By Danny Riley

Last week and into Monday we were looking for the ESZ to bottom. When the ESZ made its 1420 low on Friday’s close and then traded down to 1416.50 on Globex Sunday night, things didn’t look so good.  Based on Fridays futures close, there was a good possibility of a further slide.  Over the last few years we have pointed out how the algorithms in the S&P target the buy and sell stops.  The Pit Bull says if you want to trade the S&P you have to “buy into the sell stops and sell into the buy stops.”

After running desk operations on the floor for so many years we learned how retail traders and retail trading systems put stops in. We know the algos chase stops. We also know the ES chases the stops that are placed at the top and bottom of the range, 1420 to 1460. A few weeks ago the S&P ran the buy stops above 1459 up to 1466, and last Friday the S&P hit sell stops from 1426 down to 1420 and down to 1416.50 in Globex.  So why does this happen? It happens mainly because of the lower volumes. There is just not enough buying or selling power to keep the markets going up or down. After the S&P makes a high and the buyers step back in come the sellers. Once the markets get exhausted, in come the sell stops and down the S&P goes. Everyone gets short into the decline, the selling dries up and the S&P starts to short cover. Then the S&P short covers, the premiums levels between the S&P and the S&P cash widen out and the buy stops actually buy the offers in the ESZ that make up an index arbitrage buy program.  

Yesterday we thought it was possible the ESZ would sell off a bit after Monday’s big push up, but that wasn’t in the cards. Better news out of Europe, solid earnings and new money being put to work helped cause a mammoth, two-day short covering rally. Some of the names reporting better earnings: Goldman Sachs [GS] beat analysts’ expectations and increased its dividend. Johnson and Johnson [JNJ] beat expectations. Coca-Cola [KO] matched Wall Street expectations. UnitedHealth [UNH] reported earnings that were higher than forecasted. Apple closed up 2.37% after the company announced a Oct. 23 media event to introduce its new iPad mini.
Why so firm? It’s called QE3 Plus. The Federal Reserve is buying $40 billion of mortgage-backed securities per month until unemployment improves. The effect is higher bond prices and lower treasury yields, which helps support the stock market. There was a big warning about 3Q earnings falling way below expectations. So far that has not been the case; after the close yesterday IBM [IBM] beat expectations by a penny and Intel [INTC] topped earnings expectations.  So what we have here is what we call a “perfect storm” to the upside.  

  • Wednesday         up 15 / down 13 of the last 28 occasions
  • Thursday             up 17 / down 11 of the last 28 occasions
  • Exp. Friday         up 16 / down 12 of the last 28 occasions                                

MrTopStep Closing Print Video:

Our view:
The S&P is still maintaining its trading range of 1420 to 1465. The last two days did a good job of squeezing out the shorts, but not everyone has covered yet. The way we see it is the S&P has probably used up a lot of its buying power and needs to back and fill a bit before going back up. We lean to selling the early rally, then buying weakness. As always, please keep an eye on the 10-handle rule and please use stops.

  • It’s 6:00 a.m. and the ESZ is up .75 handles, crude is up 8 cents at 92.17 and the EC is trading 1.3132, up 82.
  • In Asia 9 of 11 markets closed higher (Shanghai Comp + 0.32%, Hang Seng +0.99%).
  • In Europe 8 out of 12 markets are trading higher (CAC +0.45%, DAX +0.27%).
  • Today’s headline: “U.S. Stocks Unchanged Before Housing Report.”
  • Economic calendar: Today: Weekly mortgage apps, housing starts, oil inventories; earnings from BofA, PepsiCo, Bank of NY Mellon, Blackrock, Northern Trust, US Bancorp, AmEx, eBay. THURSDAY: Jobless claims, Philadelphia Fed survey, leading indicators; earnings from Morgan Stanley, Phillip Morris, Travelers, Union Pacific, Verizon, Fifth Third, Huntington Bancshares, KeyCorp, Nokia, Google, Microsoft, AMD, Capital One, Chipotle, E-Trade. FRIDAY: Existing home sales; earnings from GE, McDonald’s, Schlumberger, Honeywell, Edwards Lifesciences.
  • VOLUME LOW: 1.62mil ESZ and 6.3k SPZ traded
  • SPREADS: 62 SPZ/H spreads traded
  • FAIR VALUE: S&P +2,  NASDAQ -11

Brian’s Tuesday recap: “The EU is Fraying; European Sanctions Increase Help Support.” Shared by Henry, Stanton Analytics.
The cloth that holds the Eurozone together is becoming worn and frayed. Polish lawmakers have misgivings about the single-budget mantra of the new EC remedy for the financial crisis. It was learned Tuesday that Spain is in the process of requesting aid, but fears the ramification to the euro. Moreover, the Italian finance minister, Grilli, is troubled by what the potential bailout of Spain will do to their finances. A Spanish bailout will cost Italy 1.5 percent of GDP.

Not only are there divisions amongst the individual states, so too are there talks of succession within the member countries. This is evident in both Spain and Italy. Greece is a basket case. They are looking towards their next tranche of liquidity, which they will not repay and they will need another tranche sooner rather than later. We are surprised that so many seemingly intelligent people are intransigent regarding Greece. It is a tumor for the EC, exorcise it. Nevertheless, the troika meeting on Greece does not yet have a solution despite the fact that it was supposed to be in hand before the EC summit. It will now run through it. However, by mid-morning the Trioka committee walked out of the meeting. However, someone must have locked the door to the street as the committee came back. mts2 (14:44:34): Troika, Greece Reaches Agreement on Most Policy Issues, Says IMF Official – the European Summit is scheduled to start Thursday, 10-18 at 4am CT.

On Monday, the EU tightened sanctions on Iran. It was rumored that the plunge in gold yesterday was the result of Iranian selling. That is conjecture and NOT fact, but it is plausible. This may have also been in reaction to the largest ship owner in the world, Maersk calling a halt to shipping to Tirana ports. They were allowed to do so under the sanctions for food and necessities. Meanwhile, the term structures in Brent and WTI especially point to lower prices … eventually. The market is telling us that there is plenty of crude for the time being. This also tells us that rallies are selling opportunities. However, the geopolitical concerns will support the market on sharp dips. Hence, the reason that the markets are congesting. They will do so until a new set of data points favors the bulls or the bears.

Morning observations:Plenty of headlines today and more are loaded in the chute… Greed versus Fear as short covering and the “Pain Trade” turn the month of October green with gains. Spain starts the ball rolling on the bailout and positive Eurozone economic news, exports and ZEW reports support the premarket bid. Also, Greek PM: confident Greece will get next bailout tranche; Worst is over – obviously stated before the Troika committee stormed out of the meeting midmorning.  In the US, premarket Goldman starts things off on the right foot and Citigroup steals the thunder as CEO Pandit suddenly resigns immediately – trouble in paradise – leaving many to speculate what is up with that? We look forward to the second presidential debate tonight and Thursday’s European summit and plenty more earnings come out to play – starting with tomorrow’s earnings before the open ABT, APH, ASML, BAC, BHP, BK, BLK, CHKP, CMA, Danone, DGX, DOV, FRC, HAL, KCG, NTRS, PEP, PJC, SWK, TXT, USB, Xstrata; earnings after the close AF, AXP, EBAY, GHL, LRCX, MLNX, PTP, SLM, SYK, UMPQ, XLNX.

Scott_H (11:19:39): Europe a complete mess. They can’t keep their stories straight: Greece Labor Min: talks are continuing with the Troika- Reminder: Earlier reports circulated that Greece talks with the Troika had broken down over some sticking points and that the parties had walked out.  Nothing new I suppose…Surprise!!!! mts2 (14:44:34): Troika, Greece Reaches Agreement on Most Policy Issues, Says IMF Official

From ML: “Our equity “buy” signal ends, but investors are not nearly bullish enough to prevent further upside to risk assets.” That’s October’s contrarian trade of the month: long Energy, short Discretionary. Allocation to Energy relative to Discretionary has reached an extreme (2.2 standard deviations below its 10-year average). —-  Biggest disparity on record = Right up Eubie’s alley.

MrTS Charts: Add now TLT & ya got over +35 HANDLES IN 2 DAYS! +13 from FRI 1420 PUNCH

Tuesday started with 300k ESZ and 1.2k SPZ traded on Globex, trading range 1434.90 – 1444.00 / Monday’s RTH’s, pit range was 1436.50 – 1422.20, settled at 1435.50 up 14 handles. Today’s RTH’s gapped 6.5 handles higher to 1441.80 – 1442.00, tested 1443 area before trading 1441.00 low and stepped up to 1446.30 by 9:13CT. As the spoos trade just above the middle of the recent trading range – a number of fundamental and technical factors lead to the firming equity markets, but there is still some outstanding news that will help shape the next leg. Did someone in Washington order another Crow lunch at our expense? (10:07:03): Electric car battery manufacturer A123 Systems Inc., the recipient of nearly $250 million in government grants, filed for Chapter 11 bankruptcy protection Tuesday. After holding 1444 area and the DJT’s enjoying another nice gain – the spoos traded sideways to higher marking a new highs of 1447.80, 1448.50 and 1449.20 on the European close at 10:30CT. The banks were a bit mixed, but saw some profit taking as the Citigroup news/concerns works itself out. After holding 1447.50 area, the spoos worked higher to 1450.50 by 11:13 and held 1448.50 through the lunch hours(s) in light trade as both the bulls and the bears rested, digesting the days headlines and the price action. Just after 1:00, some air was let out of the bulls balloon and the the spoos were back testing 1447.50 area, holding at 1446.50 area with headlines of Spain’s Rajoy Tells Germany’s Merkel Don’t Believe Rumors About Credit-Line Plans which were followed by Troika, Greece Reaches Agreement on Most Policy Issues, Says IMF Official. The bulls ran the spoos up to new highs of 1451.20 into the cash close. The closing imbalance showed the broader market with a very small $83M to the buy side. The cash close traded 1449.80 area before settling at 1449.20, up another 13.7 handles on the day.  




Roger Volz, BGC Partners

SP1 spikes on Spain ESM funding chatter / corporate action dominating as earning cycle kicks in full steam; potential positive bias into expiration Friday => Inside Range 1419.50 / 1444.50, 1453; Outside Range 1405 / 1461; 1436 Trading Pivot today
ND1 continued relief > 2725; continuation > 2753; top range for underside retest 2770 massed resistance => Inside Range 2722 / 2753, Outside Range 2668 / 2771;2722 Trading Pivot today
Russell 2000 relief > 825; continuation > 832 for underside retest grouping 837 => Inside Range 822 / 837, Outside Range 808 / 846
VIX .prolonged chop akin to April-June 2011, weekly reversal > 16.90 => Inside Range 15.00 / 17.00,Outside Range 13.90 / 18.50
Gold inside day capped yesterday high low holds defensive configuration < 1752, continuation < 1733=> Inside Range 1733 / 1752, Outside Range 1717 / 1768
CL1 (Crude Oil) inverted head shoulders pattern forming with yesterday’s right shoulder, resolution > 93.60 => Inside Range 91.25 / 92.85, Outside Range 89.80 / 93.60
Ten Year Notes (TY1) mixed weaving moving averages = choppy pattern => Inside Range tightens 132’26 / 133’25
Inside Range
· Represents intraday momentum gain/loss
· For example, if the upper bound of the Inside Range is 1453, one can trade short against it/use this area as a stop and vice-versa
· If level is broken (sustained 5 minute move at a minimum, not quick spike up/down), it then typically becomes support/resistance for the remainder of the day
Outside Range
· Represents short-term trend changes
· If broken, the current trend may be in the process of reversing
· 2nd Outside Range (applied if needed) may be in play for a true trend reversal

SP 500 Futures 60 Min Chart and Indicator……reversal (1429.00) consolidation (above 1434.75) continuation pattern (above 1439.25) sees the top of the current ST range at 1452.50 where ST OB is initially targeted






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DISCLAIMER: The information and data in the following report(s) were obtained from sources considered reliable. Opinions, market data, and recommendations are subject to change at any time. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any commodities or securities. MrTopStep, its officers, directors and its contributors may. in the normal course of business, have position(s) which may or may not agree with the opinions expressed in this report.

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