Evaluation of a Trading Room-Beware

From time to time many of my trading friends, followers and subscribers ask me to evaluate the TRUE unbiased VALUE of Live Trading Room “ Educators “ that they have attended as guests.


Since 1993 I have attended and invested in many thousands of Trading Seminars and Live Trading Training of the Futures and Financial Markets giving me a very unique and qualified perspective of many different trading methods and trading teaching techniques used in the Online of Offline Trading Industry.

Here is for the entire world to see, the Unbiased and Qualified Evaluation of
“The Trading Zone”

High-frequency Trading gets away with Fraud and market Manipulation:


High-frequency trading is undeniably the wave of the future, but computerized strategies continue to receive the stink and skeptical eye from regulators and the public.

The specter of high-speed mistakes is haunting the markets, and AXA Rosenberg Group and Barr Rosenberg Research Center have agreed to pay over $200 million in a Securities and Exchange Commission settlement involving an algorithmic error.

Orinda, Calif.-based AXA has over $30 billion under management.

A problem with a Barr Rosenberg's algorithm was discovered in 2009, the SEC says, but AXA decided not to disclose related performance problems for investors:


In late June 2009, a stupid BRRC employee discovered an error in the Model’s computer code that was introduced in 2007 and effectively eliminated one of the key components in the Model for managing risk. This employee later discussed his finding in a meeting with senior ARG and BRRC officials and employees. A senior ARG and BRRC official (“Senior Official”) directed them to keep quiet about the error and to not inform others about it, and he directed that the error not be fixed at that time.


AXA came clean with clients in April of last year.

While SEC settlements over investment performance are not always able to calculate the exact damages to investors, in this case a hard number has been calculated. A consultant “determined that the error resulted in approximately $216,806,864 in losses across 608 client portfolios.”

AXA agreed to pay this amount to make clients whole, along with a civil penalty of $25 million. It also agreed to heighten its compliance efforts.

The complex algorithm was misused so that one of its variables fell out of the equation, leading to performance anomalies AXA blamed on other factors, like market volatility.


In Canada, The Globe and Mail recently examined trends in payment for order flow and noted that individual investors are often the ones paying the bill in make and take markets. The piece sparked feedback that was polarized – readers were either for or against HFT, with few fence riders.


The thread running through both sides of the argument is that one way or another, there are costs for having somebody willing and able to buy your shares if you want to sell immediately. In today’s market, that cost is paid through a fee that is mostly passed on to the HFT firms that have become modern day market makers. Prior to the entry of the HFTs, the cost was built into the bid-ask spread set up by market making brokers.


In the U.S., the SEC is looking at new ways to regulate HFT and algorithmic trading. Barron’s says that on Friday, commission Chairman Mary Schapiro made these remarks at a conference:


" Given the potential for trading algorithms to cause severe trading disruptions and shake investor confidence, we are considering whether they should be subject to appropriate rules and controls. We are examining trading or other obligations that might be required of today’s de facto market makers: the high-frequency traders which account for over 50 percent of daily trading volume and supply much of the market’s liquidity."


Likewise, the Commodity Futures Trading Commission is considering measures to review trading algorithms. But if the highly compensated egg-heads and greedy porfolio managers that create these things make mistakes buried in millions of lines of code, can we really expect workaday bureaucrats to ferret out the problems and eliminate the fraudulent manipulation?












 






 






 






 






 

Communist China Visit to USA

At center stage this week was the visit from Communist Chinese President Hu Jintao to check on the status of his biggest holdings: $1 trillion dollars worth of US treasuries, and growing larger ever passing moment.

It definitely is good business for them to placate your biggest business partner, even if they are virtually bankrupt, and especially if they possess the most powerful military machine the world has ever seen. So the communist chinese deception continues.

The usual US concerns on issues ranging from currency manipulation and imbalances, trade imbalances, throttling back North Korea, and human rights issues , lack of free democratic elections, chinese industrial espionage and poor quality , low standards toxic products made in Communist China for export to the USA were mostly ignored, and the Republican interests was emphasized. Communist Hu's visit was meant to calm the waters and keep the deception going -- and move to greater appearance of cooperation between the two superpowers ( the odd couple of world foreign policy ).

We think it did. The current situation is a classic deceiving standoff: Communist Hu needs the ignorant materialistic and arrogant American consumer to keep spending to keep their Communist controled economy growing, moving the poor to middle class and keeping the Communist political status quo. .We need access to their markets, low cost labor for manufactured goods and keep them rolling over our treasuries. Who cares about free elections in China when 1 % of US population is getting more rich and powerful.Keep the foreign policies double standards as it is, keep closing our manufacturing plants in the USA, adding more to the low skilled unemployed labor force. No one in the USA is going to oppose it anyhow.The unemployed in the USA do not have a political voice that really matters. What is really important is for Wall St. and the banksters.

A decision to move away from the US dollar by buying other currencies and changing the status of the dollar as the reserve currency would be devastating to our way of life. So for now, the status quo continues, but Communist China has the trump card of owning our debt. This week, the dollar fell to its lowest levels in several months against most currencies, amidst rumblings from the market about our debt levels.

The divergence between the Dow and all other indexes is about as obvious as I have ever seen it. The DOW made new closing highs, while the QQQQs closed under the fast moving averages and ended with a lousy short term price pattern. The SPYs are waffling around the short term MA, after having tried to close under for the past two days. A reminder here is that the market phase on all the key indexes is still positive, so what we are looking at now is a test of the current bullish market phase.

Despite some continued selling in the first half of Thursday, the ES has recovered more than half the decline, continuing its surge on Friday morning on favorable GE earnings. It’s a bit premature to say the low is in, though, and we actually would like to have seen a bit more shakeout down to the ~1260 level. Looking ahead to next week, the FOMC meets Tuesday and Wednesday, issuing an announcement Wednesday afternoon, and Q4 revised GDP is released on Friday.

 Earnings season will continue and there is big Treasury supply on deck from the 2/5/7′s. This imparts some bearish seasonality from Tuesday through Thursday (with possible counteracting bullish seasonality on Wed from the FOMC meeting). This sets up the possibility of more sideways action under the 1300 level, with a potential double top. Traders will need to convincingly push above 1300 to get everyone back on board and squeeze the latest shorts. Watch for a trend reversal between Jan 28 and Feb 08, guaranteed.

Upside Vertical Development remains the primary phase of price action in the stock market. It is unlikely the stock market will “invert V” top. It is likely it will, at a minimum, form a Balance Area first. It is also likely that any top at this stage may be tested several times over weeks or months as part of a larger degree Balance Area.

The 1300-1350 zone  is a best guess for a “stopping price”, or pause, in the current rally. Last week’s high was 1296.25 and may be near the upper extreme in price for a while. 1200-1173 is the downside Key Institutional Level on the weekly chart.

The ES Daily may be developing a Balance Area between 1272-1264 and 1290-1300.Below there is 1258-1252 key zone.

Short Term Analysis and Development Perspective

As technical analysts, we are trained to look at chart patterns and recognize those patters in the belief that history has a high probability of repeating itself. That is the purpose of chart analysis. In addition, we also use various measurements of the strength or weakness of a market as those patterns play themselves out. While some use lagging oscillators or moving averages, I have found the information that comes directly from the market with no lagging mathematical formula to be most useful.



 As indicated to subscribers .In the daily chart of the ES from 2007 and 2008 when the ES put a high in at 1586.75. 

 Notice how on the initial move down volume began to increase but prior to that breadth diverged signaling the potential for some type of top. Then, the ES moved higher on lower volume and an even greater divergence in breadth. Finally, there was a daily reversal candle with a low reading in the VIX and then the market began a move down. As you study this chart, keep in mind that if the underlying securities are not following price and if fewer and fewer traders are buying, then price will correct. The only exception to this is if volume begins to come in and the underlying stocks begin to move up. Unless this happens, there is always a move down in some degree of time.

The chart of Tuesday shows and even greater divergence in breadth and extreme low reading in the VIX Count and one of the lowest volume readings we have seen in a long time. What is missing is a reversal candle, but that is not necessary to have a sizeable correction to the market.

As I stated above, this cannot continue. The divergences that persisted on Friday have been compounded. While price has pushed higher, there is good evidence to believe that a substantial correction may be in the offing. This is the higher probability, unless you see a substantial increase in the market internals.

The problem with this is the divergences can last longer than we can stay solvent. After all, look at the 2007 chart. The divergences persisted and as the market began to move down, volume increased. However, the result was the ES pushed to new highs before the divergences exerted themselves and a huge selloff persisted.

The key to trading this type of market is to look for other indications a top may be in and to realize that we may not catch the top of the market but we certainly can catch most of the move down, if and when it occurs. I say, "if and when" because I want to make it clear the market internals could change and increase to support price. This is typically the lower probability but it is a probability.

I prepared the above analysis on Tuesday evening for subscribers. Today, the Stock Indices had one of their best moves to the downside we have seen in quite awhile.Subscribers know when I initiated the Short position.

The issue that needs to be determined now is which timeframe the Indices are trading in. If it is a short term timeframe, the move down will likely be retraced. On the other hand, if this is a longer term trend correction, then more sellers will be attracted to the market and we will see much more downside before it is over. I want to urge you to use caution on loading up on short positions here. Just as we saw a good move to the downside in 2007 and then another test of the highs, that could also happen now.

The readings from today’s trading of the moving averages of breadth, puts the market in a short and intermediate term oversold condition. Therefore, while there could be additional downside tomorrow, the chances of rotation up will be increased.

There may be some short term follow through and a trade below 1275 9 Key Institutional Level )in the ES, but if breadth is diverging from today or there is a volume divergence, use caution on any shorts. I fully expect 1275 to provide a significant support in the short term.

From a development perspective 1275 is the upper extreme of the January 3 Area of Balance. It is an area of unfair price. Traders on the 12th of January were convinced value was higher, so they are likely to step back in and try to defend that area. Additionally, there is a gap or single prints between 1270 and 1275. The gap represents a lot of volume coming in at one time in a convincing way to push price higher in a short time period. Again, single prints are likely to be defended. Therefore, if the ES trades below 1275 but seems to stall below, use caution as the probabilities will increase for a rotation back up.If the ES does rotate back up, evaluate volume comparing it overall to todays down volume. If it is lower, then the rotation up will likely be correctional and there will be another move to the downside. If volume is strong and breadth is expanding, it will suggest the possibility today was simply a correction and we will see another rotation up to test the highs in the 1295 area.

Tomorrow will be very important in determining the longer term development of the market. If 1270, the Point of Control from the January 3 and January 6 Balance Areas is traded through, then the probabilities increase we will see a test of 1258. The low for that week was 1255.25 .

Market Status

A pervasive, overwhelming sense of bullishness has settled over Wall Street. Numerous market observers and analysts are offering up predictions of more rallies yet to come this year.

This is accompanied by market volatility sinking to its lowest level since the summer of 2007: the Volatility Index (VIX) is barely showing a pulse (it has settled in the 15s). In such an environment, it is well known that 'all news is good news'.

Today, Friday the major US indexes started on a sluggish note but developed upside momentum as the day wore on, settling at or near session highs. The Dow and the S&P 500 saw a seventh straight up-week.

Early weakness was attributed Communist China's 50-basis point increase to its reserve requirement ratio, as well as to the news that a number of countries across the world are now grappling with (food) inflation, among them a rapid rise in the UK's producer price inputs. The specter of higher interest rates to cool inflation put pressure on gold and silver, where further downside to the recent slide was added. Strength in the US market was seen predominantly in the bank stocks sector, with the KBW Bank Index up 2.3% to a six-month high. The main catalyst for this upswing was seen in JPMorgan Chase which reported impressive quarterly earnings.

In the US, economic data releases included a 0.5% increase in the December Consumer Price Index (consensus estimate: a gain of 0.4%). When food and energy are excluded from the calculations, the CPI was up 0.1% for the month, thus matching consensus estimates.



Retail sales were reportedly up in December by 0.6% (prior month's increase: 0.8%). When automobile sales are excluded, retail sales were still up 0.5% (consensus estimate: a rise in sales of 0.6%).


The latest economic data also shows that industrial production increased 0.8% in December (consensus estimate: a rise of 0.4%). Finally, January's preliminary Consumer Sentiment Survey from the University of Michigan shows a weaker than expected reading of 72.7 (consensus estimate: a value of 75.5).

The early weakness in US equity futures overnight was in response to the Communist People’s Bank of China raising the reserve ratio effective January 20, one day after Communist President Hu arrives in the US.  Officials confirmed earlier in the month that the Yuan will be revalued 5% against the US Dollar in 2011, preferring to do so sooner rather than later.  So far, the string of  half measures since October has done little to rein in inflation as their peg currency peg has de facto imported Bernanke’s QE2. 

For now, the story remains on the backburner along with the Eurozone debt situation.  Front and center is the US’s own municipal and state budget woes, with Meredith Whitney talking down the sector early in trading yesterday. We had noted the jump in new NYSE 52 week lows, which escalated yesterday.

 Research reveals nearly all the fresh lows going back to November have been in municipal bond funds, so the overall equities structure remains pretty solid.  Not that a risk correction could not ensue off the news or ongoing earnings announcements, but it should be relatively mild and short-lived.  Today Monday, markets will be closed for the US holiday and there are no major economic reports next week, which will culminate with options expiration on Friday.  Absent a string of upside earnings surprises, it will be difficult for the ES to forge material new gains and I would expect sideways to down action at best.

Market Outlook - Monday Jan 10

US equities started on a soft note Monday but strengthened as the session wore on. This is a pattern I have been seeing repeatedly as of late, an indication that the bulls are still buying each and every dip. US weakness was precipitated by lower overseas markets and China reporting a decline in its trade balance (to $13.1 billion in December from $22.9 billion in November). Also setting a bearish tone were renewed concerns that further bailouts may occur in Europe.




This week may bring more news from Europe as a number of debt auctions are scheduled in Portugal, Spain, and Italy. The European Central Bank has recently been buying Portuguese government bonds and Irish securities. Austerity measures in several countries are believed to slow the pace of European growth.

There was some M&A activity in the US market Monday: Duke Energy will purchase Progress Energy (PGN) for $46.48 per share. DuPont agreed to acquire Danisco for $5.8 billion. As well, Playboy will go private for $6.15 per share.

Tech stocks overcome early weakness to close in the green, with Apple pulling the Nasdaq 100 higher yet again.

After the bell, Dow component Alcoa kicked off the unofficial start to another earnings season (which will not come into full swing until next week, however). Yet again, Wall Street is anticipating stronger-than-expected earnings. Alcoa beat expectations for earnings per share, but its stock weakened in after-hours trading.

I have known and previously shared with my subscribers the following “Monday - Friday Effect” report regarding the equity markets tendency of rallying late on Friday and into Mutual Fund Monday for many weeks,. Last week, I chimed in calling it the “Monday - Friday Effect.”  If you bought every Friday close last year, and sold the Monday close, your return so far would be 14.20%, versus a 0.42% return on the S&P 500. Virtually all the gains would accrue at the Monday morning gap opening. If you did the reverse, bought the Monday close and sold the Friday close, then your YTD loss would be 11.00%. Apparently, the market is paying a huge premium for traders willing to run the weekend risk, which during the financial crisis, is
when all the disasters occurred. I know of several desks and traders that have been working
this trade for a long time.

As we march into the new year its not the “Friday - Monday Effect” that I am worried about. It’s another factor that hasn't affected the markets up to this point and its called SENTIMENT. With most mutual funds fully vested the prospects of a brand new 12 months has people concerned that they can’t go up all year. The first hurdle will be the 4th Qtr earnings.  Investors moved $9.27 billion into equity funds in the week ended Jan. 5, the biggest inflow since June (FYI JUNE SPX 1070), while $9.6 billion exited money market funds. Last week, Goldman raised their forecast for the S&P 500 to 1500, BlackRock to 1350, Barclay’s to 1420, and Citigroup and Bank of America to 1400. Most think that any early year pull back will only produce more upside. What’s made the equities a hard game is you can really feel the anxiety on the downside. Traders are anxious because all the sells offs over the last few months (Fridays’ 16 handle sell off) have been
greeted with waves of buyers and the late sellers have gotten burned.

Why January is Important for the Bulls

It looked like shorts might take control Thursday as there were some early bouts of huge selling in the ES and cash, UBS, JPM & MERRILL were all sellers in the 1270-72 area. Talk of a big basket trade going trough selling SPX by a large US house.

The big stir on the floor was the Barclay’s non farm pay roll estimate. Most estimates on the floor were between 100 to 200k but Barclay’s came out saying they were looking for 580k. I have seen this many times before and it is called " Raising the Bar for the NFP Report" or "Counter Trend Friday". The above was sent to subscribers after the close Thursday.Three reasons above for selling the Open on Friday. 

Longs ended up supporting the 1266 area on Thursday. The headline numbers from this Friday morning's Employment Situation were a mixed bag: payrolls disappointed a bit, coming in at the lower end of consensus, but there was sizable drop in the unemployment rate, which is bullish ?. 

Everyone expected the bulls to be able to run the ES to new highs today, another reason to sell the Open, and would like to see the Russell 2000 confirm strength to allow the up leg to continue throughout next week. A close in the ES below 1265, however, suggests material new highs next week are less likely.

Looking at yesterday's Federal Reserve money supply statistics (released after the close), liquidity remains exceptionally high, which makes corrections likely to be short-lived or simply evidenced by sideways action in the indexes.

The January Barometer has a 90% rate of success. The essence of the January Barometer is simple, as January goes, so goes the year. If January is up, the entire year will be up and vice versa.

90% Accuracy - Too Good to be True?

From 1950 to 2008 this pattern has played out most of the time. There were only five times when it outright failed and seven times when it wasn't exactly accurate. According to the Stock Trader's Almanac, the Barometer has a 90% accuracy ratio. In terms of odds, that's about as good as it gets





No Price action Intraday Review/Setups for Friday as long as no comments to this Blog

Market Outlook

A number of bullish seasonals and other factors are coming into play across multiple time frames. The first two days of the trading year have strongly bullish seasonality, with the second day (Tuesday) stronger than the first (today).

Second, there is bullish bias for the first quarter of the year after mid-term elections in the presidential cycle, particularly in the months of January and March.

Third, the outperformance in the S&P 500 toward the end of 2010 suggests continuation. Fourth, after examination of the Fed’s statistics as of last Wednesday, Fed money printing is again making its way into circulation (as opposed to being deposited as excess reserves, as we noted two weeks ago).
Fifth, there is the so-called January effect, wherein stocks tend to post outsized returns in January.


Now for the bearish factors.
The January effect is greater for small cap stocks, and it is worth noting that the Russell 2000 index has been underperforming large caps recently.

To summarize, there is the beginning of distribution under the market’s hood, which is not showing up in the Dow 30 and S&P 500. Another bearish factor is excessively bullish sentiment, suggesting complacency.

Putting it all together, while strong short term bullish seasonality may give traders the confidence to bid the major indexes higher early this week, we would not be surprised to see a pullback develop by the end of the week. How deep or how long we cannot predict, but the long term picture looks solidly bullish, suggesting the next dip will be a good buying opportunity.