05.11.22 | Vertical Extension to the Downside

Auction Market Analysis

• Trading below the prior day’s fairest price (“Value”) shows sellers in control and defines the trend.
• Rejected prices marked by single prints when prices are advertized above prior balance areas identify a lack of value.
• Shaded areas mark where 68% of the day’s business was conducted.
• Today’s trading typifies a “double distribution” day.  Initial balance established a fair price at 4020 but price broke out of the bracket with a further drive down.   Today’s closing price was made on increasing volume and below both areas of temporary balance … below both levels marking “fair price”.
• Double distribution days often represent exhaustion in momentum.   That exhaustion can also be seen by the slowing in the downside migration of value.
• Range extension occurs when transactional volume occurs outside of the initial balance.

Implications

• From an auction market process perspective, the most likely follow-up to today’s down-auction would be a retest of 4000 with a re-establishment of balance around that level.


• If the response to tomorrow’s economic announcements are strongly positive, the market would have to trade above 4020 and with a downside retest of that level … new buyers would need to enter and fuel upside momentum.
• If tomorrow’s announcements become another excuse to take the market lower … rotation around 3900 … then 3800 would be most likely … based on prior high volume auctions at those levels.

05.09.22 | A Profitable Carry Trade

Strategy

This was an institutional algorithmic trade, placed this morning.   All of these orders arrived at the same time.
This is a profitable strategy known as a carry trade … sell a put, buy a call, and sell stock delta neutral.   These positions decay and ultimately force the buyback of short stock.   The majority of the buybacks occur following the weekend before monthly expiration.

05.09.22 | Dark Pools Long Value and Tech

Last month, I commented on a dark pools pattern of accumulation – one where both tech and value were taking off … and this, as rate fears grew.   Counterintuitive?
While everyone watched tech sell off and value get bid, dark pools were accumulating shares … and increasingly as price declined.

05.08.22 | Position Trading Using Auction Market Principles and Hedging Flows

The Auction Market Process and Fair Value

Markets are not day-to-day serially correlated.

Value is the key to market understanding.   Time at price, also know as Time Price Opportunities (TPOs) … represent the level at which the market demonstrates the greatest acceptance and thus, represents fairest value.

If you follow changes in value, you can control trading risk.   The position trader seeks to identify market-offered opportunities when price moves well away from value and when breakouts are unlikely to return to the bracket.

Vulnerability

Not to be confused with prediction methods, which focus largely on measures of sentiment, following the auction market process is a determination method.   Sentiment analysis represents an attempt … not to predict … but to identify periods when the price auction is more vulnerable to greater changes … be they reversals or breakouts with continuation.

Following the auction market process relies not upon picking direction … rather, it represents the flexibility to change direction at any point.   A trend reverses when a certain threshold above or below the last key reference level is broken.

Hedging Flows

Gamma exposure (GEX) is a reflection of the delta hedging of options position by dealers.   Gamma is one of the most important flows in equity markets, especially when short gamma exacerbates volatility-of-volatility.   In short, market makers are economically driven to sell equities when they are falling and buy them when they are rising in price.   In a selloff, as dealers become short gamma, their activity hastens the move down and drives up volatility.   When long gamma, market makers buy dips and sell rallies … slowing the auction market process and suppressing volatility.

The Core Strategy:   Follow the Auction and GEX

In the end, it’s quite simple;  buy low, sell high.

The highest probability long is taken when GEX is at a nadir … well below its mean, implied volatility is rolling over, and long-term buyers enter the market at auction bracket lows.

The highest probability short is taken when dealer gamma is dear … having provided liquidity for call overwriting and premium sellers at dips, implied volatility is rising, and long-term sellers sell into efforts to take the auction higher.

Stephen Harlin