Wednesday, March 29, 2017

Faster Tempo

The markets have changed since the HFTs and systematic trading algos have taken over the short term trading space.  This includes anywhere from time frames from a few milliseconds to a few days.  The moves don't take their time to get to their destination.  As you saw on Monday, as soon as the gap down showed signs of being bought in the morning, it was a one way street higher for a few hours, and then basically flatline/consolidate into the close.  Same thing happened on Tuesday.

What should have taken probably 3-4 trading days to go from a gap down of 2320 up to 2360, took just 30 hours.  Those that hesitate and wait for the pullback to get in are missing the whole move.  Once there is a decent sized pullback, it is likely a sign of a trend reversal.

In the era before the HFTs, not everyone reacted to the market action as quickly.  The tempo has speeded up to the point that FOMO kicks in, and the market overextends, like what you saw yesterday afternoon, and has a healthy little selloff into the close.  Yesterday's action, with that selloff into the close, reinforces the 2360 resistance area that will be hard to break through with French elections still ahead and likely quarter end rebalancing from stocks to bonds.

The best way to adapt to this new HFT world is to base your entries on price, not time.  If you are trying to wait for the right price and time to enter, you will likely miss your entry.  If you are just looking at price, then you might be entering a few hours or a day or two earlier than you planned, but that is the only way you will beat the HFTs to the punch.  It may be scary to buy on the downside of the move, but that is the only way that you will be able to get in before the upward move begins.  You have to anticipate the HFT's moves, and get in right ahead, before they go bananas front running the hedge fund herd that pile in relentless at the first sign of a bottom (like Monday morning).

High probability of another test lower of the SPX 2320-2325 zone in the next few days.  Still range bound between 2320 and 2360.


MM111 said...

2370. Time to bail maybe? It looks like we are just going to grind upwards now.

Market Owl said...

I don't think so. Think this move up is going to flatten out early next week, and then go back down late next week.

a/c. 21214 said...

Coming to terms with the new reality (faster tempo) was a challenge; the new reality requires that one become part ant (with a preternatural nose for masked opportunity), part planarian worm (remarkable capacity for regenesis*), and part emperor penguin (with unparalleled patience). Tempo aside, much remains the same: the market's capacity to confound is largely unchanged and its central tendencies (regardless of issue) not spectacularly disorderly.

The HFTs have made good, albeit provencal, opponents, testing the trader's short-term flex, and more often than not, lost in their own positive feedback loops until the symmetry breaks (that's fun(ny!) to watch). That being said, I am of the belief that the HFTs have been naively conceived with the seeds of their own undoing. The composition of the atmosphere in which they thrive will change (as it always does/must) and edges will be conferred back to carbon-based traders. The HFTs have been written to exploit the probable actions of carbon-based traders (becoming iteratively solipsistic as they do so), while the carbon-based traders are by design possessed of the knack to unconsciously exploit nonlinear dynamical systems, something the algos fail at miserably. Interestingly, when the regime changes, there will be fewer human traders than ever before and the outsize gains will be theirs.


Market Owl said...

I don't expect a big regime change, as long as mediocre hedge fund managers still have trillions to invest. You see, he HFTs feed off of hyperactive reactionary fund managers, most of them will still have jobs in the future. If the hedge fund industry gets cut in half, then yes, there will be a regime change. But not until then.