Getting Back in the Habit
I believe the best way to induct myself back into the creative habit of writing my market thoughts in a somewhat narrative format is to actually put down what I experienced during the day and how I dealt with it – trading wise. While I have experience trading many different futures markets I have been focused on Crude Oil, (CL), the 30-year bond future, (ZB), and the S&P 500, (ES). Each of the three markets presents its own set of trading quirks, but all tend to be controlled by algorithmic duck and cover at break neck speed programs running against a myriad of trade combinations to include but not be limited to; options, (greeks hedging), arbitrage hedging, futures spreads, component trading in the case of the NQ, FOMC and anything interest rate related in the case of the ZB, and EIA and OPEC announcements along with EUR/US $ gyrations as well as options hedging in the CL. And we can’t discount or forget the huge commercial users that move in and out of the market to adjust supply and demand needs.
Monday, October 19, 1987
Today is the anniversary of the Black Monday Crash of 1987. It’s hard to believe that it was 28 years ago occurring on Monday, October 19, 1987. The “crash” began in Hong Kong, moved west to the European markets and then jumped across the Atlantic to smash the U.S. markets. I was in London preparing to sign an employment contract with a major U.S. options trading firm that was expanding their European trading to include the European Options Exchange in Amsterdam, the Netherlands. I was going to sign my contract, go out for a celebratory dinner and spend the night in a swanky corporate apartment in Sloan Square and then head back to San Francisco the following day. The sudden reversal of fortune(s) wasn’t apparent until I was watching the BBC Nightly News, which opened with a huge red arrow pointing down next to the DJIA and the number 508.
The probable primary causes for the declines were: program trading, overvaluation, illiquidity and market psychology. The selling by program traders was likely due to the avalanche effect tossed into play by the computerized selling which was kicked into gear as the required selling by portfolio insurance hedges attempting to engage their arbitrage and portfolio insurance strategies. This is turn produced a heavier reaction by program traders as the avalanches took hold triggering additional sell orders. Volume thinned as buyers scattered and the sellers hit the markets with wave after wave of market sell orders.
In 1987, this was a massive and very destructive move down – a crash. In percentage terms, the largest one-day decline in the DJIA remains October 19, 1987. By the end of October of that year the Hong Kong market lost 45.5% the U.K market was down 26.45%, the U.S. market dropped 22.68% with Canadian markets slipping 22.5%. New Zealand markets were hit the hardest losing nearly 60% and taking several years to recover.
After the Crash of ’87, regulators overhauled trade clearing protocols, which brought some uniformity to most prominent market products. This was also the time when “circuit breakers” were developed and implemented. Giving exchanges the authority to halt trading in instances of extreme price declines in the major equity indexes, such as the DJIA, and S&P.
The largest intraday point swing occurred on August 24, 2015, when the DJIA hit an intraday high at 16,459.75 and an intraday low at 15,370.33 producing an intraday swing of 1089.42 points and a net change on the day of -588.40 points. On a percentage basis October 19, 1987, remains the leader for largest daily percentage losses at 22.6%. The percentage change of October 28 and October 29, 1929, is 12.82% and 11.73% respectively. The crash of 1929 kicked off a multi-year global depression with a two-day total percentage drop of 24.55%. Although the DJIA suffered larger net change losses in 2008 with October drops of 733 points on the 15th, and 680 points on the 9th. The DJIA also experienced a 777 point drop on September 29, 2008, and a 680 point drop on December 1, 2008.
The damage inflicted on the U.S. economy during the October 2007 to March 2009 financial crisis was hardest felt in the S&P which lost 57% of its value, with the NASDAQ losing 55% and the DJIA shedding 54%. The recovery has been selective with many in the middle half of the income spectrum dropping off the “spectrum” altogether. This trend is likely to continue for a bit longer, but the light at the end of the tunnel in terms of the “you know what” hitting the fan. The longer term pictures continue to point to a major top in the equity markets being reached very within the next 12 to 18 months. Interest rates remain the larger caveat as to when rates will actually begin to rise and then of course the $64 trillion question is how quick a quarter point rise turns into a half point rise to a full point rise as the global Central Banks attempt to stay in tandem with one another.
Crude Oil – (CL) December 2015 contract
I trade using the Diversified Trading Systems platform through Ninjatrader. Within DTS, I primarily use the Eagle with UniRenko bars and Trade Manager as an execution platform. I run two algorithms that produce buy and sell signals. I trade using an ATR trailing stop that is risk adjusted for each product. Additional indicators include an ADXVMA alert, Price Action Swing oscillator, and Stochastics.
I continue to enjoy and recommend day trading over position trading. I do not carry any futures positions overnight. Currently, my primary focus remains crude oil, (CL), the 30-year bond, (ZB), and the S&P, (ES).
Below is today’s chart for crude, (CL). Future posts will include a trade by trade tracking. On the chart below trades can be followed by longs being marked by the blue dots below the “green” bars and shorts marked by blue dots above the “red” bars. I track trades from signal to signal and include all signals that are generated from the 9 AM EST opening to 2 PM EST.