Transaction Level Analysis (TLA) - The Blog

S&P Buy Programs Dominate @ '08 Year End

2009-01-03T13:46:55Z

The following graphic demonstrates the rotation to Buy Programs in the Hole at year end, as measured by the Program Trading Algorithm, MacDaddy.

Happy Trading in '09.

Go Figure - The Dow Closes Up 266 Points the Same Day That the Buy Programs Lit Up @ The Open

2008-07-29T22:39:01Z

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.

Is there a correlation between Program Trading in Crude and the S&P 500?

2008-07-19T11:16:26Z

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.

S&P - Recap 15/6-JUL-08

2008-07-16T20:08:32Z

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.

S&P - Recap 11-JUL-08

2008-07-11T21:41:32Z

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.

S&P - Recap 10-JUL-08

2008-07-10T21:27:53Z

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.

Today's the Day We Start Looking Long in the S&P - Part 2

2008-07-09T23:56:48Z

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.

Michael Covel & Ritterbusch on Sell Program in Crude

2008-07-09T13:11:43Z

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

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

True

From Yahoo Finance an educated view:

"For the time being it's what we call corrective. ... It's a profit-taking pullback that could still be followed by fresh highs down the road," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates. Ritterbusch said Tuesday's decline may have gained added momentum when computer models used by large investment funds automatically sold oil contracts once prices fell to a pre-set threshold. "A significant part of it's technical," he said of the day's trading. "A lot of these funds don't watch supply and demand fundamentals."

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.

Today's the Day We Start Looking Long in the S&P

2008-07-09T01:54:35Z

As of today, our primary trading direction is LONG in the S&P 500.

As you may know, our primary trading approach is to enter a trade in the direction of the trend when the end of a pullback is accompanied by Significant Program Trading in the direction of the primary trend.

Our analysis, which we never presume to be Gospel, and which we will rescind immediately if we are proven wrong (which we define as losing money), implies that this recent downtrend, from 19-MAY-08 until today, will primarily trade to the upside until the 1,350 area.

We are currently long and will add to our position:

As long as it remains profitable
Upon resumption of Buy Programs after any swing retracement > 50%

Hope this helps.

Has Technical Analysis Kept Pace w/the Market's Evolution from Open Outcry to Computers?

2008-06-26T02:54:21Z

I think that we can look back historically and point to Candlesticks as the earliest form of Technical Analysis.

Since then, and prior to the computer, the bulk of the improvements were Point & Figure, Elliott Wave and Tape Reading.

As the computer moved into Wall Street, all sorts of indicators based on changes in Price, which required increased levels of math and real-time processing power, such as Moving Averages, Relative Strength and Stochastics, came into the public domain.

Today, most short-term traders are fluent in the concepts and application of these indicators.

What is curious to us, is why hasn't there been a continual torrent of new indicators to match the pace of the evolution of the microprocessor and its effect on today's electronic markets?

Why has the standard list of Technical Analysis indicators not changed much in the last 20-30 years?

With the massive evolution in technology during this period, why hasn't Technical Analysis evolved at a similar pace?

Has much changed since Reagan first came into office beyond the ability to deliver and manipulate the same core set of indicators on a trader's home PC?

Is anyone else shocked by this glaring gap?

Perhaps it's time to look to some new approaches and indicators. Hopefully ones developed specifically for today's electronic markets.

As Program Trading is the predominant force in pushing around Price in the short-term, might indicators that were specifically developed to read the contrails of Program Trading be the obvious next generation of Technical Analysis indicators?

Deducing from the name of this blog, I expect that you can surmise our answer and bias towards these questions.

Throughout the lifespan of the United States of America, economists have gathered information documenting a continually increasing disparity between the rich, the middle class and the poor.

This continuum's divergence has accelerated in congruence with steady increase in computerized processing power.

Why is this? Is it because those who have computerized financial models, the means to implement them, and access to sufficient capital, can jump up the food chain substantially faster than those who don't have these resources at hand?

It certainly does...The microprocessor, if tamed, can tirelessly push through the tasks that an army of mathematicians armed with Pencil, Paper and Slide Rulers can only rub up against.

Why then, should we, as market technicians, shy away from leveraging the crunching power of today's computers for further advancing our field?

Heck, the LBO guys did it, the kids who where funded by VCs during the Internet frenzy did it. Gosh, even the Mortgage guys did it when Greenspan dropped the interest rate to nearly zip by developing programs to aggregate oodles of mortgages into pools and then sell off all sorts of sliced and diced interest and capital subsets of the portfolio to ready takers.

Why should we limit ourselves to fancier interfaces that only allow us ever increasing nimbleness at implementing newer strategies using the same old indicators when we can use these same machines to monitor the markets with new tools (indicators) specifically crafted for today's markets?

I hope that some of the questions in this post get you thinking about what's possible, what's next.

As a Post-Mortem to this rant and to use this blog to generate feedback and vetting for our ideas, I would like to posit some possible reasons for the lagged evolution of our industry.

First off, many of the manufacturers of today's trading platforms are remunerated by facilitating transactions. Thus, their business model is based on offering software that enables the trader to more readily place trades.

Secondly, TLA (Transaction Level Analysis) works better for futures markets than for equities thereby limiting the potential demographic pool of customers.

Thirdly, for a Technical Analysis software vendor to retro-fit their platform so that their core logic moves away from processing Open, High, Low & Close and instead processes all of the data points associated with a transaction, which includes loading this data into memory, writing it out to the hard drive, offering tool-sets to read this data from the hard drive and manipulate it into viable strats, managing memory overloads and memory leaks, and to top it all off, creating documentation and a trained support bench is no small order.

Regardless, where there is opportunity, entrepreneurs will tread.

The staggering amount of processing power and memory available at the retail level today combined with the growing consciousness about the net effects of Program Trading on price by the professional trader are making TLA a very exciting field to be in.

Hope this sparks some interesting pondering for you.

Tape Reading vs. TLA

2008-06-21T02:48:48Z

What's the difference between Tape Reading as was practiced by thumbing though ticker tape and TLA (Transaction Level Analysis)?

Well, looking down from an altitude of 30,000 feet, not much. As we get closer and closer to the raw, real-time data, quite a bit.

Reading the tape, at one time, could be done successfully by coordination between the human eye and the human hand.

Today, the enormity of the data load can't be thumbed through...it must be managed by very fast computers running software that is custom written to manage all of the world's electronic markets in real-time.

But many of the core concepts are still the same:

Is size going with the trend?
Is there a rhythm in the trading action as price approaches areas where clusters of stop orders are bound to parked?
When 'everybody knows' that the market must go down again because of 'ABC Economic Data' are the big players gaming for a short squeeze?

The markets have changed dramatically in their scale and complexity since the days of the ticker tape, but has the nature of man changed much during this time?

...I doubt it.

Greed, manipulation, inside knowledge, street smarts, contrarian notions and access to massive amounts of capital are still many of the core components of what is still referred to as Wall Street.

The game continues to evolve, and we as market participants must work smart and work hard to leverage the enormous technical resources available today to maintain enough of a statistical edge and trading advantage in order to remain perched with the winners in this amazing game we call Trading.

Hopefully, the current drive towards TLA and the discussions within this blog will assist in giving you this edge.

When and How Does the Smart Money Make and Take Profits in Crude?

2008-06-08T23:38:16Z

Here's a little tiddy about how the price if Crude actually changes.

Once you read and digest this post I hope you walk away thinking two things:

1. Yeah, that makes sense.
2. There are a lot of benefits to be had by monitoring Program Trades.

It has been our observation that much of the assent of the price of Crude occurs in the pre-market.

We define the 'pre-market' using an EST (Eastern Standard Time) clock from 8:00 a.m. to 10:00 a.m. when the NYMEX pits open for business.

This is a loose definition as what we are about to illustrate can happen almost anytime but seems to re-occur in around this time period.

A Little Background

Consider this, if Buy Programs usurp the supply of futures contracts, thereby increasing price, would a series of Buy Programs that were initiated in a period when there was dramatically lower liquidity (the pre-market) have the same effect on price if they were fired off in a period of high liquidity (when the NYMEX pits were open)?

If you are a subscriber to the Law of Supply & Demand then no. If the increase in demand is constant but Supply is less, then price will have to move more sharply to accomodate demand.

Thus, if one were so inclined and had the capital they could Buy, Buy, Buy in the pre-market and push the price of Crude up $3-4 with significantly less effort if they tried this antic when the pits are open.

Crude moves to a record $139

On Friday, June 06, 2008, the forward Light Sweet Crude contract ran up to $139.

What is interesting is that the move up occurred in 2 distinct $4.50 moves.

One in the pre-market and one into the close.

Wouldn't it have been nice if you had participated in the pre-market move as opposed to the move later in the day and been able to turn off your computer and go to the beach with your kids as opposed to watching the market all day wondering?

What does the effect of Buy Programs in the Crude Market looks like using TLA Software?

You will notice in this chart that there are two primary moves in Crude this past Friday, both for an upward move of around $4.50. One occurred in the pre-market and one occurred after lunch:

In this next chart you can see MacDaddy (an algorithm that monitors the strength and momentum of Program Trades) plot a series of 5 small to intermediate Buy Program Trade Runs which push the market up $4.50.

In this final chart we can see 2 very substantial Buy Program Trade Runs firing off after lunch which lift the market the same $4.50 as the smaller Buy Program Trade Runs were able to lift the price of Crude in the pre-market.

So, what does this all mean?

The pre-market action is ripe with information. Some smart guys knew when to initiate buying. They knew that they could fire off a bunch of Buy Orders and chew through the limited amount of futures contracts in inventory in the pre-market.

The net effect of this was to lift the market. What can a Fundamental Analyist say about these types of price moves? Was there a dramatic shift in Crude Inventories before during or after these price spurts? Did a another war flare out in the Middle East? Did the dollar drop some more? Nah...Price, in the short-run, which is what most traders seem to care about, is predicated on the Buy and Sell Programs, nothing more fancy or elaborate than that.

Hopefully this example gives you some insight into this approach.

Happy Trading.

The Crash of 87 - What if you had software to see inside the Crash?

2008-06-07T10:49:01Z

Remember Black Monday? What caused it?

The most popular explanation was Program Trading.

(see - http://en.wikipedia.org/wiki/Black_Monday_(1987)#Causes).

Back then, software had yet be created that could track and either prove or disprove this theorem.

Today, this type of Program Trading monitoring software exists and is referred to as TLA (Transaction Level Analysis).

Below is a view of yesterday's 400 point drop in the Dow and what the corresponding S&P 500 Futures Sell Programs looked like.

You will note that the price of the Dow 30 does not begin computing until the 9:30 a.m. EST open. To show more interesting data the S&P Futures market is also plotted in the pre-market because that is when The Machines (our vernacular for the computers that initiate the buy and sell programs) kicked on when the NFP (Unemployment Number) came across the wire.

A couple of things to note are:

1.    The Buy Programs never really lit as can be seen by only tiny spurts of Green
2.    The huge amount of selling that poured into the close...Margin calls show no mercy.

Keep in mind how the Law of Supply & Demand pertains to how Program Trades effect changes in price:

1.   Buy Programs usurp Supply thereby pushing up Price.
2.   Sell Programs create (increase) Supply thereby pushing Price down.

Hope that you found this interesting.

The Anatomy of a Revesal (As Seen Through An Electronic Microscope) Part 2...Why Reversals Matter

2008-06-05T14:52:57Z

Why focus on reversals? Aren't reversals more dangerous to trade than following the trend?

Sure, you can make that argument...but there is another side to the coin.

1.    It takes a while to establish a trend.   By the time you can validate that a market movement is a viable trend, it may be a little late in the game to get in.

2.    One of the few market truths is that market can't go in a straight line forever...They must turn. Thus, reversal are an inherent factor of the market which occur on a regular basis.   This regularity offers a steady sampling of trade setups.

3.    With competent TLA (Transaction Level Analysis) software, you can peak inside the guts of a trend to see if the program trades that created the trend are still in play. Having this insight in real-time can add dramatically to your trading results.

Completing this circle in real-time, we are in a market that goes up 200+ one day and down 400 the next day...is Technical Analysis ready to assist you with this kind of volatility?

The Anatomy of a Revesal (As Seen Through An Electron Microscope) Part 1

2008-06-03T10:28:05Z

Wouldn't it be cool if you had an electron microscope that you could focus on the markets and view in real-time, or historically, what a reversal looked like at the atomic or sub-atomic level?

We all see these reversals and wonder...."What happened in there?".

Gosh, we put 'em up on a 1 minute chart (or 1 second or 1 tick...choose your fancy), stare at the market turn and say either, "Where did I go wrong?" or if you caught it correctly, "Aren't I so smart?".

With this extended post we are going to attempt to document our understanding of how a 'run-of-the-mill', pedantic, everyday, healthy, easy to trade, profitable reversal looks like under a custom-crafted electron microscope built for the electronic markets....basically, the heart and soul and guts of TLA (Transaction Level Analysis).

(For a feel of how much data gets processed with these tool sets check out - http://www.transactionlevelanalysis.com/2008/04/why-tape-reading-matters.html )