Friday, August 31, 2012

Early read on the model - Initiating buying?

Strange as it might be to say after the last 10 trading days of bull trend in treasuries...

However, Market Profile doesn't care about the level in the market.  Market Profile is about the market based auction process, and supply / demand dynamics.  This mornings market dynamics would be best described as initiating buying.  Technically, the model needs another 12 market hours to establish today as an initiating buying day, so I'm not putting on a trade yet.  However, the pattern i'm looking for is sideways activity for a few hours, followed by an overnight dip buying opportunity.

Now for some non-model based commentary.  Today marks the last day of the month-end index extension.  So, this ends the cyclical bull trend in bonds.  Today's initiating buying will need to overcome a lack of month-end front-running...combined with the next setup dynamic (10yr and 30yr auction setup selling).  There is a 4-day week heading into the next payrolls.  Its quite possible that the market will rally into payrolls...while today's initiating buyers take profits as we head into payrolls.  That would allow the next bought of auction setup selling to take place from even higher prices.  I'm hesitant to say this, because this pattern would be "too good to be true."  However, all the signs point this way.

My next post will be using Dec contracts.  Good luck trading

govttrader out....

I'll admit...i'm amazed...the high mode reigns in the market

Repeat after me...never doubt the model...never doubt the model...never doubt the model.

Even with stocks grinding higher, treasuries don't seem to care as the Market Profile high mode reigns in the market and stocks vs 10yr yields diverge further.

Maybe i should trade from a black room with no news feeds whatsoever.  I think there might be something there.

govttrader out....

Given the strength in stocks today, i'm sitting out

This stock / EUR strength might shift the mode i'll wait for more information before trading today...which might mean not trading at all.

govttrader out...

ECB Said to Get Sole Power Over Banking Licenses in EU Commission Proposal

This story is the only one that matters for the moment.  If this proposal goes thru, then Germany will lose its ability to veto giving the ESM or EFSF or any other entity a banking license.  I imagine this is the real reason this proposal was created in the first place.  This would allow the ECB to print euros with zero constraint.  If this passes, I would hope Germany would simply leave the euro and say "to hell with all of you bastards."

This story is the reason for the EUR to rally 100 pips this morning, ES to rally 10 points, and US Treasuries to selloff 3bps.  I imagine that the next news cycle will be Germany attempting to counter this proposal...and I of course have no idea regarding the legal standing for the ECB to assume this kind of banking license power. 

So, what does Market Profile say?  Well, the mode in ZNU2 is still 134-04+, and Market profile would expect the mode to reign in the market...but with today expected to be a low volume day with Labor Day weekend just ahead, its hard to say.  I would cut all my unit sizes in half for today, just to play it safe.

For what its worth, the stocks vs bond correlation has diverged again, as the month-end cyclical force is keeping treasuries from selling off in lockstep with ES gains.

Thursday, August 30, 2012

ZN Mode shift -->134-04+

Normally, it would be too early to declare a mode shift, but the majority of the trading day has seen ZN revolving around 133-04+, in both time and volume, thus solidifying the new center of value, regardless of the movement in ES (S&P emini contracts) during the same time-frame.  For the moment, that should make 134-00+ too low.  This will be up for re-consideration come the London open tomorrow morning.

govttrader out...

What does today's price action for the 7yr auction tell us?

There are 2 remaining forces at work in the treasury market today (only 2 because the 11am bond buyback has come and gone, as well as the 1pm 7yr auction).

1)  pre-month end treasury buying for tomorrow's month end index extension
2)  stocks selling off which should result in treasuries rallying

So, we have 2 bullish forces, and 1 supply force (7yr auction).  This would tend to indicate that treasuries should be acting strong.  However, if we look at the stocks vs bonds correlation, we see that this balance of forces was subdued today as the recent stocks vs bonds gap has been just about closed (blame the 29bln 7yr auction for that). 

Of course, the next question is, "what now?"  The monthly cyclical is still bullish headed into tomorrow's month-end index extension.  However, there is no undersupply condition embedded in the market, so any bullish price action will be limited to "randomness" and stocks weakness around the center of value, and potentially a mode shift.  The mode from yesterday / today's early morning mode of 133-29 worked great to help us "buy the dip" yesterday.

Unfortunately, its too early to tell where the next afternoon/overnight mode will end up, and thus, what the bell curve ranges will be, so its "wait and see" time until tomorrow morning for me.

govttrader out...

Prudence and Market Profile say "get flat"

So we bought the market yesterday in ZNU2 @ 133-22.  The new mode seems to be setting up at 133-29...and without a supply condition to guide us, getting flat above the mode is the prudent thing to do, even if it is only 1 tick above the mode.  So, i'm getting flat at 133-30, and will just wait and see what happens next.

Tuesday, August 28, 2012

New ZN trading range - still bullish

With the ZN mode shifting up a tick to 133-28+...and the days trading range expanding a bit...the lower end of the value range should extend to 133-22 (being too low).  If the market drifts down to that lower area, then i will try to get long for a play back to the mode.  The sooner that chance appears, the better the odds of a favorable outcome.

Playbook - get flat here - top of micro bell curve - continue to buy dips

Even with 5yr and 7yr supply coming over the next 2 days, the Fed's POMO buying schedule for the remainder of the week, combined with month-end buying on Thursday and Friday, and a light corporate issuance calendar should overcome the 5yr and 7yr auction selling pressure, which should already be priced in.

I still want to trade from the long side, and i don't expect much volatility for the remainder of the week, but there should still be opportunities to find the daily mode, gauge the volatility, buy the bottom of the bell curve, and then get flat when the market trades above the center of value.

This exact pattern has already occurred today, so getting flat here at 133-31 makes sense, with an aim to repeat this pattern between now and tomorrow.

This long treasury bias for the week can be seen in the stocks vs bonds correlation.

Mode Shift - But still looks tethered

With the week heading into Labor Day weekend in the US, expect volumes to be extra-light, and typical correlation models to be extra weak for the next 5-7 trading days.  I am contemplating taking a vacation and coming back when my large sized friends in the market are back in session.  On the flip side, there may be some easy mean reversion trading to do (in small size) as fewer players means less movement?  Its hard to tell for now.

For the moment, 133-27+/28 is the new mode for today.

Recall that this Friday is month end, so combined with this weeks POMO, I do expect a grind to higher prices.  Perhaps buying dips this week won't be such a bad idea if we get a little volatility?

Monday, August 27, 2012

Undersupply condition has been aleviated

The treasury market's levered players who bought the market last week have taken their profits (between friday and today).  This means that the high probability trend is over, and the market has stabilized at these new higher prices.

So what do we do now?  Well, with the undersupply condition gone, the market should be tethered to some center of value.  With month-end looming at the end of the week, the bias in the treasury market is still to higher prices...but the bias is nowhere near as strong as it was when there was an undersupply condition embedded in the market.  So, with my bullish bias, i will try to find the bottom of the bell curve overnight, buy when the market gets too low...get flat in the middle...and get short with 50% of the position size that i would use when getting long....again getting flat in the middle.

While it looks like 133-25+ is shaping up to be the high mode...only time will tell.  However, if 133-25+ is the new center of value, then 133-20 should be too low in randomness.

Friday, August 24, 2012

Monthly Cycle - rally into month-end for trend?

2 days ago we identified a new short term initiated bull trend in treasuries.  Yesterday would have been the first day where the trend initiating traders could / would have taken profits.  However, the market has continued to make higher lows and higher highs (classic Dow theory definition of a trend). There has been no meaningful giveback on any significant volume, so we can only conclude that these buyers are still withholding bonds from the market, keeping the bull trend in place.

This means that the bond market can continue to absorb additional selling over time, price and volume.  With next Friday being month-end, accompanied by Fed POMO buying every single day, it is conceivable for this trend to continue into month-end over the course of next week.  This argues for continued buying treasuries on pullbacks for the immediate future.

Fed POMO schedule
August 27, 2012
Outright Treasury Coupon Purchases 02/15/2036 – 08/15/2042 $1.50 - $2.00 billion
August 28, 2012
Outright Treasury Coupon Purchases 11/15/2020 – 08/15/2022 $4.50 - $5.50 billion
August 29 , 2012
Outright Treasury Coupon Purchases 08/31/2018 – 08/15/2020 $4.25 - $5.00 billion
August 30, 2012
Outright Treasury Coupon Purchases 02/15/2036 – 08/15/2042 $1.50 - $2.00 billion

Thursday, August 23, 2012

What does profit taking look like?

Initiating trends tend to make correlation trades divert or breakdown temporarily.  When the trend terminates via profit taking, the correlation trades tend to revert.  This reversion is not necessarily a complete reversion...but in that direction.  The past 3 days are a good example of this.

In the treasury market, the recent initiating buying that started yesterdays trend occurred on the 21st.  You can see from the chart that, at at the time, stocks and bonds were correlated, moving in lockstep.  Then, by the yesterday afternoon (the day after the initiating buying), as the trend in bonds gained strength, treasuries broke away from stocks and the 2 lines diverged.  Then today, as the treasury traders began taking profits, the 2 lines converged back to each other.  This is the most typical example of an initiating trend (undersupply condition - followed by supply distribution - followed by profit taking and consolidation).

So, the next time one of these setups takes place, we now have a metric for measuring and confirming the existence of the pattern, and thus, how to trade it.

Are Tuesday's buyers taking their profits today?

While its too soon to tell...given the weakness in stocks today, if Tuesdays buyers were not taking profits (by being the offer in the treasury market), then we would expect treasuries to be stronger, given the undersupply condition.  Undersupply conditions tend to last 24-48 today would fall into the "normal" routine of the large player taking profits into a rallying market (how else does one unload 100k ZN contracts?).

Wednesday, August 22, 2012

One more lesson - when the system says be aggressive...don't hesitate

In trading this Market Profile Bell Curve model that i've created (modified from my collection of teachers over the years), I would group my trading difficulties into 2 categories:

a) wanting to believe a previous day's mode is still price controlling market activity (greed)
b) not being aggressive when the model says to be aggressive (fear)

My trading loss last week was an example of a). 

Today was an example of b).  I should have been involved in a max size position...instead i was watching from the sidelines.  When the model identifies an over / under supply condition, this is a 90% probability trade setup.  This means that the market goes thru a vertical supply distribution 90% of the time that the model recognizes these setups.  That means, whenever one of these setups is triggered...i should be trading with my max size...buying 1 unit as soon as the signal is generated...with scaled bids just below the market in case there is a slight dip up to my max size of 6 units.

Today, that would have been worth 20-26 ZN ticks (ZN allows 60x this was potentially a 20% return in a single trade), in a 90% confidence high probability trade.  Even when i was sitting in a dealer seat, trading a banks money, i had difficulty with this concept of being aggressive when i missed the first leg of a trade. The highest probability trades occur (such as today) after missing the first leg (buying the dip in treasuries yesterday morning was the first leg).  I need to find a way to remove the emotion out of initiating a position for this one particular setup.  If i can do that...then trading will become very easy.  This particular setup tends to occur at minimum 2 times a month...sometimes as many as 4 times.  If i only trade one type of setup, then this would be it.

New trend confirmed in bonds...undersupply condition

This was sneaky pattern that I didn't see right away.  I'm reducing the number of filters I use so this pattern won't escape attention again.

Yesterday morning there was heavy trading around 132-10 in ZN that lasted for 4 hours.  The market traded vertically from out of that level to 132-20 and then went sideways.  This technically is a "P up" of initiating buying.  Normally, this doesn't take 4 hours of sideways activity (the buying) before the vertical movement takes place.  However, we can now see yesterday for what it was.  Today we saw a supply distribution as yesterdays sellers (the liquidity providers to yesterday's large buyers) were stopped out of their positions, which has repriced the market higher in both price, time, and volume.  This process of liquidity providers covering their positions via short-covering is a cascading it creates a new population of liquidity providers, and potentially, a new population of short covering...potentially. 

So, what's the trade from here?  Wait for the bulb of today's "P" to form, and attempt to buy the bottom of the bulb of that "P."  In an undersupply condition, there is no guarantee for another supply distribution...however, there is a "guarantee" that there will not be an initiating selling event tomorrow (well, as much a guarantee as trading provides). So, the worst tomorrow should bring is a range bound day...and the best is another "P up" day followed by a vertical supply distribution.

At present...the bottom of the bulb of the "P" looks to be 132-28.  So, all things being equal, that should be the next buy zone where i'll try to get long.

govttrader out...

Either the mode has shifted...or we just saw a transition to trending

At the moment, it looks like 132-25 --> 132-27+ is the contender price range for a new mode, with 132-26 in the lead by a single stride.  Today we received the CFTC commitment of traders report for the week ended Aug 14.  This gives us a pretty clear picture of what happened last week.  Does it help us with this week?  I think it does.

Aug. 22 (Bloomberg) -- Non-commercial net positions in 10- yr Treasury futures most net long since Jan. 17; JPMorgan Treasury Client Survey unchanged this week, shows shorts near 2012 lows; primary dealer Treasury net long position smaller than previously; SMR Money Manager Survey shows increase in duration risk exposure.
●    CFTC Commitments of Traders (week ended Aug. 14)
●    TU non-commercial net position, futures only: Long 149,116 contracts, least bullish since July 10
●    FV non-commercial net position, futures only: Long 109,630, least bullish since July 10
●    TY non-commercial net position, futures only: Long 32,336 contracts vs net short 14,595; most net long since Jan. 17
●    US non-commercial net position, futures only: Long 20,808 contracts, least bullish since May 15
●    WN non-commercial net position, futures only: Long 19,702 contracts, least bullish since May 22
The period just after this data saw a selloff in 10Y yields from 1.50% to 1.85%.  Its safe to say that this selloff shook out all the weak-handed longs.  So now, strong hands are safe to come in and buy US treasuries in size (most likely, RM has already been buying into the weakness).  This tells me that buying dips in treasuries should be the trade du jour.

What does Market Profile tell us?

The stability of Market Profile over the past week indicates that the treasury market has found support from fresh buyers...taking product off the hands of weak handed sellers.  These are not the large fast levered money type of buyers...rather this is RM.  This means that the market is ripe for a levered player to buy a dip if we get one, in size.  If the opportunity arises, this levered player buying a dip will be encumbering fresh levered sellers (the marginal seller who will provide liquidity) in a manner that could cause an under supply condition to arise.  This would be a close to perfect setup.  Whether we will see such an opportunity is impossible to know.  What we know is that if we see the opportunity...we know how to trade it.

My fear is that we won't see another dip to buy in this cycle (it could be argued that we already saw it...and that was yesterdays trade).  Only time will tell.

govttrader out...

Tuesday, August 21, 2012

Whats with the big moves in the asia session treasury market?

At 8:20pm NY time, 24k ZN contracts were bought in the futures market from 132-22 --> 132-28.  Most likely a dealer was lifted on 2bln 10Y notes, and this was the only way to get back the duration (i've been in this situation before).  In the overnight session, this is a large trade (normally, less than 1 bln 10Y notes trades in the entire overnight session...never-mind a single trade), however, in the context of a normal NY session, this is small (typical NY session volume in ZN is over 1mm contracts).  So, I would expect the market to react as it has to this trade, but long term (aka...a day) this will ultimately be insignificant.  However, small players will get scared by this, and it may even cause some stop outs.  I'll wait till the London open to assess the situation...this may create some very interesting opportunities.

On the flip side, is it possible that something has changed (ie...has the market transitioned from tethered to trending?)  While I find this unlikely, we don't definitively know the'll wait for the London morning and see how things shake out.

govttrader out...

UPDATE 5:50am

The move in US Treasuries (and a similar, albeit smaller move in S&P futures) came on the heels of very weak trade data coming out of Japan.  The 2 key numbers were a 25% reduction in exports to Europe and an 11% reduction in exports to China.  These are huge decreases.  If this is indicative of things to come for US exports to Europe and China (and China's global growth engine), then things will indeed get very bad in the US (if you think they aren't already).   Follow through from this type of data should push 10yr yields back to sub 1.50%...ultimately 1.25% or even 1.00% are doable if we start to see the corollary to this trade data show up in US econ data.

For the moment, I'm satisfied with the possibility that the Market Profile mode might have shifted...and there is no trade for me here...yet.

Does Market Profile see a new trend in treasuries?

In  In order for the treasury market to initiate a new trend, a few symptoms need to appear.  A large levered buyer (or seller) needs to emerge and completely dominate all other market participants.  When this happens, treasuries will break away from their stocks vs bonds correlation.

Today, treasuries followed stocks pretty much in lockstep.  The conclusion from this price action is that the treasury market is still tethered to a center of value.

Today's profile was best described as a "fat D."  Days like this don't provide a clearly identifiable center of value....rather, they provide a range...somewhere in the range of 132-11 --> 132-19.  Once again, come the London open around 2-3am is when we should have more clarity.  Being awake for the London session should be a required prerequisite to trade this market tomorrow.

Monday, August 20, 2012

Market Profile preview for the overnight session

Today's trading session is the shape of a "D", and the mode looks to be settling in around the 132-16+/17 area.  The market is still tethered (ie...not trending), so we should have more clarity on the next trading range by the London open around 2-3am.

And then the ECB takes the rumors back??


So does this mean that the overnight risk-on party just got busted??

What does Market Profile tell us to do this morning?

Unfortunately, we aren't being told anything. 

This headline story from Bloomberg News "Treasuries Fall on Speculation ECB Will Cap Region’s Bond Yields" pretty much tells the current story.  While it is too early to tell if / when the market will ignore / call BS to the story, the only thing MP is concerned with is market data.  And we just don't have enough of it yet.

The news over the weekend of the ECB considering intervention in the bond markets in an unlimited capacity has wiped the slate clean from Friday's bell curve..this was to be expected at the London open. 

However, we don't yet know what state the market is currently in.  The most likely state is tethered to a new mode, but the model will need more time to decipher what that mode is.  So, for now, we just sit back and enjoy the show.

govttrader out...

Friday, August 17, 2012

132-15 reigns in the market...time to go home

Friday afternoons being the low volume things that they are...combined with this August super low volume vacation season...i have no more positions...unless of course for some reason ZN trades down to 132-09 in the next 3 hours...

govttrader out....

Market Profile Update- new mode for ZN 132-15..and a new trading range

The market has spent the last 8 hours coiling around the new 132-14+/15 center of value in ZN.   It was not until 3am that we would have been able to see this...which again argues the case for being awake during the London session.

 ES futures have been going sideways during the entire overnight session, so the overnight moves in treasuries were not caused by movements in stocks.  These types of moves occur as market participants battle it out in a back and forth fashion as individuals attempt to determine where the overall market believes the center of value to be.

With 132-14+/15 asserting itself as the center of value, we can establish our trading plan.  The current trading range in ZN now becomes 132-10 --> 132-20.  With the most recent high of 132-19...that should tighten up the bottom of the range to 132-11.  So, my current plan is to buy a dip down to the 132-10/11 area, and get flat when the market gets back to the center around 132-15.

Just another musing...if I had woken up earlier (5am) I would have already had the chance to do this trade cycle...twice.  The early bird indeed does get the worm.

Update 9:20am
I was just looking over the charts, and it occurred to me that i didn't discuss the possible larger trading range, as we have moved into the NY session, and with larger volumes can sometimes come larger moves.  The larger trading range surrounding the 132-15 mode is 132-08 --> 132-24.  Without some large impulse today (ECB Draghi speak for example), these ranges should hold...making today a rather tight range controlled day.

Thursday, August 16, 2012

Did the ZN mode just shift?? Stocks are screaming...

After watching stocks scream higher since the open (ES up 10 S&P points, almost to the march 2012 highs), I suppose this is not a surprise.  Today's 10pt rally in stocks would normally be good for an 8-10bp selloff in 10yr notes, but today 10yr notes have only sold off 3bps.  Our earlier blog entry describing the mode seeking nature of the market still applies, and so our Market Profile model will continue to watch the market and wait for additional activity to confirm which mode is the true center of value.  So, from our recently revised trading rules, we note that the mode has, tentatively shifted from 132-16+ to 132-11.

Both of these intraday modes are almost equally weighted from Market Profile's perspective, so we can't know for sure which one is controlling market activity...we will have to wait for more horizontal price discovery to confirm.  Its times like these that we as prop traders are paid to wait and do nothing.

For those who bought ZN when it dipped below 132-10 (while not the highest probability trade...still allowed by the model)...the model would dictate getting flat now for a small profit with ZN currently trading 132-12.  Until we get more clarity on the market's center of value, being long potentially above the center of value is not a good risk/reward.

govttrader out....

Just for fun...where would the bottom of value be (ie too low)

Because stocks are screaming today (short covering from that mongo short base perhaps? EURUSD strength perhaps?) and treasuries are getting pushed down a bit...what would our Market Profile guesses say?

With 132-16+ as the ZN mode...that would make 132-10 the bottom of the current value area.  Trade near that level should bring in buyers to take us back to the center 132-16+ center of value (at least once).  However, caution dictates either just being an observer, or playing very this model prefers trading during the overnight session, rather than during NY hours.  Just food for thought.  Still just observing over here.

Validation of trend termination

Recent strength in stocks occurring amid an absence of weakness in treasuries just validates our theory that the oversupply condition that created the past 2 days downtrend has been alleviated. 

While it is still too early to call, the 132-16+/17 area in ZN is in the lead for center of value thus far.  Not trading yet...just observing.

Where is Market Profile Now?

So the treasury market continued to selloff into the Tokyo session, but then rallied from the London open.  How does Market Profile read this?

This is the type of price action we would expect if the oversupply condition (trend lower) has been alleviated. 

Note - this does not necessarily mean the treasury market is going to rally now (that would be my gut call).  This simply means that the trend lower is over.

Given the recent selloff, upcoming month-end seasonals, and continued Fed POMO purchases, the most likely direction is of course up (again, gut call).  However, this is a gut call, and not a model generated call.  The model only says that, with the over-supply condition alleviated, the market is no longer trending lower, and  will seek out a new center of value.  Once a new center of value is established, we can calculate a high probability trading range and go from there.  This means that the model has no position, and needs more time / price discovery before it will re-enter the market.  So, given my new outlook on trading, I too will wait for more price discovery before i re-enter the market.

I realize that this blog post is, for the most part, a whole lot of nothing.  I'm simply trying to be patient and wait for my pitch.

govttrader out..

Wednesday, August 15, 2012

Wiping the slate clean...sortof

The last 24 hours have been painful, but at the same time, illuminating.  I won't disclose my single day loss in dollar terms, but it was about 10% of my portfolio...and it stings.  Yesterday I tried to be smarter than my own model.  My model gave me clear direction, and I ignored it because of a combination of pride and self loathing.  Pride that I could not enter a trade that would lose money (that's why i put the trades on in the first place), and self-loathing that i did enter a trade that lost money (that's why I didn't cut the loses when they were small for a trade i should not have had on in the first place). Add in a bit of stupidity for not being patient and doing what I myself said in my own blog should be done.  I gave myself a road map of exactly where to go, and then i decided to drive blindfolded with my hands tied behind my back...and now in the light of day, I can't believe how stupid i was.  Or, as Mr. Miyagi would say..."Miyagi say that to father when same thing happen. Father agree, was stupid. Father was right"

Trading can be an emotional roller-coaster when P&L is large (be it positive or negative), and that is a bad thing.  I use my model because, in addition to having a phenomenal grasp on the dynamics of the auction market model, it helps remove the emotion from trading.

Here is the guts of the model
Rule 1)  When tethered to value, fade movements away from the center of value, and get flat at the center of value.
Rule 1a)  Constantly re-evaluate if the center of value has shifted and trade accordingly
Rule 2)  Always be monitoring for the transition FROM tethered TO trending.
Rule 3)  When trending, only have positions in the direction of the trend.
Rule 4)  When in a trending position, stay on until the trend is over.

The specifics of implementation are not the issue here.  
  • I know how to calculate the center of value
  • I know how to calculate the volatility from the center of value to determine the trading range
  • I know how to re-evaluate if the center of value has shifted and trade accordingly
  • I know how to monitor for the transition from tethered to trending
  • I know how to trade when in a trend
Today, my issue is psychological.  My only obstacle to success with trading my model, is me.  Once i can get myself out of the way, trading should be...easy.

I've flirted with the idea of bringing in a partner of some kind.  I'm not talking about a trading partner exactly....more of a partner to keep myself in check.  Somebody to ask me questions like...Is that position in line with the model?  When does the model say to exit?  Does the model allow an entry here?   For the time being...I will have to be my own partner...and ask these questions of myself while trading.  That is sort-of the purpose of this blog.

I find that when i clearly describe what the model says to do on this blog, the model is always right...and when I "trade off my gut," I am wrong.  Its a hard thing to admit that the master of the creation is not smarter than the creation itself.  I created this model (with help from all my former trading colleagues of course), and yet, my gut is not good enough.  It's the model that can tame the market...not my gut.

So, here is a toast to a new beginning...again =)

Self...say hello to me


Post Mortem - What the heck happened yesterday in the bond market?

Ok, time to be an adult and dissect what happened yesterday. 

To begin with, volumes have been lower than normal for the past 2 weeks.  Anecdotaly, this is due to the August summer vacation season.  In trading terms, this translates into some percentage of market participants not active in the markets, and exaggerated moves from larger than normal volume trading.

After the 8:30 Retail Sales data, there was heavier than normal selling on the number (normal immediate post-number volume is 20-30k 10yr contracts...yesterday saw 60k contracts).  Combine this volume with the extra large corporate issuance calendar (as noted here on Zerohedge), and the selling volume in the treasury market yesterday was insurmountable given the missing market participants.  However, it was visible and displayed below.

In market profile terms, yesterday was a "b down"

And graphically....

In Market Profile and Bell Curve trading, a "b down" is the first requirement to creating an over-supply condition.  In an over-supply condition (the exact opposite of an under-supply condition), a small handful of market participants sell enough product (in this case, US Treasuries) to create such an imbalance in the market as to create a new trend.  Normally, this large selling comes from a group of large levered players in the futures market (think firms like Renaissance Tech and other Global Macro Hedge Funds).  All the mid-to-small market participants who were on the receiving end of this selling ultimately need to sell the paper that they have been given, and this is what creates a "supply distribution."  As this imbalance of unsuspecting "buyers" liquidate their holdings, this causes a cascading selling effect, bringing additional liquidators into the market.  Ultimately, when the last weak handed holder of paper liquidates, the market returns to a state of "balance" at whatever price the market happens to settle.  The transition to this balanced trading pattern will look like a classic normal bell curve (often referred to as a "D").  Normally, this balance returns to the market as the large levered sellers stand in the face of the market and buy back the paper they sold, thus alleviating the over supply condition.  These supply imbalances normally take 24-48 hours to work out, but there is no hard and fast rule. 

How does this knowledge help us as traders?  Obviously, we can't know before hand when the large initiating buying or selling will take place.  However, we can wait for it to occur and observe it when it happens.  After we recognize a large volume buyer or seller (think 100k 10yr contracts in a concentrated period of time), we can play for the supply distribution.  How do we "play for" the supply distribution?  Well, the first day of initiating selling will look like a "b down" as indicated in the chart above.  After we recognize a "b down," our next action as prop traders should be to measure the bulb of the "b" and get short somewhere between the top and the center of the bulb.  Ideally, we would sell the top of the bulb of the "b," but more often than not, if this is a true over supply condition, by the time we have recognized the "b" we won't get the chance to sell the top.  This is why we should make some sale at the center of the bulb of the "b", and make additional sales at the top of the head of the "b" if given the opportunity.

So what was my mistake yesterday?  As the day wore on, I saw the "b" forming.  I knew that there was a possibility for an over supply condition to form, which means I needed to find a way to reverse my position and get short.  Since I got caught long during this process, I was like a deer in headlights.  I "tried" to sell out my position as the day wore on by continually offering just above the market, but I was unwilling to hit a bid...I thought there might be a slight possibility for the market to drift higher, thus providing me an out.  This is the wrong way to approach the market, and is entirely due to bad psychology  During the Tokyo session, when ZN hovered around 133-05 (the head of yesterdays "b") I knew that this was the head of the "b", and that I should just reverse my position...take the loss, and make it back by being short for the upcoming supply distribution.  This is what I should have done.  Instead, I placed offers 2 ticks above this level (133-07).  My thinking was, "hey its only 2 ticks..there should be enough volatility around the head of the "b" to get me lifted."  In retrospect, it is clear that this is a horrible trading strategy.  In essence, I was "HOPING" for the market to trade up 2 ticks..rather than "thinking it would".  "Hope" is a horrible trading strategy.  I waited and waited for this to take place, until the London open (2AM in NY).  At the London open, Bund futures opened lower as these London based participants had their first opportunity to sell paper (recall that Bund Futures do not trade during the Tokyo session).  As soon as this happened, I knew that the supply distribution was in progress and I hit the first bid i could (98-28 in 10Y notes...about the equivalent of 132-31 in ZN).  Because I was stopping myself out, I just got flat, rather than reversing my position and getting short.  Bad psychology everywhere.

While there are positive strategies embedded in this post-mortem, this is first a lesson in what NOT to do.  I should have gotten flat before the Retail Sales data (i was small long...1 out of 6 units).  Everything after that was based on the fact that I already had a long position, and so i tried to reduce my average cost by buying more at lower prices.  I tried to convince myself that the NSA Retail Sales data would ultimately prove the 8:30 sellers wrong.  However, this approaches day trading from an entirely wrong viewpoint.  As soon as the large sellers appeared to be getting a "b down," (observable 3 hours after the initial selling event) I should have sold every pop and gotten short.  Anything other than that was wrong.  As a day trader, thinking about what the next months revisions will probably be, or what the effect of the Seasonal Adjustment was, are irrelevant.  The only thing that matters in day-trading is measuring buyers and sellers in the auction process, and determining if the market is tethered to a center of value, or if the market has transitioned into a short term trend.  Everything else is noise, and as a prop trader, it is our job to sort thru and ignore the noise.

So, I'm going to lick my wounds, take a breather, and just sit back and watch for the next 24-48 hours so that I can come back with a fresh mind.

I hope that my experience will aid other traders in their journey..but more importantly, I hope that I learn my own lesson.  Yesterday did not have to be a could have turned around into a profitable trading day.

more later...govttrader out

And I stopped myself out....

hit the 98-28 bid on 10Y notes...painfull

Tuesday, August 14, 2012

Have to be honest - I'm still long

I just didn't have it in me to sell out my position at the lows of the day, seeing as I know that the treasury market was unnaturally weighed down by corp issuance.  I'm hoping there is some giveback tonight...and i'll use that to get flat...i guess i'm not sleeping tonight.

Corp Issuance pushes treasuries down

So, its my fault today for not noticing how heavy the corp issuance calendar was.  Zerohedge has a great piece on this.  Its not clear exactly when this will end...but until it does, I think I should pull out and wait for the calendar to clear before establishing a long in anticipation of the month end extension.