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...