Multi-Pivots and Gap Up for June 21, 2011

[Billy]

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Today all indices might gap up. IWM, SPY and GDX are all in a strongly bullish cluster outlook while QQQ remains very bearish but improving.

The GDX robot is now offering a relatively strong buy signal in terms of LT/ST probabilities. The setup has not changed much from yesterday and there is a very comfortable initial support at the confluence of WS1 (50.70) and SS1 (50.64) just below our entry limit price of 51.57. The strong second resistance cluster should encourage you not to chase any gap up and buy at the robot limit instead to improve your reward-risk ratio.

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For IWM, at the time of writing, pre-market points to a possible +0.60% gap up above WS1 (79.53) and QS1 (79.32). This is the level where last week’s Tuesday’s bounce failed on the next day. A close today and an opening tomorrow above QS1 would be the most ideal positive scenario for the robot’s position. The second resistance cluster is looking more sturdy, but a close above WR2 (80.83) could be the first step in a break-out attempt.
IWM left the daily strong decline daily sub-stage yesterday and is now in weakening decline.

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SPY is in an even more bullish cluster pattern with the first support cluster being twice as strong as the first resistance cluster.

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QQQ remains a laggard and the first resistance cluster is really ominous, but the successful support from MS3 (53.90) is beginning to confirm that the sell programs may be temporarily turned off for this month’s timeframe. The launch of buy programs remains to be seen however.
Billy

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[adam ali]

Billy,

I can't recall you ever discussing volume in the context of these charts. Now I understand the 20DMF gives us a look at volume but it pays more attention to the size of that volume in a snapshot sort of way rather than as a sequence. (I think that's right.) Bob looks at volume - does it play an important part in your pivot methodology? Obviously, one of the reasons I'm bringing this up is yesterday's move was on low volume and many are pointing to that fact as indicative of a weakness in this potential rally's market structure.

[brrim]

Billy; Yesterday and today the Robot maintained the stop for the trade initiated on 6/10 at 76.97. This translated to 65.82 for TNA yesterday. Today it translates to 65.72 which would involve lowering the TNA stop. In these instances that call for TNA stop lowering should the Robot be ignored?

Thank you in advance.
Best regards,
Robert

[adam ali]

Correction: "...does it play an important part..."

Meant "...does it play any part..."

[Billy]

Billy,

I can't recall you ever discussing volume in the context of these charts. Now I understand the 20DMF gives us a look at volume but it pays more attention to the size of that volume in a snapshot sort of way rather than as a sequence. (I think that's right.) Bob looks at volume - does it play an important part in your pivot methodology? Obviously, one of the reasons I'm bringing this up is yesterday's move was on low volume and many are pointing to that fact as indicative of a weakness in this potential rally's market structure.

Adam,
Volume used to play an important role, not anymore. In 2008 and 2009 my setups discussed in the VIT group (see archives) involved much volume monitoring at breakouts of clusters and major floor levels.
Then, several research papers revealed that the official exchange reported volume had dwindled from 85% of total consolidated volume in 2007 down to only 25% in 2009. That's 75% of total true volume that you cannot monitor anymore as a retail investor and it is only traded by professionals, your most important actors to monitor.
The only way left to use official volume data confidently for tracking large players activity is Pascal's Effective Volume and 20 DMF. Since they are at the basis of the robot's signals and market direction, I don't need to add anything to Pascal's comments.
Traders who are still using old volume indicators and interpretations are lost and confused for a good reason. Only price pays. Billy

[adam ali]

Then, several research papers revealed that the official exchange reported volume had dwindled from 85% of total consolidated volume in 2007 down to only 25% in 2009. That's 75% of total true volume that you cannot monitor anymore as a retail investor and it is only traded by professionals, your most important actors to monitor.
The only way left to use official volume data confidently for tracking large players activity is Pascal's Effective Volume and 20 DMF.

The concept of dark pools and ATS is easy to understand. What is unclear to me is how all this volume is reported in an aggregate sense and what is the meaning of official exchange reported volume in relation to total consolidated volume. When you say it is only traded by professionals, how does that work?

Parsing out official exchange volume as Pascal does is one approach (and perhaps the best one). But isn't this data available to everyone?

Sounds like it may be time for me to revisit Larry Harris' book.

[Billy]

The concept of dark pools and ATS is easy to understand. What is unclear to me is how all this volume is reported in an aggregate sense and what is the meaning of official exchange reported volume in relation to total consolidated volume. When you say it is only traded by professionals, how does that work?

Parsing out official exchange volume as Pascal does is one approach (and perhaps the best one). But isn't this data available to everyone?

Sounds like it may be time for me to revisit Larry Harris' book.

Sure the estimated data is available from Markettells.com but for NYSE only and EOD.
Not very useful for monitoring and interpreting IWM volume and even less intraday.
I attach the file with the historical % of reported volume compared to total consolidated volume.
Please promise me that you will swear to yourself never looking seriously at official reported volume again, or at people interpreting doctrinally such misleading data or I will think you are out of your mind!

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Billy

[Billy]

Billy; Yesterday and today the Robot maintained the stop for the trade initiated on 6/10 at 76.97. This translated to 65.82 for TNA yesterday. Today it translates to 65.72 which would involve lowering the TNA stop. In these instances that call for TNA stop lowering should the Robot be ignored?

Thank you in advance.
Best regards,
Robert

Robert,

This issue will ever be recurring and I repeat that I am against providing indicative limits and stops for related ETFs!
These are kindly provided by Pascal based on the volatility correlation between the instruments. With the way triple leverage ETFs are adjusting daily with a decay or compounding factor, it is normal that their volatility is varying daily from the correlation with IWM. The actual stop is not changed. If IWM stop is hit, you get out of TNA whatever the indicative TNA stop. Period.
Billy

[EB]

@adam ali: since you mentioned me below, I thought I'd chime in :->. I do look at volume, but in specific contexts that are not simply daily aggregations. Specifically, I look at volume at price (volume profile), depth of market bid/ask volume (implied liquidity), realized liquidity (measured on the ES in part through active boundaries), volume delta (difference between up and down volume), and bar-by-bar relative volume.

Regarding relative volume, some may note that today's running total is again below average; however, on a bar by bar comparison (each bar measured against a 20 day average for That Bar only), the pushes to the upside have been on above average volume, confirming strength. Here's a snapshot from today:

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It's true that futures markets do not have the same reporting problems of equities, as all trades are centrally cleared and reported. So why not just use the daily totals in the futures as a proxy for the imperfectly reported cash volume? Even notionally, the futures markets are very small by comparison.

Also, much of the day's volume is due to program buying and selling and HFT churning, which affects both the cash and futures. How much algo trading there is in any day can greatly skew the aggregates, but seems not to skew the relative (bar by bar) as much.

[adam ali]

Thanks, Bob. In some ways, what you say raises more questions than it answers (for me at least). Maybe the first question is this: is there a natural equivalence between the futures and cash markets in terms of volume (meaning as cash volume increases in one venue, it will in the other venue)? Otherwise, why look at futures for volume?

I see your point about looking at individual bars but for those who don't have the alacrity to do so, then where to go for volume analysis - relative to Billy's point about Pascal being the one place for this?

I feel like I'm wading in muddy waters - personally speaking - discussing these issues at this level of granularity. (I'm not sure I'm even thinking about all this correctly.) From a hierarchical POV, there is the total consolidated volume, then the official exchange volume, and then there's the parsing Pascal does...just trying to understand what's what here.

[EB]

A volume correlation analysis of the ES, SPY and Cash S&P 500 is attached. For intraday, there is no reported cash volume.

We can see on the daily time frame, volume correlation of the ES and SPY to Cash was much higher in the past than now. This adds evidence that reported volume for Cash is suspect.

On the intraday (over the last year), we see on the 30 minute, correlation between the ES and SPY was high (.89), while on the 5 minute it was very low (0.25). The latter is not surprising because the average daily SPY volume is about 100 x higher, so differences will be magnified on very short time frames.

All I can tell you is what works for me on the very short intraday time frames. Market Profile scales to any time frame, but is geared more toward showing supply and demand areas, not indicating likely directional movements. It's possible some simple form of volume analysis can still provide an edge, such as OBV, but I suspect it is materially less so than in years past.

[adam ali]

Thanks, Bob.