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Algo Futures Market Insights - Weekly Newsletter - Issue 01 - Saturday, October 5th, 2013

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21st Century Tape Reading - Lesson 01 …

21st Century Tape Reading - Lesson 01

Why Do Prices Go Up & Down?

When I speak with active traders about the effects of High Frequency Trading Bots in the markets, invariably I see flashes of recognition in their eyes and they say, “Of course, I see it happen all the time!”
Also, invariably, their current software setup does not possess the functionality to manage and interpret the type of market activity that is created by the presence

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  • 1. Analysis Prepared By: www.FollowTheBots.com Algorithms Powered By: www.sceeto.com 21ST CENTURY TAPE READING - LESSON 01 ......................................................1 TO WHAT IS THE HIDDEN FORCE BEHIND PRICE MOVEMENT?............................1 TRADE OPPORTUNITY OF THE WEEK................1 MARKET STRUCTURE.......................................2 MARKET DEVELOPMENT..................................5 MARKET FUNDAMENTALS...............................7 MONDAY’S TRADING OPPORTUNITIES..............9 DAILY MORNING BRIEFINGS..........................13 DAILY OPENING RANGE MARKET COMMENTARIES............................................16 DAILY INTRA-DAY MARKET COMMENTARIES............................................17 EUROPEAN MARKETS....................................18 ASIAN MARKETS............................................20 DAILY MARKET RECAPS.................................23 INSIDE THIS ISSUE When I speak with active traders about the effects of High Frequency Trading Bots in the markets, invariably I see flashes of recognition in their eyes and they say, “Of course, I see it happen all the time!” Also, invariably, their current software setup does not possess the functionality to manage and interpret the type of market activity that is created by the presence of High Frequency Trading Bots. As noted in Sunday’s Market Structure commentary, the computational finance model developed by Follow the Bots indicates that trade opportunities are dictated by the market “state” (ie - Consolidation. Direction). The price discovery mechanism plays a major role in all “states” of market development. Price discovery is the process by which financial markets determine the price Read More Turn on CNBC and you will find an inexhaustible supply of Talking Heads explaining why price did what it did today and what, they believe, price will do in the future. How can these pundits be so sure? One says price will go up because of x, y and z, while the other half of the split-screen says that price will go down because of a, b and c. Either or neither analyses may come true….Price may go up then go down and then go sideways. The question then to ask is, “Do you have the resources to track, back-test and validate all of this expert advice”? Transaction Level Analysis, TLA, which you can think of as “21 Century Tape Reading”, springs out from the notion that changes in price, in the short-term, particularly in the electronic futures markets, are determined largely by the supply and demand created by order flow. As greater than 50% of all trades are generated by automated Trading Bots, Read More 21st Century Tape Reading - Lesson 01 Why Do Prices Go Up & Down? Trade Opportunity of the Week To What is the hidden force behind price movement? SATURDAY, OCTOBER 5th , 2013 Algo FuturesSTRATEGIES FOR TRADING IN HIGH FREQUENCY MARKETS STRATEGIES FOR TRADING IN HIGH FREQUENCY MARKETS FOR PROFESSIONAL TRADER USE ONLY WEEKLY NEWSLETTER Market Insights .Electronic footprints left from Smart Money & High Frequency Trading Bots are readable and are quantifiable. Algorithmically generated buying andsellingwillfrequentlydetermine the path of least resistance. This newsletter is focused on continually demonstrating that:
  • 2. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 20132 Market InsightsMarket Insights Coming into Monday’s session: S&P futures traded up to the multiyear high at 1727 on September 19th. On Friday, September 20th, the S&P broke down below the minor support level at 1712 and sold off into the prior FOMC trading range pulling back to 1701. During Sunday’s (09-22-13) Globex session, the S&P retraced up to 1707, before selling down to a new low at 1689. September 24th, price auctioned up to 1701 before pulling back to 1687, at or near the September 17 FOMC session low. The exponential decline caused on Wednesday (09-25-13) after S&P futures sold down to 1684, the upper edge of the three day consolidation range that started on September 11th. During the subsequent minor intraday rallies, buying interest waned as S&P futures retraced between 1696 and 1698. On Friday (09-27-13), S&P futures sold off below Thursday’s overnight Globex high at 1696. By Friday’s open, price had pulled back to what had been prior support at 1686. During the week, the “best” long trade location had been between1688-1484. At Friday’s open, S&P futures broke down below what had been minor support and traded down to 1680. Following the selloff to 1680, S&P futures retraced back to 1686-1687. Late-in-the-day, there was a minor pullback to 1682, but price auctioned back to 1686 into the close. Follow the bots, employs the principles of computational finance, a branch of applied computer science that deals with problems of practical interest in finance, i.e. the market “state”. In the general, the term market “state” refers to whether or not a market is moving directionally (vertically higher or lower) or moving horizontally (consolidating within a given range). Follow-the bots uses a Gaussian Mixture Model to analyze the market “state”. The Gaussian mixture model provides a method of studying the market data and algorithms currently used in finance and the mathematics of computerized programs that influence price direction. Two major areas of focus are the accurate computation of “direction” of a financial securities and the modeling of micro intraday stochastic price series. The output of the Gaussian mixture model and the micro intraday price series analysis are described using Bayesian logic. Bayesian logic is based on probability. Bayesian logic acknowledges that there exists a degree of uncertainty and financial data. Thus, a financial forecast can be “best” (most accurately) using conditional: “IF”, “THAN” statements. While it has become fashionable in the trading industry to market courses and trading systems to novice beginners, the goal of Follow the Bots is to present a detail analysis of the markets condition (state) to assist Traders in developing a comprehensive understanding of market development. Friday’s session, provides an interesting case study. At the open of Friday session, we commented in our daily market briefing that S&P futures were likely to break down below their earlier in the week low (1684). Indeed, S&P futures traded below the prior support and sold off into the previous three day trading, which began on September 11th. We also noted that, earlier in the week the “best” long trade has been between 1684- 1688. Therefore, we expressed the view (Bayesian logic) that the retracement back at or near the prior low (1686-1688), provided the opportunity for previous buyers to exit their long positions. The rationale behind the market development observed on Friday was telling, inasmuch as there was no retracement to the earlier low at 1680. Indeed, having given the appearance that the low was in, price traded primarily between 1684 and 1686. What was the purpose of making a lower low and then not selling off, but instead spending the entire day trading at what had been support? The answer to the question, while it could have only been inferred at the time, it is apparent at the open of Sunday’s Globex session, where in S&P futures gapped below Friday’s close and sold down to 1672. Therein lies the rub; the conditional uncertainty of the Bayesian inference. In the event, the government was to agree by extending the debt ceiling and resolving the US budget problems, undoubtedly S&P futures would have “gapped” higher at the open of Sunday’s Globex session. In light of the failure on the part of the government to resolve the US budget problems, S&P futures opened Sunday’s Globex session, the low Friday’s close and traded down to the next support level at 1671. It should be noted, that the Gaussian mixture model consistently indicates that opportunities and financial markets occur at the edges of the trading ranges. Lows are deemed opportunities to get long: buy the pullback. Highs are deemed opportunities to get short: sell the retracement. Friday’s Market Structure Market Structure
  • 3. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 2013 3 Market InsightsMarket Insights Coming into Tuesday’s session: S&P futures have auction up 14 points above Monday’s low. Monday’s high equals low developed during Friday session. However, very little volume traded at Friday’s low. The bulk of the trade activity is between 1682 and 1684. Hence, shorts at Friday’s low have not seen fit to cover their positions. Should price auction above 1682, the likelihood is short will cover. S&P futures will fill the gap at Friday’s close and potentially auction above Friday’s high. A rally above 1682 will be accompanied by initiated buying (HFT buy surge). To the extent a retrace to Monday’s high and or Friday’s low as accompanied by a buy programs waning, resistance will continue to hold. While S&P futures found minor support at Monday’s low, the political events that led to Sunday’s breakdown yet to be resolved. Therefore, there is the possibility of a retest of Monday’s low and a lower low. The next support level is located at the September 10th low at 1662-1660. A break-down below Monday’s low will be accompanied by initiated selling (HFT sell surge). To the extent that during a subsequent pullback to Monday’s lows order flow events indicate sell programs waning, support is likely to hold. In the event S&P futures breached support at Monday’s low and auctioned down to 1662, if price discovery find support at the September 10th low (16620-1660), the order flow events will indicate sell programs waning. Coming into Wednesday’s session: The Major Resistance reference points remain at 1705 – 1709. The up-side maximum likelihood expectation price level is located at 1713-1715. Wednesday’s extreme price excursion level is dependent upon tomorrow’s release by the Federal Reserve’s forward guidance on monetary policy. In the event, the Feds extraordinary unconventional accommodative policy is unchanged, the extreme price excursion price level is located at 1720-1730. Minor support is located at Monday’s low 1688 Monday’s Market Structure Tuesday’s Market Structure Frequent listeners of our daily market recap, will note that prior to S&P futures making a new multiyear high, we had noted that the historic data consistently indicates that the S&P 500 as well as the DOW30 and the NASDAQ 100 have sold off from every multiyear high. Indeed there is no example, where in financial market development does not result in price selling off from the high. Corrections in bull markets are common occurrences. Hence, there is no evidence supporting that one can be profitable (outperforming the index) by buying the high. Quoting the research of Richard Schabacker; in his classic book technical analysis and stock market profits first published in 1930; buying the high is where the uninformed traders (retail) enter the market. Buying the pull-back is where the informed traders (wholesale) enter the market. With regards, the Wall Street analyst hype, the “this time it will be different”, William Hamilton wrote in his treatise titled stock market barometer, “trees don’t grow in the sky and markets don’t go up forever”. Therefore we are confident, that the principles of computational finance will prove beneficial to our members. The Current Reference Points: key support and resistance levels for the developing trading range; (as of) September 3rd through September 29th, 2013. Friday’s close 1681; corresponds with last weeks high 1684. Near term support is located at the September 9th low (1668- 1672); with fractal lows at 1672 (09-11 low) and 1673 (09-13 low).
  • 4. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 20134 Market InsightsMarket Insights Coming into Friday’s session: We are now seen the S&P auctioned back down to Monday’s low (1666) and test support at the September 10 low (1662). We have also observed that buyers during Tuesday and Wednesday session (best location) at 1676-1673, had the opportunity today to liquidate their long positions. These September 10th low (1662) is now the key support level. In the event, price pulls back a second time, at or near 1662- 1663 the rationale for buying the pullback remains in place. The lack of buying interest observed this afternoon, above the midpoint of the developing trading range (1676) suggests buying above today’s low at the minor intraday pullback level (1668) is potentially higher risk. The conditional factors, order flow events indicating sell programs waning, should be paid close attention to. These events were present during the afternoon pullback resulting in S&P futures retracing back to the midpoint (1676). However, the weakness observed late in the day is cause for concern. Similarly, sellers at the midpoint of the developing trading range (1676), while currently in profit, should not be overly committed, as the market is prone to short covering, as observed during Monday’s session. Wednesday’s Market Structure Thursday’s Market Structure Coming into Thursday’s session: Coming into Thursday’s session the trade opportunities can be considered are as follows: 1.) Minor resistance is now located at 1687. This is considered a weak reference point and resistance could easily be penetrated as it was yesterday and S&P futures could potentially auction up to the overnight high at 1692, and or, the fractal highs which developed last week. Therefore, sellers at today’s high are advised to be cautious. 2.) Support is located at today’s low. However, should the S&P pull back and retest Wednesday’s low, the obvious implication is that price would have sold down from today’s close (1684). Therefore, selling pressure would have returned. While support has held at or near 1675-1673 during the past two sessions, a third pullback may not result in the S&P auctioning back to the overnight high. In the event of a third pullback to 1673 and the potential for a lower low (1671) and a retest of Monday’s low, increases. While S&P futures held support Monday at 1666, the known support level beneath Monday’s low, the lower edge of the demand cluster at 1662. Once again, the conditional outcome: i.e. support holding at 1673 is contingent upon sell programs waning during the third pullback, and the lack of initiated selling (high frequency sell surge) during the price discovery phase. In the event support is breached, the trade consideration is to sell the break-down. Selling the breakdown is easier said than done, as break-the down trade requires strong momentum. An alternative strategy to selling the breakdown is to allow price to breach support and sell the retracement. A retest of Monday’s low (1666), and or a sell-off to 1662, would provide a long opportunity.
  • 5. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 2013 5 Market InsightsMarket Insights Sunday, S&P futures breached support at the weekly low (1680) and sold-down to 1666 at Monday’s open. The sell-off triggered a buying opportunity. Informed market participants took advantage of the decline. S&P futures rallied into Monday’s close ending the session at 1676. Overnight, the recovery rally continued. S&P futures traded up to the lower edge of the minor supply cluster at 1684-1686, during the overnight session. At Tuesday’s open, S&P futures pulled back to 1675, the mid- point of the developing trading range. In light of the overnight rally up to 1684, the sell-off down to Monday’s close (1676) was met with a buy response. The order flow events confirmed the computerized trading program ceased executing to the sell-side. Responding buying was followed by initiated buying (HFT Buy Surge). The price path reversed direction and the S&P futures auctioned up to fill the “gap” at Friday’s close 1686. The buying interest continued until the European markets close, with S&P futures trading up to 1690. The rally to 1690 was a long drawn out affair. Trade activity diminished. The rate of trade decreased, as did the number of trades and the volume at trade. The order flow event indicated that the computerized buying programs decreased (BPW). After 3 hours of no meaningful participation, S&P futures sold below the high (1690) and pulled back to 1682. During the pull-back to 1682, the selling pressure ended. The electronic trading bots ceased executing on the sell-side, buying interest (demand) held support and initiated buying auctioned price back to the high (1690) into Tuesday’s close. The purpose behind describing the intraday market developments is not to reiterate what occurred during the session. The purpose is to illustrate how the intraday market developments fall into the pattern of discernible market structure. By the faculty of vision or intellect the astute observer can draw inferences based upon the reaction of buyers and sellers at key price levels. Mathematically modeling the market development is a method used to describe a dynamic system; i.e. price series. A mathematical model helps to explain a system and to study the effects of different components, and to make predictions about behavior. Mathematical models are proposed of variables. Variables represent the parameters of the system. Charting applications provide visual graphics of the data model. A graphical model is a probabilistic model for which a graph (chart) denotes the conditional structure between variables. Graphical models are commonly used in probability theory, statistics—particularly Bayesian statistics—and machine learning. On Friday, the Major U.S. Indexes traded modestly lower. The Dow fell half a percent, the tech-heavy NASDAQ declined 0.2% and the S&P 500 declined 0.4 percent. However, at the open of Sunday’s Globex session U.S. futures “gapped” below Friday’s close. S&P futures breached support at weekly low (1680) and sold down to the September 11th low at 1671, before retracing back to 1676. The selling pressure continued at Monday’s open. S&P futures re-tested the overnight low (1671) and made a lower low; trading down 1666: 51 points (3.5%) below it multiyear high at 1727. Following the break-down below the overnight low (09-11-13 low) at 1671 and the subsequent sell-off to 1666, S&P futures auctioned act into the overnight trading range: auctioning up to 1674. There was a minor pull-back to 1670, after which the price direction reversed and S&P futures traded above the overnight high (1676) and auctioned up to 1681, at or near Friday’s low. After the close of the European market, S&P futures traded in a relatively narrow trading range (1679- 1675) until the final hour of Monday’s trading session. Price sold below the minor support at 1675 and traded down to 1671. Following the pull-back to 1671, initiated buying entered the order flow and S&P futures auctioned back up through the trading range, closing Monday’s session at 1678. Tuesday’s Market Development Market Development Monday’s Market Development
  • 6. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 20136 Market InsightsMarket Insights In the previous session, S&P futures held support at 1675 and rallied up to 1690. Overnight, the rally extended - modestly trading up to 1692. During the previous week, a series of fractal highs developed between 1698 and 1696. S&P futures sold off from the overnight high and initially pulled back at or near Tuesday’s low, selling down initially to 1676. In addition to the responsive selling at the overnight high (1692), during the sell-off, initiated selling was present in the trading range at 1686 and 1682. Prior to the open, S&P futures traded up to 1682, encountered selling pressure and auctioned back to retest Tuesday’s low (1675 ). During the price discovery phase, price probed two points below Tuesday’s low and traded down to 1673 before the computerized trading programs ceased executing to the sell side. After encountering support at 1673, the computerized programs initiated trade to the buy side. S&P futures auctioned up to 1682, paused and down ticked to 1680 and then traded up to 1687. Following the retracement to 1687, the computerized trading programs ceased executing to the buy side in the S&P sold down to 1681. The pullback to 1681 elicited a buy reaction and S&P futures auctioned back to the high at 1687, before closing the session at 1684. The above description of Wednesday’s session illustrates the benefits of understanding the market structure. In Bayesian logic the previous distribution (trading range) contains the current knowledge of where the market participants express their willingness to buy and sell. The acceptance of this plays a key role in understanding the potential outcome of future developments. The obvious example in today’s session was the pullback to the previous day’s low. The sell-off from the overnight high (1692) was equal to the distance of a daily range. The potential outcome was as follows: 1.) The market would encounter buying interest as it had during the previous session and auction back to, at or near, the previous day’s high. 2.) The market would pause at the low and selling pressure would increase in price would continue lower and auctioned down to Monday’s low (1666). To assist in discerning which outcome would be the most likely, the micro order flow events provide the required “insight” in real-time. IF; S&P futures were going to sell below the prior days low, initiated selling (high frequency sell surges) would have been evident during the price discovery phase. The lack of initiated selling below the price level wherein “stop loss orders” are typically located (2 points below the previous low) indicate that probability favors price will auction off the low and trade back into the prior trading range days range. This conditional outcome, in the context of the selling pressure that developed in the overnight session was dependent upon previous sellers at 1682 and 1686 covering their short positions. The second conditional requirement would be that there was renewed buying interest (high frequency buy surge) during the retracement. In the event, the nuances of the above statement are unclear; we recommend that you replay the market developments that occurred this morning when S&P futures pulled back to 1673. After pulling back to retest support at 1675-1673- in the previous session and subsequently trading up to 1687 into the close, S&P futures sold down to 1673 overnight. The astute market observer will note that last week the “best” long location (support) was between 1684 and 1686. The sell-off during the overnight session recovered prior to Thursday’s open. S&P futures retraced to back to 1685. However, at the open of Thursday session the selling pressure that had dominated overnight returned. S&P futures traded back to Wednesday’s low (1673), paused and then continued to sell lower. The sell side trade execution continued until S&P futures had Wednesday’s Market Development Thursday’s Market Development
  • 7. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 2013 7 Market InsightsMarket Insights The Major US Indexes declined for the week on concern the U.S. government is headed for a partial shutdown amid a political stalemate over the budget. The dollar weakened against the yen while crude oil and copper futures declined and gold rallied. According to Moody’s Analytics a failure to approve funding to keep the government open and to raise the debt ceiling would have a destabilizing effect on the economy. Closing the government would cut fourth-quarter economic growth by as much as 1.4 percentage points depending on its length, as government workers are furloughed. The possibly that the federal government could shut down next week barring a last-minute agreement remains high. Unless Democrats and Republicans compromise on a bill to raise the legal limit on how much the government can borrow, the U.S. could default on part of its debt. The Treasury could effectively run out of money in late October. The U.S. Treasury will continue selling debt in the event of a government shutdown next week, while economic reports from the Commerce Department will be uspended and the Bureau of Labor Statistics will stop operations. The Treasury said yesterday that it would keep paying interest on the government’s debt and maintain collections and daily cash management. It would also keep up disbursements of Social Security and other federal benefits, as well as “critical government-wide accounting activities.” U.S. indexes went into “risk off” mode over the weekend, primarily as a result of stalemate over the federal budget increased the likelihood of a government shutdown. The dollar fell against the majority of its most-traded peers. However, three economic reports showed business activity expanded more than forecast, reaching a four-month high. The MNI Chicago Report business barometer rose to 55.7 in September from 53 the prior month. The Dallas Fed’s manufacturing gauge jumped to 12.8. The Institute for Supply Management’s Milwaukee index rose to 55, versus the August 48.2 reading. The Federal Reserve Bank of New York’s general economic index showed manufacturing expanded in September, though the measure eased to 6.3 from 8.2 last month. Factory activity gauged by the Federal Reserve Bank of Philadelphia’s index expanded at the fastest pace since March 2011. Monday’s Market Fundamentals Tuesday’s Market Fundamentals Fed Refrains from “tapering” its extraordinary unconventional accommodative monetary policy: otherwise known as quantitative easing (QE). In today’s FOMC announcement, the Federal Reserve, said it needs to see more signs of lasting improvement in the economy. Conditions in the job market today are still far from what all of us would like to see,” Chairman Ben S. Bernanke said at a press Wednesday’s Market Fundamentals Market Fundamentals of traded down to Monday’s low (1666) and probed for stops down at 1663. Prior support going back to September 10th was located at 1662. Following the sell-off, S&P futures recovered during the mid-day, and retraced its decline auctioning up to 1677. It should be noted that with the exception of Monday’s low (1666), during Tuesday and Wednesday session S&P futures had found support at or near 1678-1675. During the retracement order flow events indicated buying interest waned. Price made a modest pullback to 1668, before retesting the high at 1676. The retracement back to what had been previously support encountered with a lack of buying interest. However, the price action stalled at the high. The high frequency market maker algorithmic pattern dominated the remainder of the session. The trade execution sequence was limited. Price traded between 1676 and 1674, until the final 15 minutes when S&P futures sold off into the close.
  • 8. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 20138 Market InsightsMarket Insights U.S. Stocks Fall as Investors Assess Effects of Impasse U.S. stock indexes decline primarily after price discovery failed to attract sufficient buying interest to continue the rally above last week’s resistance levels. While the financial media attributed the lack of interest to the impasse over federal spending that shut down the government a second day. However, after trading at or near last week’s resistance levels the astute observer will note there was equally no interest above those price levels prior to government shutdown. From a technical buying interest, selling pressure perspective it can be said that, informed buyer at Monday’s low, sold their positions to the uninformed trend chaser during yesterday session. However, the government shutdown continues to dominant the NEWS cycle. The White House met with Bank leaders to discuss the economic effects of the budget impasse. Goldman Sachs, CEO said lawmakers are risking the recovery if they don’t raise the federal debt ceiling. The U.S. dollar index declined for the third weekly against the yen. The greenback traded near an eight-month low versus the euro, on speculation the FED would tend to be more cautious about reducing the monthly pace of bond purchases. The government shutdown has delayed three economic data releases this week. The U.S. Department of Labor won’t issue the September payrolls report tomorrow as initially scheduled because of the partial government shutdown now in its third day. Thus, the Fed “tapering is going to be pushed back further and that’s bad for the dollar. The Treasury Secretary has said the U.S. government has begun final extraordinary measures to avoid breaching its debt limit that will be exhausted no later than Oct. 17. The more serious concerns are the issue of the debt ceiling. House Republican leaders plan to bring up a measure to raise the debt limit as soon as next week as part of a new attempt to force Obama to negotiate on the affordable healthcare act. Trade well my friends Thursday’s Market Fundamentals Froday’s Market Fundamentals conference today in Washington after a two-day meeting of the Federal Open Market Committee. The committee has concern that rapid tightening of financial conditions in recent months would have the effect of slowing growth. Bernanke and his policy making colleagues held back from paring record accommodation as rising borrowing costs show signs of slowing the four-year expansion. Treasury yields have jumped since May, when Bernanke first outlined a possible timetable for a reduction in the asset purchases that have swelled the Fed’s balance sheet to $3.66 trillion. Bernanke said a decision on tapering asset purchases depends on economic data, and there is no set timetable. Chairman Bernanke emphasized there is no fixed calendar schedule. If the economic data confirms our basic “outlook for growth” and the labor market, “then we could begin later this year.” Bernanke added in his press conference that the first interest- rate increase may not come until the jobless rate is “considerably below” 6.5 percent. The Fed chairman has orchestrated the most aggressive easing in the Fed’s 100-year history, pumping up the balance sheet from $869 billion in August 2007 and holding the main interest rate close to zero since December 2008.
  • 9. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 2013 9 Market InsightsMarket Insights The Gaussian mixture model indicates that trade opportunities are dictated by the market “state”. When the market is trending, i.e. the price series is moving directionally, the trade opportunities are in the direction of the trend. When the market is consolidating: the price series is trading within a range, the trade opportunities are to sell the high of the range and buy the low of the range. When the market breaches support, the trade opportunity is to sell the break-down and or sell the retracement at what had been prior support. When a market penetrates resistance, the trade opportunity is to buy the break-out and or by the retracement at what had been prior resistance. With the exception of when price is auctioning above a prior multiyear high, a market is auctioning within a continuous distribution. Therefore, when a market breaches support it will find a stopping point at or near the location of the next major support level. In those circumstances, when price has breached prior support and has pullback the distance of an average daily range below its previous support level, the micro order flow events provide the astute observer with “insight” into the computerized trading algorithms that dominate the market. During pullbacks to previous levels of support, the order flow events will indicate “when” the computerized sell programs ceased executing to the sell-side. This is referred to as “sell programs waning” (SPW). During a retracement to previous resistance, the order flow events will indicate “when” the computerized buy programs ceased executing to the buy-side. This is referred to as “buy programs waning” (BPW). The term “waning” refers to gradually decrease in size, intensity or degree: to decline; and or to the approaching end. The act or process of gradually declining or diminishing in the order flow to the buy or sell side; during pullbacks and retracements has a price series provide the traders with the decission making information to analyze the potential trade opportunity. During a time or phase of gradual decrease, the Gaussian digital filters, which are part of the Follow the Bots quantitative model, will provide additional information as to the change in price direction. We encourage our members, the review the patterns of market structure that are posted in the chart gallery which a company our daily commentary. As noted in Sunday’s Market Structure commentary, the computational finance model (Gaussian mixture) developed by Follow the Bots model indicates that trade opportunities are dictated by the market “state”: consolidation, direction. The price discovery mechanism plays a major role in all “states” of market development. Price discovery is the process by which financial markets determine the price of assets through the interactions of buyers and sellers. In dynamic markets, i.e. major indices price discovery takes place continuously, a price auction through the trading range. Price will sometimes trade above the daily average and sometimes below the daily average. Price will auction within a defended trading range (consolidation) and or break-down below support or break- out above resistance. A market will trend (move directional) “pause” and consolidate and or reverse direction. Distance between prior highs and lows, as well as range extension below support or above resistance provide important insights as to the “state” the market is in and what is likely to occur next. To illustrate the concept of price discovery consider the market developments coming into Monday’s session. On Friday, S&P futures extended the trading range modestly below the prior low at 1684, trading down to 1680. Price discovery determined that on Friday there was no “willingness” on the part of market participants to sell below Monday’s Trading Opportunities Monday’s Trading Opportunities Tuesday’s Trading Opportunities
  • 10. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 201310 Market InsightsMarket Insights 1680. Sell programs diminished and price traded back to what had been prior support at 1684-1686. Since the price discovery mechanism is the process by which the interaction between buyers and sellers determine the price of an asset, at every price trends action there is a buyer and a seller. While there was no willingness to sell below 1680 during Friday session, there was indeed willingness to trade between 1684 and 1686. It can be said that half of the market participants were willing to buy between 1684 and 1686 and half were agreeable to sell. At the open of Sunday’s Globex session, “fundamental factors”, i.e. US budget negotiations influenced market sentiment. S&P futures sold below Friday’s close, below the weekly low and traded down to the next support level: i.e. the September 11th low at 1671. At Monday’s open, S&P futures extended the trading range below the September 111th low (1671) selling price down to 1667-1666. However, when price traded back into Sunday’s Globex trading range on, price discovery took on a new form. S&P futures traded back at or near Friday’s low (1681). Once again, it can be said half of the market participants were willing to buy between 1680 and 1677, while the other half was willing to sell. The end result was, when price discovery determined there were no more willing buyers above 1680-1681, S&P futures sold back through the trading range and retested Monday’s low. This is the perpetual nature of the price discovery mechanism. The question arises, how then can a trader determine where to be a buyer or seller? In regards to the above question, the Gaussian mixture model indicates the trade opportunity is always to be the buyer at the support (low) and the seller at the resistance (high). In the case of a directional market (price series) 1.) To be a buyer on a break-out above previous resistance and or a buyer on the initial pullback following a break-out. 2.) To be a seller on a break-down below previous support or a seller on the initial retracement following a break-down. Analysis of the historical market development in the S&P 500, the DOW30 and the NASDAQ 100 going back to 1995 indicates the above stated trading strategy outperforms the buy and hold or the modern portfolio method. In the context of Monday’s session, the Bayesian logic explanation is as follows; 1.) Price breached support at Friday’s low; therefore expect resistance following the initial retracement. 2.) Price auctioned down to the next support level (1671) and extended the range modestly lower (1667). Following the range extension, price auctioned back to the prior support: therefore expect support during the initial pullback. In an effort to enhance the macro directional model (Gaussian mixture), the order flow events provide the micro insights, i.e. buy programs waning (diminishing) at the high, sell programs waning (diminishing) at the low. The combination of the macro and micro algorithms developed by follow the bots are intended to model the near term “direction” of a financial securities and to accurately compute the micro order flow event of intraday stochastic price series. We are confident, that the principles of computational finance, described above, will prove beneficial to our members. The goal of Follow the Bots is to present a detail analysis of the markets condition (state) to assist Traders in developing a comprehensive understanding of market development. Wednesday’s Trading Opportunities In today’s chart gallery I have included three charts which illustrate Tuesday’s intraday market development. The charts include the numbered references to the key variables that developed during Tuesday’s session. #1.) The pullback to Monday’s close (1676). In the context of the overnight rally to 1684, The conditional outcome to the pullback to Monday’s close is as follows: A.) Price discovery will find support and the S&P will auction back to retest the overnight high (1684) and fill the gap at Friday’s close. B.) Price discovery will fail to find support and the S&P will auction back into Monday’s trading range and retest support at Monday’s low. The conditional variable (unknown) is the reaction on the part of the market participants during the price discovery phase. “IF”, selling pressure diminishes (SPW) and buyers initiate trade (HFT-BS) the likelihood is price will auction back and fill the gap at Friday’s close. “IF”, selling pressure increases (HFT-SS), the order flow sequence indicated by the slope of the Gaussian digital filters,
  • 11. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 2013 11 Market InsightsMarket Insights Thursday’s Trade Opportunities Trading strategies are dictated by the market “state”. The Gaussian mixture is based on a two “state” model of market development. The two states are: direction and consolidation. These states occur in multiple time frames and or within a Gaussian mixture distribution. The term distribution is synonymous with the trading range. The trading range is a continuous distribution from the inception of the data set (IPO of the Index) up until the present. Price is the variable. By definition price is always located within the trading range (probability distribution). The location of price indicates the bias with in the distribution. If price is located at the midpoint (median) of the trading range (probability distribution) the market is neutral. If price is above the median and within the upper quarter of the trading range the bias is positive If price is above the upper quarter in the 90 percentile and or at the maximum value the bias is extremely positive. The bias is the measurement of price change with in the trading range (probability distribution). The price change is a result of trade activity. More trades on the uptick, higher ratio between upticks & downticks results in price auctioning higher. More trades on the up-tick (at the ask) is accepted as being representative of buying interest More trades on the downtick higher ratio between downticks & upticks results in price auctioning lower. More trades on the downtick (at the bid) are accepted as being representative of selling pressure Thus, buying interest equals demand and selling pressure equals supply. The strength or bias within the supply demand curve is point lower the likelihood is price will auction back to retest support at Monday’s low. Additional observation: the slope of the polynomial regression channel is ascending. #2.) The conditional outcome to “gap” fill at Friday’s close A.) “IF”, the price is going to sell back into the trading range, buying interest must diminish (buy programs waning), the price series must reverse, and initiated selling (high frequency sell surge) must be detected in the order flow. B.) “IF”: price is going to continue higher, initiated buying must be present in the execution sequence (high frequency buy surge), and the slope of the digital filters which accurately computes the execution sequence (up-tick/down-tick count) will continue ascending. In this manner the market structure, the order flow events and key reference points combine to make discernible the most likely, least likely outcome of the auction process. It is the knowledge that price series data contains a degree of uncertainty. The uncertainty cannot be removed, as it reflects the irrational (fears and greed) behavior of the market participants. Acknowledging the uncertainty cannot be removed; the astute trader accepts the “risk” and manages the position. #4.) During the rally (up move) to fill the gap at Friday’s close, which resulted in the minor range extension up to 1690, as price auctioned above the opening range low (1675), a minor reference point developed. As the price series traded up to the high and exponential function was present in the price series. In mathematics, the exponential function is used to describe a relationship in which a constant change in the independent variable gives the same proportional change (i.e. percentage increase or decrease) in the dependent variable. I first read about exponential function of the price series in the research of Welles Wilder. When a directional “turning point” develops the price level associated with the change in direction is referred to as the inflection point. Depending upon the extent of the exponential function, i.e. the distance price moves above or below the inflection point (turning point), pullbacks and retracements to these price levels are worthy of consideration. In the case, where the exponential rally exceeds a prior high, there is the potential for the market to encounter support on the pullback. In the case of #4, during the pullback, the inflection point (1682) was also aligned with the lower band of the ascending polynomial regression channel. The conditional outcome to the pullback A.) “IF”, during the pullback to 1682 the order flow events indicate the computerized trading programs ceased executing to the sell side (SPW), the slope of the digital filters will turn up and initiated buying will enter the order flow (high frequency buy surge): likelihood is price will auction back and retest the high at the upper edge of the polynomial regression channel. We encourage our members to review the charts posted in today’s gallery.
  • 12. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 201312 Market InsightsMarket Insights measured by the location of price within a probability distribution (trading range). Currently, S&P futures have broken out above their prior multiyear high (1705) and have extended the trading range up to a new multiyear high at 1727: 22 points (1.29%). Based upon the above stated criteria the bias is extremely positive. The extension of the trading range above the prior multiyear high is estimated with the Markov chain sequence in relation to the close. Whereas techniques like Fibonacci range extension is the mathematics of the Golden mean, the hidden Markov algorithm uses statistical measurements based on cluster analysis. Previous examples, as in the case of a breakout above a prior multiyear high are statistically analyzed to determine distances referred to as the maximum likelihood expectation price level and the extreme price excursion level. The current distance above the previous high equals a hidden Markov chain sequence: (17 to 23 points). Price has pulled back 14 points, to 1713; modestly below the midpoint of the developing trading range. This represents an “initial pull-back”. The previous market structure (prior distribution) provides the information as to where in buying interest (demand) and selling pressure (supply) is located in relationship to the current location of price within the trading range. In the context of Wednesday’s break out above the prior multiyear high, the low the current location of price at 1717; buying interest was present at 1713-1711 during the previous rally up to a new multiyear high at 1723. Below 1713-1711, market structure indicates buying interest was present when the S&P traded above the prior multiyear high at 1705. The significance of the 1705 price level is that it was the prior multiyear high and therefore the breakout point. The breakout point refers to that price above which a transition in the market state occurs. Price located at the previous high (maximum value of the previous distribution) a strong positive bias and the breakout represents an extreme positive bias. Therefore, trading strategy of buying the pullback at or near the price levels that exhibited demand: buying interest sufficient in quantity to halt the downward movement in price and result in a reversal of the price path back in the direction that came. When price auctions back to retest the new multiyear high, during the initial retest probability favors the price direction will continue higher. During today’s session, as price gradually sold down to 1713, the market structure currently indicates a lack of buying interest at the high (1727). During today’s open there was no buying interest above 1723, Wednesday’s high. The selling pressure (more down-ticks then up-ticks, war volume on the down-ticks) occurred between 1719 and 1716; at or near Wednesday’s close. Therefore, the minor supply cluster is the immediate obstacle to price auctioning back to retest the multiyear high 1727. At the close of today’s session, S&P futures auctioned back to 1618. Within the context of Thursday’s trading range (distribution): maximum value 1727, minimum value 1713: the midpoint is 1720. Interpreting the outcome of the retracement back to Wednesday’s close (1717) the positive and negative outcomes are described as follows: Price auctions up to 1717, there is insufficient buying interest (high frequency buy surge). Buyers (buy side computer program trades) are unwilling to absorb the supply above and selling pressure auctions price back to the low. The down tick sequence would represent the second pull-back to 1713-1711. Probability favors a lower low, continuation of the directional lower. The expected outcome of the second pullback would be an increased likelihood that support (1713 – 1711) would be breached. The outcome would precipitate the initial pull-back the breakout point at or near 1705, the prior multiyear high. The expectation of a pullback to 1705 would be that price will auctionbacktothemidpointofthecurrenttradingrange(1715- 1717). In above manner each of the component indicators in the market structure is categorized by their significance with in the supply demand curve (in flexion points). Inferences are then drawn using Bayesian logic. The micro developments during pullbacks and retracements are indicated by the order flow sequences of micro price structure. The order flow algorithm events that surface during the price discovery (pullback phase) along with the digital filters will aid in interpreting the rotational shift in the high frequency computerized trading programs. Therefore, the immediate information regarding how price arrived at its current location in which “state” is likely to trade (auction) is found in the market structure. On the sell side, micro resistance on the retracement to 1718 – 1720 is expected. A positive outcome would be the price sequence “pauses”. The “pause” is followed by buying in the direction of the current high (1727). The negative outcome would be the price sequence pauses, buying interest waned and high frequency computerized sell programs (HFT sell surge) auctioned price back to today’s low 1713. The current market development calls for buying the pullback at 1713-1711. The risk potential breakdown below 1713- 1711 and pullback to at or near 1705, followed by a retracement back to 1713-1711. The positive outcome would be following the retracement to 1713-1711, price “pauses” and trades back up into the midpoint of the trading range and retraces up to 1718-1720.
  • 13. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 2013 13 Market InsightsMarket Insights Good Morning Traders, Global markets are trading lower on Monday, as investor sentiment reflects a “risk off” attitude, as the U.S. Government faces a historic shutdown. On Sunday, the U.S. House of Representatives voted 231- 192 to delay many provisions of President Barack Obama’s healthcare law for a year and added it to the funding bill. If the Democrat-controlled Senate, which will convene this afternoon, rejects the bill, the government may have to stop some functions from October 1. The Euro Stoxx 50 index of Eurozone bluechip stocks is down1.15%. The Stoxx Europe 50 index, which includes some major U.K. companies, is down 0.57 percent. The German DAX has declined 1% and the French CAC 40 is down 1.2%. The UK’s FTSE 100 is declining 0.8% while Switzerland’s SMI is dropping 0.6%. Asian stocks also closed lower on Monday Japan’s Nikkei index declined 2%to end at its lowest level in about two weeks The broader Topix index fell 1.9%. China’s Shanghai Composite held on to its recent gains, to close 0.7% higher, to close at 2,175. Hong Kong’s Hang Seng dropped 1.5%. The benchmark S&P/ASX 200 fell 88 points or 1.7%, to trade at 5,218, with resource and financial stocks leading the decliners. U.S. Markets On Friday, the Major U.S. Indexes traded modestly lower. The Dow fell half a percent, the tech-heavy NASDAQ declined 0.2% and the S&P 500 declined 0.4 percent. However, at the open of Sunday’s Globex session U.S. futures “gapped” below their prior week’s close. S&P futures breached support at Friday’s low (1680) and sold down to the September 11th low at 1671, before retracing back to 1676. The selling pressure is continued, with the S&P trading down to 1669: 58 points (3.3%) below the multiyear high at 1727. The September 10th low at 1662 is the next support level. The 1662 low equals a Hidden Markov chain sequence level relative to Friday’s low at 1680. The extent of the economic damage to the US, if the government defaults on its debt and the impact it would have on the US dollars position as the world’s reserve currency is difficult to estimate. The current political impasse regarding increasing the US debt ceiling is of major concern. While previous debates have proven to be nothing more than political theater, the reoccurrence of the debt ceiling argument is indicative of the US government living beyond its means. The reality is the US can no longer afford to play the role of the world’s policeman, without increasing the burden of debt upon future generations. Trade Consideration In the context of the current breach of support and the subsequent sell-off, the ideal trading strategy is to sell the retracement. In light of the break-down occurring when the US markets were closed, there is the potential for S&P futures to find a temporary stopping point at/or near the 1671-1670 price level. However, Monday’s Markov chain sequence level at 1662 (09-10-13) would provide a stronger support. Coming into Monday’s session, attention should be focused on the micro order flow events associated with the previous known support levels mentioned above, to determine potential long opportunities. More importantly, attention should be focused on selling the retracement. Friday’s retracement to what had been prior support at 1686- 1684 is the location, where the “Informed Traders” liquidated their long positions. Minor resistance at the overnight Globex high (1676) is also a candidate for a short location. However, there is potential for S&P futures to attempt to fill the “gap” and possibly auction up to Friday’s low at 1680-1682. Good Morning Traders, S&P futures traded higher in the overnight session, auctioning up to 1684, the lower edge of Friday’s micro price cluster. The possibility of a government shutdown has become reality, it would appear market participants have concluded the materialization of the risk is unlikely to cause immediate negative impact to the global economy and corporate profits. However, a broader reality is that informed traders that accumulated positions at yesterday’s low (1667-1671) are likely to be willing to sell there acquired positions to the uninformed participants at 1684-1686. S&P futures has not as yet traded above Friday’s close (1686), the best possible long location during the prior week’s session. As we observed during the previous week’s auction, S&P futures consistently sold-off from the 1698-1696 price level. On a positive note, data released yesterday indicated that manufacturing around the country showed notable improvement. October will also begin third-quarter earnings season. US futures are also trading higher due to positive manufacturing activity data for several countries and a strong improvement in Japanese business sentiment. The domestic markets may also Monday Morning Briefing Tuesday Morning Briefing Daily Morning Briefings
  • 14. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 201314 Market InsightsMarket Insights Good Morning Traders, 24 Hour Recap U.S. futures traded lower in the overnight session. In the previous session, the major averages moved to the upside going into the close, ending the day above their previous settlement. The Dow rose 0.4%, the NASDAQ rallied 1.2% percent and the S&P 500 advanced 0.8%. S&P futures continued moving higher in the overnight session and traded up to 1692. S&P futures had previously encountered resistance at 1695 (09-27- 13) and 1698 (09-26-13). Relative to Tuesday’s low (1675), the overnight high equals 17 points. The overnight sell-off was exponential in character. Price “paused” briefly at 1682 before continuing its dissent down to Monday’s low (1675). Initiated selling occurred at 1682 and 1686. Trading Analysis For Today’s Session. A retracement above the overnight low is likely to encounter minor resistance (buy programs waning) at/or near the initiated selling points (1682 & 1686). However, the significant resistance levels are located at the September 26th & 27th highs. Support below Tuesday’s low (1675) is located at 1671 and 1666. We would expect to see S&P futures retrace up off of Tuesday’s low (1675) and depending upon the (conditional) response at the initiated selling price levels, an attempt to continue to move higher: retest the overnight high. Global Markets The European markets are trading lower on Wednesday. The European Central Bank is slated to announce its interest rate today. The Euro Stoxx 50 index of Eurozone bluechip stocks is losing 0.46%. The Stoxx Europe 50 index, which includes some major U.K. companies, is down 0.67%. Asian stock markets traded mostly higher. In commodities November Crude is trading at $101.79 per barrel: ( ) down -$0.25. December gold is trading at $1293.7 a troy ounce: ( ) up + $7.60. Wednesday Morning Briefing stay tuned to the results of separate manufacturing surveys due to be released by Markit and the Institute for Supply Management. The Institute for Supply Management is due to release the results of its national manufacturing survey for September. The consensus estimates call for a reading of 55 compared to 55.7 in August. The Commerce Department will release its construction spending report for August. Construction spending is expected to have risen by 0.4 percent month-over-month in August compared to a 0.6 percent increase in July. The major Asian markets closed on a mixed note. The Chinese and the Hong Kong markets were closed, with the Chinese market due to remain closed until October 7th for Golden Week holidays. Japan’s Nikkei 225 ended up 28.92 points or 0.20% at 14,485. Australia’s All Ordinaries ended 11.40 points or 0.22% lower at 5,206. The results of the official survey by the China Federation of Logistics and Purchasing and the National Bureau of Statistics showed that Chinese manufacturing activity saw a slight acceleration in expansion in September. The results of the Bank of Japan’s quarterly Tankan survey showed that sentiment among large manufacturers in Japan improved in the third quarter. European stocks opened mixed and continue to see mixed sentiment. On the economic front, the results of a survey by the German Federal Statistical Office showed that the number of unemployed people in Germany fell 4.8 percent year-over- year to 108,000 in August. On a monthly basis, the number of unemployed individuals was down 3.6 percent. The unemployment rate remained at 5.2 percent. Overnight Globex Price Levels Resistance is still located at Friday’s close (1686-1684. Minor support is located at Monday’s 1676. Monday’s intraday low at 1671 (September 11 low) Monday’s opening range low at 1666 (Support) The 1676- 1575 price level is the approximate midpoint of the developing trading range. To the extent that buying interest wanes on a retracement to Friday’s close, resistance is likely to hold between 1684 and 1686. Should initiated buying (HFT buy surge) develop during a retracement to Friday’s close, traders should be alerted to the potential for a breakout and a retracement to last week’s highs 1696-1698. In the context of yesterday’s breakdown the possibility of a retracement to the 1696 1698 price level would be a “least likely outcome”. A pullback to 1676 and a potential breakdown below the mid- point, resulting in a sell-off to 1671 and the possible retest of Monday’s low, is the main concern for buyers at the midpoint of the developing trading range. Initiated selling (HFT sell surge) accompanying a pullback to 1675-1676, would indicate long positions at the midpoint of the trading range should not be defended. To the extent that the order flow events continue to indicate sell programs waning, 1675-1676 are likely to be the opening range low during Tuesday’s session.
  • 15. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 2013 15 Market InsightsMarket Insights Good Morning Traders, S&P futures sold below Wednesday’s close in the overnight session, pulling back to re-test support at or near Wednesday’s low at 1674. Support at 1674 held and price traded to 1682, before pulling back to 1677. Thus far, S&P futures have consolidated gains since selling off below last week’s low and traded down to 1666 during Monday’s session. Last week S&P futures failed to attract buying interest above the fractal highs at 1696-1700. The best long (buy) location during last week’s session was at1682. The overnight retracement has stalled at what last week had been support 1682. Thus, the market structure indicates the trade disbursement is lower. Coming into Thursday session: yesterday’s low 1675-1673 is the key over under price level in other words Wednesday’s low is the transition point, below which S&P futures break-down into the lower quartile of the developing trading range. To the extent that a pullback at Thursday’s open continues to hold support at 1673-1675: i.e. sell programs waning during the next pullback, S&P futures may still auction above 1682 an attempt to retest the current high at 1690-1692. In the event that during the next pullback initiated selling (high frequency sell surge) accompanies a retest of the overnight low, probability favors S&P futures will sell-off and retest support at Modnay’s low (1666). Minor resistance is located at the overnight retracement high at (1682). Wednesday’s high at 1687 is equal to the short covering high which developed on Monday, prior to the minor range extension up to 1692 in the overnight session. Sellers at the overnight retracement high (1682) are advised to be cautious as S&P futures are prone to short covering above the 1682 price level (HFT buy surge). Good Morning Traders, U.S. stock-index futures traded modestly higher in the overnight session. In the previous session, US stocks sold off following disappointing service sector data and growing concerns that the budget impasse will hurt the economy weighing on the markets. S&P futures sold down to 1663, pulling back to support at or near the September 10th low. While S&P futures rallied back to 1676, buying interest faded and price sold off into the close. Overnight, S&P futures traded down to 1667, at or near Monday’s low (1666) and the minor intraday pullback level that developed on Thursday. S&P futures held support at 1667-1666 and have retraced back to the price level from which they sold off late in the day (1674). However, order flow events indicate there is still no buying interest above what had been support earlier in the week (1675). The dollar traded at almost a month low against the yen. The U.S. government shutdown has delayed a key jobs report, clouding the outlook for when the Federal Reserve will reduce stimulus. U.S. lawmakers have still not agreed on raising the debt limit. House Speaker John Boehner has been telling fellow Republicans that he won’t allow the U.S. to default on its debt, even if that requires Democratic votes, according to two Republican congressional aides. Atlanta Fed President Dennis Lockhart said the shortage of data “would tend to make me somewhat more cautious” about reducing the pace of bond purchases. Trade Opportunities Sellers at the overnight high (1674 - 1675 ) are advised to be cautious, in as much as S&P futures are currently prone to short covering. Ideally, at Friday’s open we would like to see S&P futures retest yesterday’s low (September 10 low) and or the minor pull-back level at 1667-1666 (Monday’s low) before attempting to move higher. A move above yesterday’s late in the day high (1666-1677) would be nothing more than a short covering rally. Thus, the short opportunity would be the retest of Thursday’s opening range high (1684) and or Wednesday’s overnight high (1692). In the event S&P futures trade above the 1666- 1667 price level, without first retesting support, it would indicate a reversal in sentiment (short covering) and not new capital entering the market. Whereas, a retest of yesterday’s low (1663) and or the intraday pullback level, would create an opportunity for the S&P to establish a new base of support. The overnight events suggest the selling pressure has backed off and therefore we would expect a retest of Thursday’s lows to continue providing a buy opportunity. This would make it easier to consider buying off the low, as opposed to selling the short covering rally. The indication that the short covering rally is underway will be evident in the order flow events; i.e. initiated buying above 1676 (high frequency buy surge). Trade well, my friends Thursday Morning Briefing Friday Morning Briefing
  • 16. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 201316 Market InsightsMarket Insights Good Morning Traders, U.S. stocks sell-off during Sunday’s globex session, erasing quarterly gain for the Standard & Poor’s 500 Index, as a stalemate over the federal budget increased the likelihood of a government shutdown. All 10 main industries in the S&P 500 dropped, with technology and energy shares declining the most. At the open of Sunday’s globex session, S&P futures sold-off, breaking down below Friday’s low (1680). At Monday’s open, S&P futures extended the trading range down to 1666, 20 points (1.18%) below Friday’s settlement (1686). The price direction reversed off the low (1666) and auctioned back to the overnight high at 1676, the mid-point of the current decline. Price extended the range up to 1678, before pulling back to 1674, prior to the close of the European session. Minor resistance is likely to be encountered, if S&P futures attempts to fill the “gap” at Friday’s close, prior to re-testing Monday’s low. However, should the S&P re-test Monday’s low (1666) before attempting to fill the “gap” at 1686, market participants will have had the opportunity to acquire new positions at a relative discount (1.18%). In the event S&P futures re-test the low before trading above the current intraday high (1678) and/or Friday’s low at 1680, the sell response may be minor, as informed traders, long at the low, will take their time selling to the uninformed trend followers at 1686. During Monday’s opening range price discover was down to 1666, S&P futures spent little time at the low, before auctioning back into the overnight trading range. There was a second (minor) pull-back to 1670, prior to the retracement up to the overnight high 1676. The price discovery to Monday’s opening range low resulted in a 12 point retracment. Thus, a re-test of Monday’s low would offer a potential long opportunity (buy the pull-back). The next support level below 1666 is the September 10th low at 1662. Attenion should be focused on the order flow event should S&P futures re-test the 1666 price level during today’s session. In the event, S&P futures continue higher, minor resistacne is likley to be encountered at Friday’s low 1680-1682. The order flow events are likley to indicate buy programs waning. Market Fundamentals The negative market reaction to political events which developed over the weekend was certainly to be expected. Market participants have been down this road before. The politician dharma will last until there’s some economic disruption that will cause public outrage and the politicians feel some negative repercussion. U.S. lawmakers have to approve emergency legislation by midnight to keep the federal government operating from tomorrow, the beginning of the 2014 fiscal year. Failure to do so may result in as many as 800,000 federal employees being placed on temporary unpaid leave. U.S. lawmakers face their next fiscal dispute over raising the $16.7 trillion debt ceiling. The Treasury has said measures to avoid exceeding the limit will be exhausted on Oct. 17. The debt limit debate is a bigger problem than a federal shutdown. There will certainly be a negative impact if the U.S. shuts down, but the real concern is with the debt ceiling. If the debt ceiling is not raised, then the U.S. government won’t be able to pay its bills and that would be much more damaging to the economy. European Market Closed lower on Monday Europe’s economic recovery has yet to make any impact on the region’s jobs market. Unemployment in the 17-nation euro area remained at a record high of 12.1 percent in August. The European Union’s statistics office is due to publish the jobless numbers at 11 a.m. tomorrow in Luxembourg. Europe’s Record Jobless Rate Europe is faced with a high level of structural unemployment and this is not likely to change any time soon. The recovery is happening painfully slow and that’s another reason why we’ll see jobless rates far above 11 percent well into 2015. Even after the currency bloc emerged from it’s longest-ever recession, unemployment has continued to raise and peak at 12.3 percent in the final quarter of this year. The job market’s resistance to an improving economy has been the subject of political debate across the region. European Central Bank President Mario Draghi has urged governments to implement “decisive structural reforms” to fight unemployment. Structural unemployment is much the same in the U.S. as manufacturing has moved to emerging markets, where labor cost are cheaper. Daily Opening Range Market Commentaries: Monday Opening Range Market Commentaries:
  • 17. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 2013 17 Market InsightsMarket Insights Hello Traders, The dollar fell against the majority of its most-traded peers as U.S. budget threatened a partial government shutdown tomorrow. The yen erased its rally versus the dollar even with Congress deadlocked and a decision on raising the debt ceiling needed within three weeks. The dollar remains in defensive mode. Intraday Developments U.S. indexes went into “risk off” mode over the weekend. Selling below Friday’s close at 1686 and trading down to 1666 at Monday’s open. The U.S. markets pared declines as three economic reports showed business activity expanded more than forecast, reaching a four-month high and adding to signs of a rebound in manufacturing that will help underpin the world’s biggest economy. Positive economic data released on Monday includes the MNI Chicago Report business barometer, which rose to 55.7 in September from 53 the prior month. The Dallas Fed’s manufacturing gauge jumped to 12.8. The Institute for Supply Management’s Milwaukee index rose to 55, versus the August 48.2 reading. The Federal Reserve Bank of New York’s general economic index showed manufacturing expanded in September, though the measure eased to 6.3 from 8.2 last month. Factory activity gauged by the Federal Reserve Bank of Philadelphia’s index expanded at the fastest pace since March 2011. Today’s indication of economic improvement is likely to support the Fed’s ‘tapering” its quantitative easing monetary policy at its upcoming October meeting. Trade Consideration S&P futures recovered from its overnight decline, after trading down to 1666 at Monday’s open. There was no pull-back to the opening range low during the development that followed Monday’s open. Price auctioned back to Friday’s low at 1680, after a 2.5 hour period of HFT market marker algo grind between 1678 and 1676. There was a minor down tick to 1675, at/or near the mid-point of the developing trading range, prior to price trading back to up to the 1678 and extending the range to 1681. During the retracement to Friday’s low, the order flow events indicated the computerized buy programs diminished and the Market Maker algorithm kicked in. There would appear to be little rationale for buying the high as there was no buying interest above 1686 on Friday. And the recent events, leading to the “risk off” trade have not changed. Support is located at Monday’s low 1666: secondary (intraday) support is located at 1670. The mid-point of the range is at 1674. As the market comes into Monday’s close, minor resistacne is at Friday’s low 1680- 1682. Near term resistance is a Friday’s close 1686. The pattern of Monday’s price structure suggest there is the potential: i.e. no-pull-back to re-test the low, for price to auction above the current high (1681) and possibly fill the “gap” at 1686. Hello Traders, Following Tuesday’s overnight development, wherein the S&P futures traded above Monday’s high 1676 and auctioned up to 1684 the lower edge of Friday’s micro price cluster, S&P futures pulled to the mid-point of the developing trading range (1675) at Tuesdays’ open. As inferred in the Morning Briefing, the likelihood that price would encounter a buy response on the pull-back was confirmed in the order flow events. The computerized trading program “waned” as price traded down to 1675-1676. Initiated buying (HFT buy surge) was followed on the up-tick and S&P futures traded up to re-test the overnight high (1684) and fill the “gap” at Friday’s close 1686. The price action stalled following the retracement to 1686. S&P “paused” and eventually made a higher high, trading up to 1690. However, the rally to 1690 was a long drawn out affair. Trade activity diminished. The rate of trade decreased, as did the number of trades and the volume at trade. After 3 hours “flat” with no meaningful participation, S&P futures sold below the high (1690) and pulled back to 1682. Market Fundamentals Data today from the Institute for Supply Management showed U.S. manufacturing expanded in September at a faster pace than forecasted, indicating U.S. factories will provide a bigger boost to the economic expansion. Earnings at S&P 500 companies are projected to have grown 1.8 percent last quarter. Alco and Safeway are among the 316 companies in the gauge scheduled to report in October. Analysts’ forecasts show earnings will increase at the fastest pace in two years during the fourth quarter. In light of the partial shutdown of the U.S. government, the dollar traded at almost the lowest since February. There is growing speculation that the Federal Reserve will persevere with asset purchases that tend to weaken the currency. European Central Bank President Mario Draghi said Sept. 23 he’s ready to deploy another long-term refinancing operation to fund banks. The central bank is scheduled to announce its next policy decision tomorrow. Daily Intra-Day Market Commentaries: Monday Intra-Day Market Commentaries: Tuesday Intra-Day Market Commentaries:
  • 18. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 201318 Market InsightsMarket Insights The European markets are trading lower on Monday. Investor sentiment has turned to “risk off”, as U.S. Government faces a historic shutdown.On Sunday, the U.S. House of Representatives voted 231-192 to delay many provisions of President Barack Obama’s healthcare law for a year and added it to the funding bill. If the Democrat-controlled Senate, which will convene this afternoon, rejects the bill, the government may have to stop some functions from October 1. Sentiment was also impacted by disappointing data out of China, as well as political turmoil in Italy where Prime Minister Enrico Letta is expected to bring confidence vote later this week. According to the data released by the Federal Statistical Office, Germany’s retail sales increased less than forecast by economists in August. Retail sales grew 0.5 percent month-on-month on a seasonally and working day adjusted basis, weaker than the 0.7 percent growth expected. Eurozone inflation slowed more than expected to 1.1 percent in September, the lowest since February 2010, from 1.3 percent in August, preliminary data from Eurostat showed. It was forecast to slow to 1.2 percent. Meanwhile, according to Markit Economics, an indicator of manufacturing activity in China increased less than previously estimated in September. The latest result signaled only a modest improvement in operating conditions from August. The Euro Stoxx 50 index of Eurozone bluechip stocks is down1.15%. The Stoxx Europe 50 index, which includes some major U.K. companies, is down 0.57 percent. The German DAX has declined 1% and the French CAC 40 is down 1.2%. The UK’s FTSE 100 is declining 0.8% while Switzerland’s SMI is dropping 0.6%. In London, Albemarle & Bond is plunging more than 46%. The holding company for pawn-broking and retail jewelry sales said the ongoing weakness in gold price creates significant uncertainty over its prospects as well as profitability for the current fiscal year. Asian stocks fell sharply on concerns that a prolonged U.S. budget impasse would hurt economic growth in the world’s largest economy.U.S. futures point to a lower open on Wall Street. In the previous session, the Dow fell half a percent, the tech-heavy NASDAQ declined 0.2% and the S&P 500 declined 0.4 percent. In commodities November Crude is trading at $101.46 per barrel: ( ) down - $1.41. December gold is trading at $1336.1 a troy ounce: ( ) down - $3.10. The European markets are mostly higher on Tuesday. As market participants ignore the partial shutdown of the U.S. Government. Sentiment was influenced by firm cues from Asia where most markets advanced. According to the Federal Labor Agency, Germany’s unemployment rate increased to seasonally adjusted 6.9 percent in September from 6.8 percent in August. A survey by Markit Economics confirmed that Eurozone’s manufacturing sector expanded at a slower pace in September. The headline purchasing managers’ index edged down to 51.1 in September from August’s 26-month high of 51.4, matching the flash estimate released last month. Meanwhile, according to a survey by the China Federation of Logistics and Purchasing and the National Bureau of Statistics, manufacturing activity in China expanded at a slightly faster rate in September, with business activity across the sector seeing a modest pickup. The Euro Stoxx 50 index of Eurozone bluechip stocks is gaining 0.58%. The Stoxx Europe 50 index, which includes some major U.K. companies, is rising 0.21%. The German DAX is gaining 0.6%, the French CAC 40 is adding 0.7%.Switzerland’s SMI is up 0.1%, while the UK’s FTSE 100 is falling 0.2%. In London, consumer goods giant Unilever forecast slower underlying sales growth of 3 percent to 3.5 percent in the third quarter, citing a slowdown that has accelerated in emerging markets. The stock is declining 3.7%. Asian stocks ended mostly higher, after the Bank of Japan’s closely-watched Tankan survey showed business sentiment in Japan hit its highest level in almost six years in the three months to September. U.S. futures traded higher in the overnight session. In the previous session, stocks closed lower as concerns about a government shutdown weight on investor’s sentiment. However, according to data released on Monday manufacturing activity in many area of the U.S. improved. In commodities November Crude is trading at $102.14 per barrel: ( ) down - $0.19. December gold is trading at $1331.3 a troy ounce: ( ) up +$4.30. The European markets are trading lower on Wednesday. The European Central Bank is slated to announce its interest rate today. The bank is expected to retain its refi rate at a record low 0.50 percent. The announcement will be followed by the customary post-decision press conference by ECB President Mario Draghi at 8.30 am ET. According to Markit Economics, British construction sector growth eased unexpectedly in September. The headline Markit/CIPS purchasing managers’ index fell to 58.9 in September from a near six-year high of 59.1 in August. Economists had forecast the index to rise to 59.5. Former Italian Prime Minister Silvio Berlusconi’s party announced over the weekend that its ministers would resign from the Cabinet. Prime Minister Enrico Letta is expected to hold a confidence vote today to save the government. The Euro Stoxx 50 index of Eurozone bluechip stocks is losing 0.46%. The Stoxx Europe 50 index, which includes some major U.K. companies, is down 0.67%. The German DAX is losing 0.6% and Switzerland’s SMI is falling just over 1%. he French CAC 40 and Switzerland’s SMI are declining 0.8% each. In London, Tesco is losing 3.5%, after the supermarket chain reported lower profit for the first half of the year, amid challenging economic conditions overseas, particularly in Europe. U.S. futures traded lower in the overnight session. In the previous session, the major averages moved to the upside going into the close, ending the day higher. The Dow rose 0.4%, the NASDAQ rallied 1.2% percent and the S&P 500 advanced 0.8%. Asian stock markets traded mostly higher. In commodities November Crude is trading at $101.79 per barrel: ( ) down -$0.25. December gold is trading at $1293.7 a troy ounce: ( ) up + $7.60. European Markets Monday European Markets Tuesday European Markets Wednesday European Markets
  • 19. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 2013 19 Market InsightsMarket Insights The European markets are trading mixed on Thursday. Volume was thin in Germany owing to the German Unity Day public holiday. According to the latest figures from Eurostat, retail sales in the Eurozone increased more than expected by economists in August. Retail sales increased 0.7 percent month-on-month in August compared with forecast for a 0.2 percent growth. A survey by Markit Economics revealed that private sector business activity across the Eurozone improved slightly more than previously estimated in September. The composite output index, which measures performance of manufacturing and service sectors, rose to a 27-month high of 52.2 in September from 51.5 in August. The flash estimate was 52.1. The Euro Stoxx 50 index of Eurozone bluechip stocks is losing 0.24%. The Stoxx Europe 50 index, which includes some major U.K. companies, is gaining 0.02%. The German DAX is losing 0.1% and the French CAC 40 is falling 0.4%. The FTSE 100 index of the U.K. and Switzerland’s SMI are up 0.2% each. Investors also cheered a major political victory for Italian Prime Minister Enrico Letta’s government in a no confidence vote and positive economic data out of China. U.S. futures have traded modestly lower in the overnight session. In the previous session, stocks modestly lower as a report from payroll process ADP showed weaker than expected private sector growth in September. Concerns about the economic impact of a prolonged government shutdown and the looming debt ceiling is said to have attributed to a lack of interest in the market at this time. However, last week there was also no interest in the S&P 500 at the current price levels. The Dow slipped 0.4%, while the tech-heavy NASDAQ and the S&P 500 dropped about 0.1% each. In commodities November Crude is trading at $103.87 per barrel: ( ) down -$0.23. December gold is trading at $1305.5 a troy ounce: ( ) – down $15.20. The European markets are trading mostly higher on Friday. According to a survey by Markit Economics, Germany construction sector expanded for the fifth straight month in September, but at a notably slower pace than in the previous month. Eurozone industrial producer prices dropped 0.8 percent in August from a year ago, largely due to a sharp fall in energy prices. The Euro Stoxx 50 index of Eurozone bluechip stocks is gaining 0.56%. The Stoxx Europe 50 index, which includes some major U.K. companies, is down 0.09%. The DAX index is marginally higher while the FTSE 100 index is up 0.2%. The UK’s FTSE 100 is climbing 0.6%. Switzerland’s SMI is, however, losing 0.4 percent. In London, Tate & Lyle is rising 1.7 percent. The maker of sweeteners and starches expects adjusted operating profit for the first half of the year to fall slightly from the prior year, amid softness in the US beverage sector. Overall, the company expects to deliver another year of profitable growth. Premier Gold is plunging 24 percent after announcing a safety issue at Cholokkaindy in the Kyrgyz Republic. U.S. futures traded modestly higher overnight. In the previous session, U.S. stocks sold off, as disappointing service sector data and growing concerns that the budget impasse would hurt the economy. The monthly U.S. jobs data will not be released today due to the U.S. government shutdown. The Dow and the S&P 500 declined 0.9% percent each, while the tech-heavy NASDAQ declined 1.1%. In commodities November crude is trading $103.58 per barrel: ( ) up + $0.27. December gold is trading $1316.5 a troy ounce: ( ) down - $1.10. Thursday European Markets Friday European Markets
  • 20. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 201320 Market InsightsMarket Insights Asian stocks fell sharply on Monday. The U.S. budget impasse, the stalemate over the U.S. debt ceiling, rising political tensions in Italy and disappointing economic reports out of China and Japan are all contributing to the negative investor sentiment: “”risk off”. Japan’s Nikkei index declined 2% to end at its lowest level in about two weeks, weighed down by the yen’s appreciation on concerns over the U.S. budget crisis and weak industrial production data domestically. The broader Topix index fell 1.9%. Exporters and technology firms bore the brunt of the selling as the dollar traded below 98 yen for the first time since the end of August. Toyota Motor lost 2.6% and Nintendo declined 2.5%. Toshiba dropped 1.1% after announcing job cuts at its loss-making TV unit. According to official data, Japan’s industrial output contracted a seasonally adjusted 0.7 percent in August compared to the previous month. Production eased 0.2 percent on an annual basis, below expectations for a 0.4 percent gain. The total value of retail sales climbed 1.1 percent year-over-year in August, beating forecasts, and construction orders received by big 50 contractors increased 21.4 percent annually. Housing starts growth slowed unexpectedly to 8.8 percent from 12.4 percent in July. China’s Shanghai Composite held on to its recent gains, to close 0.7% higher, to close at 2,175. China’s manufacturing activity edged up at a pace slower than expected in September. The HSBC China manufacturing purchasing managers’ index rose to 50.2 from 50.1 in the previous month. Hong Kong’s Hang Seng dropped 1.5%. Australian shares lost ground as investors braced for a partial government shutdown in the U.S. The benchmark S&P/ASX 200 fell 88 points or 1.7%, to trade at 5,218, with resource and financial stocks leading the decliners. Global miner BHP Billiton lost 1.7%, Rio Tinto declined 2.5% and Fortescue Metals Group tumbled 3.9%. Gold miner Newcrest rose 2% as gold prices advanced on uncertainty over the U.S. budget impasse. Oil & gas producer Woodside Petroleum shed 1.3% percent and Santos declined 3.7%. According to data from the Melbourne Institute, Australian consumer inflation rose 2.1 percent in September from a year earlier. On a monthly basis, inflation rose 0.2 percent, accelerating slightly from 0.1 percent in the previous month. Reserve Bank of Australia reported that total private sector credit in Australia rose 0.3 percent in August compared to the previous month, missing forecasts for an increase of 0.4 percent. South Korea’s Kospi average closed 0.7% lower at a two-week low after three affiliates of embattled Tong Yang Group filed for court receivership to avoid a default. Overseas investors, however, extended their buying streak for a 24th streak, purchasing shares worth a net 115 billion won, official data showed. Industrial production in South Korea climbed a seasonally adjusted 1.8 percent in August compared to the previous three months, Statistics Korea said. Industrial production spiked 3.3 percent on an annual basis, also topping forecasts. New Zealand shares lost ground in line weak regional cues. The benchmark NZX-50 declined 1.0%, to trade at 4,736, with 37 of its components retreating. According to a report released by Statistics New Zealand, business confidence came in with a score of 54.1 for September, with the construction, services and building sectors seeing significant gains. The total number of building permits issued in New Zealand rose a seasonally adjusted 0.8 percent in August from the previous month. Malaysia’s KLSE Composite was down 0.4% and the Taiwan Weighted average dropped 0.7%. The key benchmark indexes in India, Indonesia and Singapore were down 1-2%. U.S. stocks traded modestly on Friday, as continued concerns about the U.S. budget talks and the debt ceiling. On the economic front, U.S. personal income and spending both rose in line with estimates in August, while confidence among consumers declined to a five-month low in September, separate reports showed. Besides the budget stalemate, investors are more worried about debt default as the government won’t be able to pay some of its bills on October 17 if Congress doesn’t raise the debt ceiling. A failure to raise the federal debt limit would have huge ramifications for the global economy. U.S. futures are trading lower in the overnight session. Asian stocks ended mostly higher on Tuesday. Monday’s midnight deadline to approve the U.S. federal budget passed with no sign of a deal, forcing a partial shutdown of the government for the first time in 17 years. Standard & Poor’s Ratings Services said that the current impasse over the debt ceiling debate is unlikely to change the firm’s double-A-plus rating on U.S. sovereign debt. The ratings agency said its base-case assumption doesn’t include a failure by lawmakers to raise the debt ceiling by October 17 when the U.S. government will run out of money. Japan’s Nikkei index advanced modestly (0.2%), after Prime Minister Shinzo Abe said that he would hike the sales tax as planned from April next year to reduce the country’s huge debt load. The government is also set to announce a stimulus package to cushion the potential negative impact that the tax hike could have on the nascent recovery of the economy. The Nikkei index advanced was capped by the yen’s rise against the dollar ahead of Abe’s press conference in the evening. The Bank of Japan’s closely-watched Tankan survey showed business sentiment in Japan hit its highest level in almost six years in the three months to September. The government move to proceed with the sales tax hike Asian Markets Monday Asian Market Tuesday Asian Market
  • 21. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 2013 21 Market InsightsMarket Insights Asian stock markets are mostly trading higher on Wednesday. In the Australian market, financial, healthcare, property trusts, consumer discretionary and information technology stocks are trading higher, while energy and mining stocks are mixed. The benchmark S&P/ASX 200 index, which advanced to around 5,231 in early trades, is currently up 12.7 points or 0.2%, to trade at 5,219. The broader All Ordinaries index is up 12.9 points or 0.2%, to trade at 5,219.2, off the day’s high of 5,229. In economic news, Australia saw a seasonally adjusted merchandise trade deficit of $815 million in August, the Australian Bureau of Statistics said on Wednesday. Exports added 3.0 percent on month to $27.116 billion, while imports gained 1.0 percent to $27.931 billion. According to another report from the bureau, the total number of building approvals issued in Australia was down a seasonally adjusted 4.7 percent on the month in August at 13,687. On a yearly basis, approvals gained 7.7 percent - also missing forecasts for an increase of 12.8 percent following the 28.3 percent spike in the previous month. In the currency market, the Australian dollar opened lower against the U.S. dollar. After a flat start and a subsequent smart up move, the Japanese stock market faltered, with the yen’s rise against the U.S. dollar triggering some selling. The benchmark Nikkei 225 index, which rose to 14,569.2 after opening at 14,492.5, was down 102.6 points or 0.7%, to trade at 14,382. According to the Bank of Japan, the monetary base in Japan surged 46.1 percent on year in September to 181.701 trillion yen. Banknotes in circulation were up 3.4 percent, while coins in circulation added 1.0 percent. Current account balances surged 139.2 percent, including a 137 percent spike in reserve balances. The adjusted monetary base climbed 69.4 percent on year to 181.533 trillion yen. For the third quarter of 2013, the monetary base jumped 42.0 percent on year. In the currency market, the U.S. dollar traded in the upper 97 yen range in early deals in Tokyo. The yen is currently trading at 97.79 to the U.S. dollar. Hong Kong, South Korea, Taiwan, Indonesia, New Zealand and Malaysia are trading firm, while Singapore is down marginally. On Wall Street, stocks moved mostly higher on Tuesday, while traders ignored concerns about the economic impact of the government shutdown and focused instead on an unexpected increase in U.S. manufacturing activity aided sentiment. The Dow rose 62 points (0.4%), to trade at 15,191, the Nasdaq rallied 46.5 points (1.2%) to 3,818 and the S&P 500 advanced 13.5 points (0.8%), to end the session at 1,695. Major European markets ended higher on Tuesday. The U.K.’s FTSE 100 index ended roughly flat, while French CAC 40 index and the German DAX index moved up 1.3% and 1.1%, respectively. U.S. crude oil pared much of the losses but ended lower for a third straight session on Tuesday, as investors continued to mull over the impact of the partial shutdown of the U.S. Government on oil demand. November Crude delivery dropped $0.29 (0.3%) to close at $102.04 per barrel. Wednesday Asian Market next year comes as that Japan’s average monthly household spending dropped a worse-than-expected 1.6 percent in August from a year ago. The financial markets in China and Hong Kong were closed for public holidays. Chinese manufacturing activity expanded at a slightly faster rate in September, with business activity across the sector seeing a modest pick-up, an official survey showed. China’s purchasing managers’ index rose to 51.1 from 51 in August. Australian shares erased early gains to end modestly lower after the Reserve Bank of Australia retained its benchmark cash rate at a record-low of 2.5 percent, matching expectations. The benchmark S&P/ASX 200 declined 0.2%. The current setting of the monetary policy remains “appropriate” and the board will “continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target” the central bank said in a statement accompanying its rate decision. Leighton Holdings advanced 1.1%, after winning a contract worth $370 million to build a new terminal and car park at Melbourne Airport. According to Australian Bureau of Statistics, retail sales added a seasonally adjusted 0.4 percent in August compared to the previous month, the said, standing at $21.923 billion. A survey results released by the Australian Industry Group showed that its manufacturing PMI index moved into positive territory for the first time in more than two years. The headline index rose 5.3 points to 51.7 in September from the previous month. South Korea’s Kospi average closed 0.1% higher, to trade at 1,999. Overseas investors bought shares worth a net 149.7 billion won, extending their buying streak for the 25th straight session, data showed. Korean government data showed consumer prices in South Korea eased to a 14-year low of 0.8 percent in September, down sharply from 1.3 percent in the previous month, while the nation’s exports fell slightly last from a year earlier. New Zealand shares posted modest gains, tracking gains elsewhere across the Asia-Pacific region. The benchmark NZX-50 closed 0.2% higher, to trade at 4,744, with 19 of its components advancing. Among the prominent gainers, Auckland International Airport climbed 3.4% India’s Sensex was moving up 0.7 percent following Monday’s selloff. According to Markit Economics, Indian’s manufacturing sector contracted for the second successive month in September, but at a slower rate than in the previous month. Indonesia’s Jakarta Composite index was gaining a percent, Malaysia’s KLSE was little changed. Singapore’s Straits Times was up 0.4% and the Taiwan Weighted average closed up 0.2%. U.S. Indexes traded higher overnight, as concerns about a looming government shutdown overshadowed data showing improved manufacturing activity in the Chicago area.
  • 22. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 201322 Market InsightsMarket Insights Asian marekt traded mostly higher on Thursday. Positive economic data out of China indicated that China’s service sector has expanded at a fastest pace in September. According to a survey by the China Federation of Logistics and Purchasing, non-manufacturing purchasing managers’ index, which covers services including aviation, real-estate, retail, software, retail and construction sectors, rose to 55.4 in September from 53.9. Hong Kong’s Hang Seng gained 1.0%, while the Chinese market remains shut until October 7 for National Day holidays. The Nikkei average declined 0.09%, to trade at 14,157. The broader Topix index closed 0.1% lower, to trade at 1,174. Heavyweight Fast Retailing declined 0.8%, after reporting a 4.4 percent increase in same-store sales for September. Tokyo Electric Power tumbled 4.8% after the company said it has found a fresh leak at a storage tank holding contaminated water at the crippled Fukushima station. The central bank is forecast to retain its plan to increase the monetary base at an annual pace of JPY 60 to 70 trillion, while maintaining interest rates at 0.10 percent after the end of its policy board meeting on Friday. Governor Haruhiko Kuroda previously said that he supported the sales tax increase and would respond with fiscal and monetary measures, if the tax hike threatens economic growth. The dollar gained slightly from the lower 97 yen range to the upper 97 yen range ahead of the Bank of Japan’s policy decision. Australian shares posted modest gains, with firmer commodity prices and encouraging service sector data underpinning sentiment. Australia’s service sector activity contracted further in September, but the pace of contraction slowed significantly, according to survey results released by the Australian Industry Group. The benchmark S&P/ASX 200 rose 0.4%, to trade at 5,235. New Zealand shares ended marginally higher, led by gains in retailers. The benchmark NZX-50 inched up 0.03%, to trade at 4,770, with 20 of its components advancing. New Zealand Oil & Gas ended unchanged on its announcement that its 35 percent partner in the Tui oil and gas field, Japan’s Mitsui, had quit its stake. India’s Sensex was rallying 1.9%, tracking gains in rupee, which strengthened to below 62 levels in early trading, driven by dollar weakness in overseas markets. South Korea’s stock market was closed for the National Foundation Day. Indonesia’s Jakarta Composite index was gaining 0.7%, Malaysia’s KLSE Composite was rising 0.1%. The Taiwan Weighted average rallied 1.7%, but Singapore’s Straits Times was down 0.2%. U.S. Indexes trader lowers overnight. The U.S. government shutdown entered its third day amid no signs of progress toward ending the budget impasse. The weaker dollar weakened amid fears that prolonged budget talks indicate a bigger showdown will develop over raising the nation’s debt ceiling. However, disappointing private-sector jobs data has increased speculation that the Federal Reserve will go slow on tapering, a move that will help sustain large capital flows to emerging markets. The Dow slipped 0.4%, while the tech-heavy NASDAQ and the S&P 500 dropped about 0.1%. Asian stocks ended broadly lower on Friday. Japanese shares fell for a third consecutive session on worries over the U.S. fiscal problems after the U.S. Treasury Department warned the world’s largest economy could fall into its deepest crisis since the Great Depression if Congress fails to raise the cap on government borrowing soon. The Nikkei average fell 0.9%, to trade at 14,024, its lowest level in one month. The dollar weakened for the fourth day against the yen amid the U.S. budget standoff and as overnight data showed growth in the U.S. services sector cooled last month. Meanwhile, at the end of a two-day meeting of the nine- member policy board, the Bank of Japan left its monetary policy unchanged for the seventh consecutive time, citing a continuing economic recovery, rising inflationary expectations and improving business sentiment. Australian shares retreated, led by losses in mining stocks on concerns over ripple effects of the U.S. government shutdown across the world. The benchmark S&P/ASX 200 declined by 0.50%, to trade at 5,208. The Chinese market remained closed for the Golden week holidays. Hong Kong’s Hang Seng index shed 0.4 percent. Operating conditions in Hong Kong’s private sector stayed unchanged in September after deteriorating for five months in a row, survey data released by Markit Economics and HSBC Bank showed today. Seoul shares ended a choppy session slightly lower. The benchmark Kospi average slipped 0.1%, to trade at 1,997, with foreign fund buying helping to limit the downside. Overseas investors bought shares worth a net 413.9 billion on Friday, extending their buying streak for a 27th consecutsession, data showed. Samsung Electronics ended unchanged after the company said it expects third quarter operating profit of 10.1 trillion Thursday Asian Market Friday Asian Market
  • 23. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 2013 23 Market InsightsMarket Insights Sunday’s Market Recap Monday’s Market Recap Daily Market Recaps won, representing a 25 percent increase from the company’s operating profit in the prior year period, reflecting strong sales of memory chips as well as steady demand for the company’s Galaxy S4 and other smartphones in emerging markets. New Zealand shares eased slightly as investors locked in some profits to subscribe for the Meridian Energy share offer. The benchmark NZX-50 dropped 0.2%, with 17 of its components retreating. India’s Sensex was rising 0.4%, extending the previous session’s 2% rally, driven by strong FII inflows. Malaysia’s KLSE Composite was moving up 0.3% and the Taiwan Weighted average edged up marginally, while the markets in Indonesia and Singapore were subdued. Malaysia’s exports rose 12.4 percent in August from a year earlier, mainly due to higher shipment of refined petroleum products, the Department of Statistics reported. U.S. stock indexes traded lower overnight, adding to the modest losses posted in the previous session, with disappointing service sector data and growing concerns that the budget impasse will hurt the economy weighing on the markets. Concerns about U.S. lawmakers failing to reach a compromise on raising the nation’s debt limit before the October 17 deadline has dominated the news. The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the U.S. economy. The Dow and the S&P 500 dropped about 0.9% each, while the tech-heavy NASDAQ declined 1.1%.
  • 24. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 201324 Market InsightsMarket Insights Tuesday’s Market Recap Wednesday’s Market Recap Thursday’s Market Recap
  • 25. Algo Futures | Market Insights — Weekly Edition Saturday, October 5th, 2013 25 Market InsightsMarket Insights Continue from page one.... Why Do Prices Go Up & Down? we believe that the activity of these Trading Bots, which can be tracked in a market’s Order Flow, are the key to thriving in today’s High Frequency Trading dominated markets. We believe that in the electronic futures market, more than any other market, the footprints left by High Frequency Trading Bots, can be read, measured and deciphered with regards to their immediate effect on supply and thus, on the short-term price. Technical Analysis Tells ½ of the Story. Order Flow will tell you the other ½, specifically: • Are The High Frequency Trading Bots Firing With Sufficient? • Force To Move The Market? • Is My Position Synched Up With The minant High Frequency Trading Bots , or Am I Fighting Them? • Is The Smart Money Active In This Setup? The futures markets have grown and evolved significantly over the last decade. All of world’s financial markets, be they Equities, Bonds or Foreign Exchange, are forever intertwined with the electronic futures markets. As every trader wants to take advantage as many opportunities as possible, and as the information available in the dust trails of High Frequency Trading Bots is now readily available to all traders, doesn’t it make sense to sprinkle in this Transaction Level Analysis to your existing setups to increase the returns on your trading? In this newsletter you will learn many insights into how to apply Transaction Level data, such as how to tell if a Momentum trade has a higher likelihood of failing, or when a Bounce off of the lows is more likely to be the beginning of a trend. These are critical distinctions that reading the tape in the electronic futures markets can offer you. of assets through the interactions of buyers and sellers. In dynamic markets, i.e. major indices price discovery takes place continuously, a price auction through the trading range. While on Friday (09-30-13) there was no willingness to sell below 1680 during Friday session, there was indeed willingness to trade between 1684 and 1686. During the initial (the first) retracement back to Friday’s low (1680-1681) price discovery determined there were no more willing buyers above 1680- 1681, S&P futures sold back through the trading range and retested Monday’s low. The question arises, how then can a trader determine where to be a buyer or seller? In the context of Monday’s session, the marker (Bayesian) logic explanation is as follows; 1.) Price breached support at Friday’s low; therefore expect resistance following the initial retracement. 2.) Price auctioned down to the next support level (1671) and extended the range modestly lower (1667). Following the range extension, price auctioned back to the prior support: therefore expect support during the initial pullback. In an effort to enhance the macro directional model (Gaussian mixture), the order flow events provide the micro insights, i.e. buy programs waning (diminishing) at the high, sell programs waning (diminishing) at the low. The combination of the macro and micro algorithms developed by follow the bots are intended to model the near term “direction” of a financial securities and to accurately compute the micro order flow event of intraday stochastic price series. We are confident, that the principles of computational finance, described above, will prove beneficial to our members.The goal of Follow the Bots is to present a detail analysis of the markets condition (state) to assist Traders in developing a comprehensive understanding of market development. Continue from page one.... Trade Opportunity of the Week FOR PROFESSIONAL TRADER USE ONLY Market Insights