Transaction Level Analysis: June 2008 Archives

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:

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.

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 )

Some have asked, "Under what conditions does TLA (Transaction Level Analysis) work best?".

The simple answer is 3-fold.

TLA works best:

1.    For futures contracts over equities/options/forex
2.    Certain markets such as S&P 500 and Crude Oil
3.    When the market are busy

Hope this helps.