Transaction Level Analysis (TLA) - The Blog

Here are back to back examples of the Buy Programs firing away in the hole thereby offering traders Early Warning Signals to either cover their shorts or to piggy-back the Big Guys.

It is our opinion that MacDaddy, an algorithm that measures the strength and momentum of Program Trading, will consistently give a quicker signal than a momentum indicator, such as ROC (Rate of Change).

Why is this?  Simply because Price is a function of Supply & Demand.  Price will go where it needs to go to find liquidity and transactions when there is an imbalance in Supply & Demand.

Large Program Trading runs, such as the Buy Programs shown below, will usurp the local inventory of contracts available.  Their continued presence will thus, drive up price.



Hope that you found this interesting.

The graphic below pretty much says it all.

The momentum of the Buy Programs accelerated at the open and then, go figure, the Dow runs up 266 points.

To us, what transpired was an injection of above normal Demand.  The downstream effects of this Demand requests, created by the Buy Programs, was that the market had to roll up on the price ladder in order to match buyers and sellers.   This is the essence of TLA (Transaction Level Analysis).



Hope that you found this interesting.

There is frequently conversation around the effect of the price of Crude on the stock market.

What is interesting to us, is the conversation around whether there is a correlation between the Momentum of the Program Trading between the S&P 500 and Crude.

Our initial research into this says, that at times, there is correlation; And at times there does not seem to be.

This is a new area of analysis for us so we have not gone through much data, but initial results are so interesting (well, at least to us).

Below is a graphic that illustrates a strong inverse correlation between these two markets Thursday, July 17th, 2008.

We mention that Momentum of the Program Trading in these markets are inversely correlated because the Buy Programs in Crude tend to be accompanied by Sell Programs in the S&P.

For this graphic we have inverted the Momentum of the Program Trades in Crude so that it is easier on the eye to see the correlations.



What we will be looking for next is to determine whether, during the periods when the Momentum of Program Trading of the S&P 500 and Crude are strongly correlating, (albeit inversely), does on tend to lead the other?  Initially, the answer to this question seems, Yes. 

This could be a pretty handy piece of information for those trading the S&P.

Hope that you found this interesting.

Yesterday saw the strongest run of Buy Programs in a long time....(see graph below).

Today, the market opened with more Buy Programs (see below)...Guess what happened...The market charged up.

These last two days are solid examples of how reading the tape, via Transaction Level Analysis, can give you a handle on the real moves behind Supply & Demand.

I hope that these pictures of the Program Trading in the S&P 500 (and other historical graphics in recent posts) can tell more of a story than I can.

Hope that you find this interesting.

The Achilles Heal of Momentum indicators is that they must lag prices simply because they reflect a change in Price.  Thus, Price's Momentum must change before an indicator can calculate and report it   Simple cause and effect.

But what if we went further upstream in the phenomenon of how changes in Price are triggered?

From ECO 101 we know that Changes in Price are a function of changes in Supply & Demand.

Thus, if we want a faster momentum indicator, should we build on that is predicated on changes in Price?  Or should we build one that is predicated on the core contributors to changes in Price, they being changes in Supply & Demand?

This is the heart and soul of Transaction Level Analysis.

If changes in Price are determined by changes in Supply & Demand, then to get an early jump on changes in Price, should we be looking at a lagging price Momentum indicator, or should we be analyzing each and every transaction and determining their likely effect on Price?

When more than average buying comes in (the Demand part of the equation) does Price move immediately or is a there a lag?

It is our belief that Price does not react immediately, rather Demand, in the form of Buy Programs must first chew through the available Supply of contracts before a change in Price occurs.

Thus, by focusing on Supply & Demand, which are precursors to Price moves, as opposed to Momentum indicators which trigger after Price moves, we feel that a trader will have more time to effect a trade.

Hope that you found this interesting.

Today, we'd like to discuss how Program Trading action in the pre-market is a great indication of things to come, particularly in the S&P 500 market.

Today, the market opened up, way up.  Paulson was going to bail out Fannie Mae and Freddie Mac and the sun would continue to shine.

But if you look at the tape, insiders were selling for 2 hours straight, beginning around 7:30 EST.

Go figure...The tape doesn't lie...as the following graphic shows.



Hope that you find this as neat as we do.

Today shows a fairly textbook example in the electronic S&P 500 market of how and when Program Trades drive the market.

One thing to remember with TLA (Transaction Level Analysis), is that it works best when the markets are active.  In a hum-drum market The Tape is also hum-drum.

Luckily, as traders, we frequently make most of our profits when the markets are active.

The graphic below shows just how prescient these 'machines' (which is what we refer to as the substantial Program Trades) are.



Hope that you think this is as neat as we do.

Have a great w/e.

Still no fire power from the Buy Programs.

Though we are looking to go long, simply because the market is oversold, the Sell Programs are still dominating.

Neither lift in the S&P were accompanied by substantive Program Buying but the 2nd run down which coincided with a massive pop in Crude, saw the Sell Programs kick in.



The net effect of the Sell Programs was an increase in supply.  This, we know from the basic economics of Supply & Demand, pushes Price down.

Hope that you find this interesting.

As we noted yesterday, our orientation for entering trades is now to the long side in the S&P 500 futures market.

Our setup was to wait for a retracement >= 50% and enter Long when we saw evidence of substantive Program Buying.

Today, we saw a substantial pullback, but the Buy Programs never kicked on (see graphic below).



We are maintaining our Long orientation and will continue to look to piggy-back any substantive Buy Program runs.

Hope that you find this interesting.

A post from MichaelCovel.com which he titles, "True"

...See our comments and graphical review of the Sell Programs below.


Rittherbusch is on to something.  We monitor Program Trading in the global electronic Crude markets.

We noticed that Sell Programs kicked in with each downward breach of $140 for Light Sweet Crude.  

Once the market began trending down after its last lunch up through $140 the Sell Programs picked up momentum.

As Price is a function of Suppply & Demand, the net effect of these Sell Programs was to increase the immediate supply of contracts which helped push price down.

A graphic of these Sell Programs in Crude can be seen here.

View image

Hope that you found this interesting.