One explanation for recent volatility

If you ask me, trading hasn't been the same since the short sell ban on financials. Stocks used to move smoother when arbitrage strategies were being used by the hedge funds. The five minute charts have become increasingly choppy, so I've started relying more on the 15 minute. The following quote describes exactly what I think is going on:

"Analysts said the low volumes could be attributed to the absence of many traders, particularly statistical arbitrage players who would ordinarily be responsible for significant volume on a daily basis.

Dan Mathisson, head of Advanced Execution Services, Credit Suisse’s algorithmic trading platform, says that when the short selling ban came into force in the US in mid-September, hedge funds “turned off their long/short algos, volatility began to spike and bid/ask spreads widened”.

“If you take algos out, you enhance volatility. A lot of people don’t understand that yet. It’s tied to the hedge funds reducing their trading and exiting the market, leaving the market much more exposed to volatility,” he says."

Source: Financial Times

More chaos

Sometimes patterns emerge from chaos and sometimes chaos is just simply chaos.

Oil - direct relationship with market continues

The link between oil and our markets appears to be strengthening. I would guess that the short term rally in the dollar was starting to hurt us in the U.S. Exports were the one bright spot in our economy. I haven't been trading as much lately. There are definitely opportunities out there, but I think this market calls for more instinctive trading. I'm still looking for picture perfect setups and there haven't been as many of those lately. We get these sharp moves that seem to come out of nowhere. I'm at break even this month. To those who are doing well this month, congratulations! If you can trade this market, I think you can trade any market.

Be careful out there!

Look for the VIX to hit 100 today. If you're an amateur like myself you should be sitting on the sidelines today preserving capital or at least decrease your position size. On days like this, orders don't always trigger like they are supposed to so you're risk increases. I know agressive traders love this high volatility, but it stresses me out too much. I'm looking forward to a day when the VIX gets back under 30.

Monday trade - STP

I traded STP as a bearish pennant. You can see the nice volume contraction and the three inverted hammers in a row. Oil was starting to move down after gapping up, XLF was setting up an inverted cup and handle, and the Nasdaq started making new lows. I thought seriously about exiting at 21, but I ended up getting out at 21.18 for a 1.38R trade. Once USO hit support at 59, the whole market turned back around along with oil. I've pointed out before how the market is moving directly with oil now instead of inversely and this continues to be the case.

Setup: 80

Tuesday trade - POT

This was my fastest profitable trade so far. 2.79R in 10 minutes is not bad. I traded this as a bear flag shorting at 104 and covering at 101.21 (initial stop at 105). The setup wasn't extremely clean but there was volume contraction and I liked how it was close to the 100 psychological support level. I think of major support and resistance levels as exhibiting gravity--they will often suck price down to its level. POT took a stab at hitting 100, but then the tape slowed, so I exited. In better conditions I might have been more patient, but with the choppiness I was quick to take profits. With the huge volume POT was seeeing today, the orders executed in about .2 seconds.

Setup:75

Unprecedented Fall

I've never seen anything like this. I thought we could see 9000 or 8000 in the Dow, but I thought it would take several months to get there, not two weeks. We sliced through 9000 today like it was butter. I was actually thinking about moving a small amount of money into the market in my 401K this morning but then I remembered the saying about falling knifes. We've never witnessed a massive deleveraging like this, so there is no case study. Being invested in the market long term also affects my market neutrality. It still seems like we should get one last massive bear market rally but I won't bet any money on that. I'm starting to wonder what trading is going to look like one or two years in the future. I'm guessing low volume, low volatility sideways action for several years as the number of players decreases. Bush is going to give a speech tomorrow to "Assure the Nation". It's like a CEO denying their company is bankrupt. The markets will probably sell off when he starts speaking. Sorry to be so negative...

Thursday trade - LEN

This was actually a pretty decent setup that just didn't work out. This was a base and break, and you can see the volume contraction before the breakout, the breakout occured on increasing volume and then proceeded to do a 180. This setup would have been stronger if the peak before the breakout was even lower then the previous peak. Also, the time of day was not ideal and the day was very choppy until the late day breakdown.

Setup: 70

Interesting day

Today was very interesting. A global interest rate cut is a lot to digest so chopiness was to be expected. But there were signs of buying at least for short periods of time. I don't know what happened at 1 p.m., if it was just traders returning from lunch, everybody spotted the falling wedge, or if somebody started a rumor, but that was a pretty strong move. In Google Finance, when I see all the indexes overlapping, that indicates to me that a move has conviction. At the end of the day though, the Nasdaq bounced off of 1800 and we're left with what looks like a double top.

Tuesday trade - DRYS

I traded this as a bear flag / short term double top. Whenever I find myself trading the same stock several times in a row, I make sure that I'm not treating the stock as a good luck charm. This was a half decent setup but the one thing I didn't like about it was the volume spike early on indicating that most of the people who wanted to sell probably did so on that bar. But I liked the short term double top look, and I still thought there was a good chance it would retest the ORL. Once DRYS couldn't break 23, not even by a penny, I started thinking about exiting. When USO moved down from 73 to 72 like I was expecting, and other oil sensitive stocks moved in sympathy, and DRYS held firm, I exited.

I've started a new way of thinking for exiting. Before I enter a trade I try to visualize how I expect the stock to move. Once the stock doesn't conform to my visualization, I consider exiting.

Setup:65

Market indigestion

I'm on the sidelines until things quiet down a little. Some major rumor or news is coming out every hour. This afternoon, the market has to digest the CNBC rumor that the ban on short selling may be extended, Ford had a terrible September, and GE is issuing more shares or something. Technical analysis is next to useless in this news driven environment and you can't tell if a pattern is being formed by supply and demand or driven by news.