Apr 18, ISRG and GOOG earnings play

Traded first few hours. Put on a short AAPL trade right when my system gave me a long signal. Took a loss on AAPL, but was able to scalp the futures to end the day positive. I'm still not in my groove, that's why I've been keeping size down and not worrying about my P/L. I need to work on my risk management more, prove to myself that I can follow my system and trade signals, stay consistent, and then maybe I will start trading larger size.


Took a loss on AAPL. My trade signals worked great today on AAPL. I however suck at trading AAPL and did not follow my initial trade signal that popped right after I went short. This means I need more time trading smaller size until I start following my signals.
Tech very strong this morning-
GOOG---up over 90pts in a day after earnings......INCREDIBLE.

Wish I shorted this yesterday- ISRG down over 60pts on earnings-
Long Term view of GOOG- could head to 580 to test that 38% fib.
YM vs ZF- A look at inverse relationships between stocks and bonds. (overall I'm turning BEARISH on STOCKS going into next week because of this relationship)
A VIX chart I posted like 2 weeks ago, The price is right at the arrow I drew 2 weeks ago.

Block Trade Signals

How do you know if the block trades you see are buying or selling?



I asked myself the same question when I first started filtering for these block trades. I honestly don't don't if the traders initiating these trades are buying or selling, but we both know that if someone is buying then someone else is on the other side of the trade, and that person is selling. I asked myself, if I was a professional trader would I have bought 200,000+ shares of SPY at the market near the high of the day at a NYSE TICK high? Doesn't sound very smart to be buying at the top now does it, especially when that single trade is valued at over 28+million dollars worth of equity. The important thing to notice on these block trades is the current volatility of the markets and the type of trading day it is, whether the market is bracketed or breaking out and trending. Ask yourself the question, do you expect to see breakouts during the afternoon dulldrums when the majority of the time there is no news to act as a catalyst to drive the market higher? If your seeing block trades during the dulldrums on tick extremes, the majority of the time I see these block trades are being faded.

If your using quotetracker and want to filter for block trades the data must be collected in realtime through Interactive brokers. These high volume block trades cannot be backfilled through IB, and the block trades will only be stored in quotetracker's memory for 3 days max. To get the block trades filtered using Quotetracker I use 1-2 tick charts with a paintbar indicator that will show me when the bar volume is over a certain number of shares, such as 200,000 shares for SPY. Filtering out these block trades tells you where the professional money is entering at. Right now the latest software traders are using is MarketDelta, which shows you where the volume is traded when compared to price. My method works in a similiar fashion, but only shows where the professional money is entering at in the form of block trades, which is the most important thing. Marketdelta also has filters for there charts that will allow you to see only trades over a certain amount similiar to what I'm doing. I like my tick charts because I'm able to pinpoint exactly where the trade occured with red dots (or whatever color I choose) and the tick charts provide good detail. I do use 3min charts as my secondary time frame for the futures contracts I trade to get a clearer picture of the trend.

Chart Examples:

Bracketed Day-
Here are comparison charts between SPY, NYSE TICK, and NYSE A/D. (block trades on SPY are 200k+ shares). This was a bracketed day where the high was faded and the lows were bought. Notice how the tick extremes correspond to block trades seen in SPY, and how NYSE A/D showed bullishness when compared to SPY at point #4. For the most part NYSE A/D would have kept you on the right side of the trade. (I use pointer tracking when comparing my charts while doing my research, and it is a must have if you are a serious trader wanting to learn)



Trend day-
Here are comparison charts of ER2, IWM, NYSE TICK, NYSE A/D (ER2 block trades 100+ contracts, IWM block trades 100K+ shares). This was an unexpected trend day brought on with a buy program around 12pm EST and also from news from DiamlerChrysler that helped move the market higher in the afternoon. Also we saw selling around 3pm EST, probably due to traders closing out there long positions before the 3 day holiday weekend. Right around 3pm there was a pop in the VIX, probably from option traders hedging there downside risk with put options before the holiday weekend. NYSE A/D again would have kept you in the trend for most of the day. Notice how the tick lows showed block trade buying on IWM for the majority of the day and then we started seeing block trades fading tick highs on ER2 during the afternoon.

HIGH PROBABILITY TRADE SETUPS

In this post I will be going over my typical trading day from the night before, to premarket, and to market close. I will discuss how I use the bond futures, the VIX, NYSE advance/decline line, NYSE tick, and block trades as a way to trade in conjuction with my volume based market profiling.

Volume based market profiliing-
First and foremost I look for trade signals in relation to the market profile. When price is away from the Point of control POC(highest volume area of the day) I look to take trades that would move back to the POC(like a mean reversion approach). To become familiar with market profile I suggest checking out Trading Naked's large number of educational links found at the bottom of his main page. Here are a couple charts which show what a market profiler looks for on a range bound day and a breakout day.(courtesy IOAMT.com)





My Trading methodology-
I look for short trade signals more so when price is above VAH(Value Area High), and I look to go long when the long signal is below VAL(Value Area Low). When trade entries are made with regard to volume profile on a range day, profit targets should be set to the POC, VWAP, or an exit based on a tick extreme. Entry points are based around block trades seen in IWM and SPY, with the prefered entry made at a tick extreme. When trade entries are made with regard to volume profile on a breakout day then I look to exit when there is heavy volume at a tick extreme.

The Night before the trading day-
What happened yesterday? Did we have a breakout trend day or a range bound day? If the previous day was a bullish breakout day, then I would have a bias to take trades based off my trading method that would be buying VAL and vice versa if the previous day was a bearish trend day. If the previous day was a range bound day, then I would be looking to short VAH and buying VAL normally; however I will also be looking for breakout trend days driven by catalysts such as economic news and in some cases breakouts based on technical analysis like having a 3-7 day narrow trading range(NR3-7). Below is an example of how I charted my volume market profile forecast for the next day.
(NOTE: All of my charts are set to Pacific Time, because that is the time zone I live in.)



Also in my research the night before I like to look at the daily, weekly, and monthly volume profile for the markets I follow by going to Chart-ex.com. By checking out the volume profile on a weekly and monthly chart, you can see volume gaps; which are areas that I typically expect to be filled. Here is an example of the volume profile charts from chart-ex on ER2 taken February 23, 2007. In the chart you can see price is trading at VAH on the weekly and monthly time frame, with a volume gap to the downside.



The start of the trading day-
Premarket: What is the news for the day? What could be the catalyst for a breakout trend day? In order to be prepared for pending news events I checkout the forex factory calendar, which gives pending news events for not only the US, but for all of the world; with regards to the currencies, bonds, and stock markets of the world. Rueters market calendar and Econoday,
are good as well for tracking US specific pending news.

Market open: Is there a gap up/down at market open, and if so, why? Most of the time the gaps in the morning are due to economic news being released before the morning bell around 8:30am EST. Most traders know that morning gaps are good trading opportunities because they have a high probability of being filled or at least partially filled within the first hour of trading. Here is an example from March 29, 2007 of a morning gap due to the GDP # being released before premarket, with the result of a 9pt gap on ES being filled with the first 2 hours of trading.



I will now discuss how I use the bond futures, the VIX, NYSE advance/decline line, NYSE TICK, and block trades as a way to trade in conjuction with my volume based market profiling.

Bond Futures-
Starting during premarket of the stock market I track ZN, which is the most heavily traded bond futures contract(I also track ZF and ZB contracts as well). When watching ZN I look to see if there is heavy volume being traded and if there are any correlations or inverse correlations between ZN and ES. Some days you can see an inverse relationship between ZN and ES and other days you will see no relationship at all. The relationship between ZN and ES is a more advanced trading method that should be used in conjunction with other intraday market breadth indicators as a way to help confirm your trading signals. Here are some examples of the inverse relationship seen between the bond futures and ES, ER2, and SPY.







Sometimes you can see a positive correlation between ZN and the VIX, seen more so during the first 2 hours of trading. Here's an example.



The VIX-
Sometimes you can see divergences between ES and the VIX. Here are some chart examples.






NYSE Advance/Decline line-
By watching the NYSE A/D chart you can stay on the right side of the trend and see where possible breakouts in volatility may be placed. Here are some chart examples compared with ES and SPY.






NYSE TICK-
The NYSE TICK is one of the best intraday market breadth indicators for gauging short term price movements as noted by the NYSE TICK expert Dr. Brett Steenbarger. Some of Dr. Steenbargers articles on trading with the NYSE TICK can be found at Traderfeed. Here are some of my chart examples using NYSE TICK.



ER2 example.



YM example.



This tick chart of SPY highlights block trades as red dots compared to NYSE TICK.



Here is an example of NYSE TICK compared to NYSE A/D.




Block Trades-
I filter for block trades(50-200,00 shares) on the ETF's of the underlying stock indices as a way to track large traders. I particularly look for these block trades around NYSE TICK extremes as signals for short term scalping opportunities and places to exit if I'm already in a trade. I do this because I don't have software like marketdelta, and I like looking for large volume trades in the ETF's because these block trades are seen as better signals when compared to ES and ER2 block trades. Here is a great article from Traderfeed on Tracking Large Traders. Here are some chart examples showing block trades highlighted as red and green dots on the ETF's I follow.





Here is a chart of ER2, NYSE TICK, and IWM showing block trades near NYSE TICK extremes.



Trade examples-
Here are a couple of my trading days taken from my journal that show my trade executions posted above the chart.

Here is an example of one of my trading days where I used a tick chart of SPY showing block trades for guidance in trading ER2 and YM. I looked for short signals because we were trading near VAH and there was no sign of a catalyst to turn the day into a breakout trend day.




On this day I saw a double top on NASDAQ A/D and NYSE A/D, with the NASDAQ A/D line being the more bearish of the 2 charts. Also we were trading in the VAH, so based on my volume profile trading methodology I used this as a way to confirm my short trade signal.

Market outlook for march 19 2007

It's Sunday night and the US futures are up big, about 6pts on ES, 4.5pts on ER2, and 42pts on YM. Why? JPY and US bonds sold off to reaction to China's interest rate hike and the Asian market is trading up. The chart for the last month tells a different story of where things look like they are headed.

The market looks setup for a selloff. Vix and bonds on support, JPY has a bull flag, and tommorow is the day after option expiration. I will wait for my signals, but things don't look good for the bulls.

I'm a little scared of this next week, but I think I have to face my fears to become a better trader. Good luck to all those trading next week, unless of course, your the one taking the bet against me.