Friday, September 14, 2012

Back to Market Profile - forget the rest

Duration traders - If you were just looking at a chart of 10yr futures yesterday (or for the whole last week), and didn't see or know about any of the headlines, what would you think?  Lets rewind to pre-NFP and see if we can tell a story: 

Going into NFP, there was an over-supply condition in the treasury market - a large player sold the market the day before, and the market distributed lower overnight as that large seller held their position...going into NFP at the lows...NFP surprised, the market gapped up thru where the sellers had originally set their shorts and those shorts were forced to short cover.  After the short covering was over the market slowly fell back down over the next 3 days as we headed into long end supply.

Going into the next "unknown" risk event, the FOMC statement, the market was "random" (ie...there was no over or under supply condition embedded in the market from a levered player).  The price action post FOMC statement went from the top of the bell curve (where we entered FOMC) all the way to the bottom of the bell curve on the "re-price event."  When the bottom of the bell curve was offered, it was bought in size (heaviest volume was on the way back up around 132-06 +/- 2 ticks...lets call it at minimum 100k contracts bought by a single player).   Then, not only did the high mode of 132-14+ reign in the market, but the market continued thru the high mode all the way back to the top of the bell curve.

If we go back to our model trading rules, we will see that fading the first move to the outer edge of the bell curve during "re-price events" when there is no embedded supply condition, is the bread and butter of the model.  The second rule we will notice is that when we watch the market travel from one extreme edge of the bell curve to the other, we need to watch for the possibility of large initiating positions.  Yesterday saw large buying near the bottom of the bell curve, which took the market all the way to the top of the bell curve.  You might say that yesterdays buyers post the FOMC "re-price event" got a "P" up.  The next question is, will their buying create an under-supply condition?  We'll be able to figure this out by sometime today.  If today's sellers are unable to take out yesterdays buyers, then the buyers position will be cemented, locking in the under-supply condition, and allowing us to enter the market buying dips.  The key level should be the mode prior to entering FOMC...which was 132-14+...if that level holds today (which i expect it will), then the buyers are in control and we will need to find a way to get long the market.

govttrader out...

1 comment:

  1. But the heaviest volume was on a way down yesterday, no? After selling whatever longs they have and establishing new positions at event, they were covering it from 132'000 to previous day's WVAP (132'150). And then retail with algo's help bought it up to another VWAP, 132'290 (which is Thursday and previous Tuesday).

    But providers don't want to be long here, and the boys already shorted it, so they started distribution overnight taking out retail's stops. Which tells us that every pop will be a sell, especially if it gets again to Wednesday-Thursday WVAP around 132'150