Unusual Overnight Patterns

From October 2008 to March 2009, the financial system was  crashing.  A lot of funds got wiped out, a lot of dumb money was eliminated.  The remains are not so much the fish that were so abundant, but a lot of sharks.  This brings me to the topic of what I view as very peculiar overnight action the past week.  I am sure the stock traders could care less, but I'm mostly a futures trader and it matters to many of us.  A bread and butter play of many stock traders is to sell emotional large gap ups, and buy emotional large gap downs.  However, those plays are well known and many smart traders anticipate the RTH (regular trading hours 9:30 - 4:00) moves and buy or sell ahead in the premarket.

Big gap ups that reverse in regular hours are not that common anymore, because the smart traders who anticipate the RTH  reversal are already in pre market pounding on the futures while they are gapped up big.  By the time the market opens, the gap up has been shrunk in size to where there is little edge.  This is what happened after the State of the Union speech by Obama on Wednesday night.  We traded up to 1103 on the futures but we drifted lower all night in the overnight session until the gap up was whittled down from 9 to 3 points.

Same can be said for the big gap downs.  On Monday night AND Thursday night, we had mini panics in the Asian hours.  On Monday night, the market went down to 1081 during Asian hours, after closing at 1092.5 in the RTH session.  Usually, this means that we stay down big during afterhours and gap down big ahead of the RTH session.  But the smart traders smelled the gap down buying opportunity and jumped on it, buying up futures overnight in anticipation.  So a gap down of 11.5 points turned into a gap down of about 6 points.  Same thing happened on Thursday night, but was even more extreme.  The market closed the RTH session at 1079.25, and started weakening in Asia, down to 1071, an 8 point gap down, before staging a massive reversal and gapping up on the day by 6 points. 

The competition out there is as tough as I have ever seen.  There is an immense amount of statistical data that is available to the big trading institutions.  They are looking for whatever edge they can get, and it is mostly coming up with mean reversion strategies that buy weakness and sell strength.  That is the fundamental statistical strategy among seasoned stock market traders.  They seem to be crowding out their own edge and are partly responsible for these recent unusual overnight patterns.

Long For the Weekend

I have gotten long below 1070 for the weekend, I think odds are that we gap up on Monday.  If we gap down, it will present an opportunity to buy more at lower prices.  There is strong support in the mid 1060s.  My target is fairly modest, aiming for 1085.

Not Good For Bulls

Today's initial rally and failure to continue just made the intraday chart more bearish. There is more bearishness but traders are still thinking that a bounce is just right around the corner.  Perhaps that is why there is no give up and a flush lower, the buyers are just hanging on, hoping for a bounce.

I think a bounce will come, but from lower levels.   I am staying short here, and expect the next couple of hours to be weaker. 

GDP Excitement

The GDP number came in better than expected, which was widely anticipated, yet the market went up on it anyway.  The buying won't go away easily, traders have been well conditioned to buy dips.  Instead of a cascade selloff, I imagine a drip drip selloff with down days sprinkled with flat to slight up days.  I think the low for this correction is still many days away.  Today is the end of the month, historically bullish, but that hasn't really held up for the past several years.  The Chicago PMI number will be out at 9:45, but usually its leaked a couple minutes early to members.  I will maintain my short position. 

Short Ahead of GDP

I have added to shorts here ahead of the GDP number.  Overnight trade was quite volatile, but we're near the highs overnight.  Expectations are pretty high for the number.  I think there will be a sell reaction to the number, whether it be good or bad. 

Overnight Short

The closing 30 minutes of trade can tell a lot about a market.  The successful Bernanke cloture vote got the traders excited, but this market doesn't have the gas to go higher and finished weak in the closing minutes again.  That's the 4th weak close in the last 5 trading days.  MSFT and AMZN numbers were great, as expected, and there isn't much reaction to them.  Tech is overowned, we still need to work off the extreme bullishness that was built up over the past couple of months.  I am going to keep my short position overnight.

MSFT, AMZN, Bernanke, GDP

That is the lineup for this afternoon and tomorrow morning.  I think most traders are leaning long on all 4 of those items, i.e., they think the outcome for each of those events will lead the market higher. 

• MSFT and AMZN might move the market a bit but I don't think earnings matter at this point unless they are really bad.  Good earnings is most priced in.  
• Everyone knows Bernanke will get the nod, so the news will be anti-climactic, and possible sell on the news.  
• I am hearing that the GDP number will come out strong tomorrow.  Expectations seem to be high for this.  That's not good.
  

1081-1083 is Now Resistance

Are we going to pull off one of those tricks that this market has always done when there was a big dip, and ram a rally into the close?  I am not betting on it.  Serious technical damage has been done, and we will need to do some work at lower price areas and consolidate before springing higher.  Bernanke is keeping the bears at bay for the moment with his imminent confirmation but that is pretty much priced in.  I am staying short.  Target is the mid 1060s.

Very Bearish Action

What I am seeing extremely bearish on the screens.  I expected at least a bit of a pop after we got Obama out of the way but its not happening.  It seems like yesterday's rally gave everyone a sigh of relief, and this market is on shaky footing.  Bernanke's reappointment vote is coming up at 10:30 AM, I don't think it makes a difference.  Everyone knows he's getting reappointed.  In fact, it could be another sell on the news item.  I am short now.

No More Obama

Now that we have the Obama factor eliminated for the short term, the market will be focused more on technicals and China.  China looks very weak right now, and it doesn't look like it will spike back up anytime soon.  Looking ahead, the China factor could cause a few more gap downs in the coming days. 

We probably will have a sigh of relief rally for the first couple hours of trade, with Obama out of the way.  But I don't think it will be all that strong.  After that, I am not so sure, but I wouldn't want to overstay the long side.  It will probably be a sell opportunity.  I have changed tactics for the next few days.  I will be looking to short rallies, instead of looking to aggressively buy dips. 

Buy the Bad News?

Obama State of the Union is the last mine in the minefield before the longs get back to aggressive buying.  You could see that the longs were eager to let loose as they immediately bought after the FOMC announcement that Ben will keep rates at zero forever.  Now the nervous longs will wait to buy after the bad news passes.  Sell the rumor, Buy the news?  That's probably the case for tonight, I expect a gap up tomorrow as "relieved" longs buy after realizing that Obama won't take out the banks as his main agenda.

I expect us to test 1103 tomorrow and may get as high as 1105.

No Chasing

I think we keep going higher and finish near the highs but I don't want to chase because I don't have a ton of confidence chasing rallies in this market.  If it falls back down to 1080, I will welcome it as a buying opportunity.  Otherwise I will just watch.

Strange Action

Usually you don't see this kind of late selling right ahead of the FOMC meeting, so I don't know how to read the current action.  It feels like we need a flush lower before going higher.  I can't picture us going straight up after the FOMC announcement.  Another scenario, very unlikely unless we are super weak, is that we selloff all day after the annoucement.  I will play it as the first move lower second move higher type of day. 

Now Long

I am buying the premarket weakness that just hit the market.  My price target is 1092. 

Fed Day

We have sold off hard over the past week coming into the FOMC meeting.  It is now a more two sided market, and every bounce has been sold lately.  Today could be a fulcrum day.  A change of short term trend for at least a couple of days.  The market is very close to strong support levels around 1080-1085, and it will take a lot of initiative selling to get through that.  I don't think we'll do it this go around.  It will be quiet ahead of the FOMC meeting.  But I do think there will be an initial selloff on the FOMC announcement as Obama jitters overcome the market ahead of the State of the Union address.  That should be the time to buy.