the VIX and its inverse relationship to the S&P

 

Sorry Suby, forgot to give a shred of evidence. Actually, I kinda use my eyeballs and a couple charts to see if something has some positive/negative correlation, but if you want a more precise visual representation, this guy has some cool looking pics that although doesn't give a standard D of variation of a mean... it is pretty obvious that there is some strong correlation going on, particularly with copper/ES

 

S&P 500 Relationships & Correlations - TheArmoTrader | TheArmoTrader

 

As far as the vix goes, your right on with it's inverse correlation to the S&P... I use the vix from time to time, but I don't think of it as a capital market that has an inverse correlation to the S&P, for the simple fact that it is literally a derivative of the S&P... it literally calculates volatility and the rate of change of volatility in the S&P... so it's not really a "correlated market" as much as it is a "derivative index" of volatility of the S&P. Though your point is true, a high vix usually occurs with strong selloff days (or right before strong selloff days), this really can work no other way. Without the S&P, we would not have a vix.

 

But without the S&P, we could still trade 30 year bonds, copper futures, etc.

 

i'm primarily arguing semantics here, but I do see it as a worthwhile stance because I feel the vix is more an "indicator" of sorts (kinda like charting the COT data, or the TRIN or TICK), and not so much a "correlated market"

 

FTX

[MightyMouse 12]

The direction of the price of copper can be implied by the direction of the S&P, not the other way around.

 

There are very good reasons the S&P/copper relationship exists. The reasons will change as central bank policy changes.

[SunTrader 10]

The direction of the price of Copper and S&P are implied by Central Bank policy (QE uno, dos, tres).

 

Smart azz, huh? Couldn't resist.

[ForexTraderX 10]

The direction of the price of copper can be implied by the direction of the S&P, not the other way around.

 

There are very good reasons the S&P/copper relationship exists. The reasons will change as central bank policy changes.

 

Fact is Mighty, sometimes I find copper leads, sometimes the spooz, sometimes they dance in tandem. I know what your saying, but over the past few years of observation, I find the relationship is more like that of the NQ and the ES...sometimes one leads, sometimes the other, sometimes they are in lock step.

 

As far as CB policy influencing the spooz/cop relationship... care to expand on that a bit? are you implying simply because copper is an inflation hedge (like gold, silver, etc?) If so, you may be correct, but "common sense" tells me that gold and silver and other precious metals absolutly, but copper I believe is more influenced by industrial production than it is by a "flight to/escape from" quality.

 

if your making another point, please elaborate.

 

FTX

[TRADEZILLA 10]

It is correlated with gold and silver, but gold and silver are not really "industrial" metals. However, copper is very much so. demand for copper futures often will start to tick up as businesses make more semi conductors, electrical appliances, etc. In fact, nearly anything tech related uses copper as a raw material to at least some degree... so for these reasons, copper is frequently viewed as sort of "leading indicator". At very least, it's more correlated to the S&P than probably any other raw good or raw commodity.

 

Here is a link to a few graphs that show the degree of correlation between various markets. As you can see, of the various commodities that have some statistically relevent positive correlation to the movement of the S&P, it's actually copper that has the highest and most consistent degree of correlation, when compared to gold, the U.S. dollar index, crude oil...etc.

 

S&P 500 Relationships & Correlations - TheArmoTrader | TheArmoTrader

 

Interesting with the copper and that does make sense.. How do you use it with your trading? Do you consider it leading/lagging or do you primarily watch for divergence as a warning sign?

 

It will be interesting going forward as mentioned that although copper should be correlated with gold/silver, there is some fundamental reasons to believe gold is positioned to move higher whereas the SPX may be positioned to move lower. If that was to happen, it will be interesting to see how copper responds to that scenario.

 

I agree with your comment that although hind sight analysis can teach some things, that's not how the money is made and that really is why we're all trading, to make money and not to give great hind sight analysis..... I'll readily give my real time analysis and trade calls though I find this rare anywhere.. Other than showing the dom or pnl, everything comes out over a short time period real time in terms of the value of the analysis or the correct use of analysis tools... TL don't have a live chat room which is really the easiest way to do that.. I think it would be a lot of fun and a great learning experience to have such a room and take turns moderating for the day so as not to have tons of confusing calls in it with various rationale..

 

I trade a combination of levels and PA. I don't predict where price will go ahead of time or what levels are going to hold and etc, but will read it real time in terms of how price should be behaving and how it is behaving and what that means within the current context.

 

The opening trade is based on where we open within the structure of price. Where in the balance area, and where the closest s/r are and how price is behaving. There's a contextual aspect. I also look at some correlated markets but prioritize what I see.. I can give plenty of hind sight analysis but the trade has to survive real time entries, exits and stop outs to really assess the value of the analysis and approach real time..

Edited November 4, 2012 by TRADEZILLA

[MightyMouse 12]

Fact is Mighty, sometimes I find copper leads, sometimes the spooz, sometimes they dance in tandem. I know what your saying, but over the past few years of observation, I find the relationship is more like that of the NQ and the ES...sometimes one leads, sometimes the other, sometimes they are in lock step.

 

As far as CB policy influencing the spooz/cop relationship... care to expand on that a bit? are you implying simply because copper is an inflation hedge (like gold, silver, etc?) If so, you may be correct, but "common sense" tells me that gold and silver and other precious metals absolutly, but copper I believe is more influenced by industrial production than it is by a "flight to/escape from" quality.

 

if your making another point, please elaborate.

 

FTX

 

Interest rates, inflation, and earnings lead the S&P. Copper is currently moving in the same direction as the S&P. It is a quasi-valid relationship since it is an industrial metal and an increase in the industrial component of the S&P would lead to more demand for copper. The current high level of correlation is because copper can also be used as a hedge against central bank policy. All commodities are being used as a hedge against a further devaluation of the USD. These relationships are all a result of fed policy. So much for free markets.

 

The bulk of the S&P gets its earnings from finance. So, rising copper prices from increased manufacturing would have only a partial impact on the S&P. You would be better of betting on the price of copper because of a increase in industrial production than you would by trying to buy the s&p.

 

If central bank policy "works" we will have falling commodity prices and a rising S&P. if it "fails" we will have skyrocketing commodity prices and a falling S&P. Everything at this point is a bet on fed policy.

 

You have every right to call me completely wrong if you are making money by trading the copper/S&P correlation. You also have every right to call me completely wrong if you are going long by flipping a coin at the beginning of the day. Heads you go long and tails you don't. Both are working just as well.

[MightyMouse 12]

The direction of the price of Copper and S&P are implied by Central Bank policy (QE uno, dos, tres).

 

Smart azz, huh? Couldn't resist.

 

They are adding a level of "randomness" to markets that most of us, ( me included ) might not be able to figure out in time. It is impossible to determine what the consequences will be to these unprecedented actions.

 

You can say that fed policy is an attempt to get everyone to bet in the wrong direction. Will getting everyone to bet in the wrong direction work?

[ForexTraderX 10]

Interest rates, inflation, and earnings lead the S&P. Copper is currently moving in the same direction as the S&P. It is a quasi-valid relationship since it is an industrial metal and an increase in the industrial component of the S&P would lead to more demand for copper. The current high level of correlation is because copper can also be used as a hedge against central bank policy. All commodities are being used as a hedge against a further devaluation of the USD. These relationships are all a result of fed policy. So much for free markets.

 

The bulk of the S&P gets its earnings from finance. So, rising copper prices from increased manufacturing would have only a partial impact on the S&P. You would be better of betting on the price of copper because of a increase in industrial production than you would by trying to buy the s&p.

 

If central bank policy "works" we will have falling commodity prices and a rising S&P. if it "fails" we will have skyrocketing commodity prices and a falling S&P. Everything at this point is a bet on fed policy.

 

You have every right to call me completely wrong if you are making money by trading the copper/S&P correlation. You also have every right to call me completely wrong if you are going long by flipping a coin at the beginning of the day. Heads you go long and tails you don't. Both are working just as well.

 

Ok... ok, that's kind of what I figured you were saying... and from a few minutes on google I can't argue the inflationary effect on commodities over the last X years... and as you say it's really all about the fed (and for the most part I agree with you here). However, the devaluation of the dollar also has a positive effect on many U.S. firms, particularly those doing a good deal of business abroad. Earnings for the past 2 years have been quite remarkable on wallstreet in a variety of industries. We could credit this to many factors, but I would suspect that fed policy has had a significant influence, even if only indirectly.

 

And besides, correlation that is statistically valid, regardless of underlying rational, is still statistically valid. It's also prone to becoming "uncorrelated" fairly rapidly at some point, and probably never to see that type of correlation again. But as long as it is a statistically valid correlation, it's better than the 50/50 proposition of a coin toss. Kind of like the rational of following a trend. Sure it eventually ends..but while it is trending in a particular direction, there is a greater likelyhood of any given trade being successful if it trades in the underlying direction of that current trend.

 

FTX

[SunTrader 10]

They are adding a level of "randomness" to markets that most of us, ( me included ) might not be able to figure out in time. It is impossible to determine what the consequences will be to these unprecedented actions.

 

You can say that fed policy is an attempt to get everyone to bet in the wrong direction. Will getting everyone to bet in the wrong direction work?

 

My reason for saying Copper and S&P are moving according to Fed policy is strickly due to liquidty. Basic econ 101 more dollars equals more activity. And of course less activity in the future once the "bill to pay" comes due.

 

No attempt to get everyone to bet wrong though.

[TRADEZILLA 10]

Sorry I had to wait till today to get an example REAL TIME so I could show you. So this is what was going on before the ES open.

 

Let me decifer the bones/charts. The one on the far left is the bonds 30 year. The middle one is the 10 year notes and the right is the ES. The ES chart is a SPLIT chart so that means that the profile you see is the overnight action on the ES. The profile next to it yesterdays action. The bonds and notes are both RTH (Real Time Hours). So no over night action on them. The notes and bonds open at 6:20 my time and the ES opens at 7:30 my time as well. The "A" period on the bonds and notes is set for 10 mins not the usual 30 mins

 

So the bonds/note opened and in the first 10 mins went up then down. You can CLEARLY see that the 30 years get into yesterdays range and the notes did not. Divergence!!! But which way? Hard to say but so far they are both going back up to the open. So far it looks like rejection off of yesterdays high and we are moving back up.

 

Now look at the ES and you will notice that its trading near its over night highs. Well not close per say. You can see its at 1407 and the high is 1411. There is no gap in the ES signaling some rally. But the bonds might rally today. If they reject off yesterdays highs and go up all day then that means the ES will go...

 

DOWN ALL DAY.

 

I am willing to bet (and I did) that folks will come in JUST LOOKING AT THE ES and get long!!!!! If you just look at the ES it looks like rejection over night and there are folks going to get long first thing. The information they are looking at is old and the bonds are telling a different story. My guess was at the open we go higher. My plan was to start shorting every level I have up above till either the bonds look like they are going lower or till something sticks in the ES. Took me 2 shots. So far that black line at 11.50 is the HOD. My guess is down and we look below 1400. Watch for folks to get long there and crushed all day long. Does this mean we go down for the next few months?? Does this mean that Obama is a sure winner??? Does this mean that the Mayan calendar is correct and expect the word to end on the 21st of December??? Stay tuned.

 

Just from what I see today my bias is to the down side.

 

Here are my trades the blue one is a buy at 1/2 size. I didn't want to get caught with a full boat with all ores in the water. Second was a short and it got hit full size. The third was a winner. Moved over the box so you can see the volume. But the bottom of the red box is my entry and the top of the blue is my entry there. Look at what the notes are doing there. Dumping volume and getting ready to go up a bit. So that means all the folks in the ES that are on the blue side are about to be trapped. And there is alot of blue up there.

 

Hope this gives a clearer picture of what I was talking about.

 

When watching both the 10 year and the 30 year bonds, do you give more weight to one over the other? I know the old SP futures floor traders used to watch primarily the 30 year so is watching the 10 year in addition redundant? Its interesting that in your example there was some divergence between the 10/30 year giving 2 stories about the ES opening.. How often does that occur and how do you typically read into that?

[Steve66 10]

They are adding a level of "randomness" to markets that most of us, ( me included ) might not be able to figure out in time. It is impossible to determine what the consequences will be to these unprecedented actions.

 

You can say that fed policy is an attempt to get everyone to bet in the wrong direction. Will getting everyone to bet in the wrong direction work?

 

The market IMO is not random. People change markets, markets change people. I believe that there are correlations & divergences based on what people believe, not true economics. Information has no power unless people react to it. This is why markets are so efficient. My job as a trader is to simply access who is in control, quickly identify pending change, place trades at these points and monitor for continuation. Plain and simple, most information received is just noise. perceived to go against your thought process, and shake out the weaker hands. Follow the big picture to find opportunity, but be ready to counter without emotion.

[MightyMouse 12]

The market IMO is not random. People change markets, markets change people. I believe that there are correlations & divergences based on what people believe, not true economics. Information has no power unless people react to it. This is why markets are so efficient. My job as a trader is to simply access who is in control, quickly identify pending change, place trades at these points and monitor for continuation. Plain and simple, most information received is just noise. perceived to go against your thought process, and shake out the weaker hands. Follow the big picture to find opportunity, but be ready to counter without emotion.

 

Can you determine if fed policy will work?

[Steve66 10]

Can you determine if fed policy will work?

 

Without getting into politics and staying on post topic, Based on what we have seen the last few years, No.. Its not working for the majority of the people and Its become very complicated.

[MightyMouse 12]

Without getting into politics and staying on post topic, Based on what we have seen the last few years, No.. Its not working for the majority of the people and Its become very complicated.

 

yes the market continues to rock

[Savant 10]

yes the market continues to rock

 

we can expect a rocky week...

[kuokam 10]

My respects, my Colonel!

I am looking to that day (26 october 2012 if I read well) in hindsight and I see it eventually turned out a doji like consolidation day. Then the divergence you pointed out between bonds and notes comes to my mind, and I wonder : can that be a fore teller of entry to a consolidation zone?

Also, I thought the big indices are better traded with one another as indicator. Why do you think treasuries are better? Because they start trading well ahead or is there another reason?

 

Your Sergeant-at-arms, Kuokam

 

 

Sorry I had to wait till today to get an example REAL TIME so I could show you. So this is what was going on before the ES open.

 

Let me decifer the bones/charts. The one on the far left is the bonds 30 year. The middle one is the 10 year notes and the right is the ES. The ES chart is a SPLIT chart so that means that the profile you see is the overnight action on the ES. The profile next to it yesterdays action. The bonds and notes are both RTH (Real Time Hours). So no over night action on them. The notes and bonds open at 6:20 my time and the ES opens at 7:30 my time as well. The "A" period on the bonds and notes is set for 10 mins not the usual 30 mins

 

So the bonds/note opened and in the first 10 mins went up then down. You can CLEARLY see that the 30 years get into yesterdays range and the notes did not. Divergence!!! But which way? Hard to say but so far they are both going back up to the open. So far it looks like rejection off of yesterdays high and we are moving back up.

 

Now look at the ES and you will notice that its trading near its over night highs. Well not close per say. You can see its at 1407 and the high is 1411. There is no gap in the ES signaling some rally. But the bonds might rally today. If they reject off yesterdays highs and go up all day then that means the ES will go...

 

DOWN ALL DAY.

 

I am willing to bet (and I did) that folks will come in JUST LOOKING AT THE ES and get long!!!!! If you just look at the ES it looks like rejection over night and there are folks going to get long first thing. The information they are looking at is old and the bonds are telling a different story. My guess was at the open we go higher. My plan was to start shorting every level I have up above till either the bonds look like they are going lower or till something sticks in the ES. Took me 2 shots. So far that black line at 11.50 is the HOD. My guess is down and we look below 1400. Watch for folks to get long there and crushed all day long. Does this mean we go down for the next few months?? Does this mean that Obama is a sure winner??? Does this mean that the Mayan calendar is correct and expect the word to end on the 21st of December??? Stay tuned.

 

Just from what I see today my bias is to the down side.

 

Here are my trades the blue one is a buy at 1/2 size. I didn't want to get caught with a full boat with all ores in the water. Second was a short and it got hit full size. The third was a winner. Moved over the box so you can see the volume. But the bottom of the red box is my entry and the top of the blue is my entry there. Look at what the notes are doing there. Dumping volume and getting ready to go up a bit. So that means all the folks in the ES that are on the blue side are about to be trapped. And there is alot of blue up there.

 

Hope this gives a clearer picture of what I was talking about.

[kuokam 10]

So, what's the best way to read volume, Steve? Dom? T&S ? Profile? Vol indicator?

 

 

Direction based on the longer term distribution, and on the historical record for the DOW or the S&P Market (or any market a person might be interested in) is relatively easy to anticipate.

 

As WBtrader commented, longer time frame context is where a skilled person starts the process....then simply reviewing how the market has acted in the "context" of previous similar circumstances...the human beings who move these markets are creatures of habit, and so one can count on them to repeat what has been done before...

 

For our own pre-market prep, we identify both long & shorts, however we do that as a matter of professional discipline....for the S&P Futures market, the historical record shows a tendency for reversal whenever price tests a distribution extreme. This can be confirmed when you bring analysis of volume to bear....simply, on the test or retest of any high, do we see increasing volume coming into the market on the buy side..if not, we wait for the price to stage a reversal pattern and AT THAT TIME, WE LOOK FOR PRICE TO CONFIRM THE MOVE WITH INCREASING VOLUME...This exercise is called "reading volume" and it is one small element of what I was taught to do.

 

It never fails to identify a move...

 

Finally I have to say, that I am growing a bit short of patience with the so-called vendors (actually they act more like use car salesmen) who regularly show up here claiming to have something to offer traders, and yet we seldom see them offer comments of this nature....one assumes that they either don't have the knowledge (or the skills to) do it correctly themselves...

 

Good luck