Monday, May 10, 2010

After The "Flash Crash" It Is Apparent The Market Is Held Up With Tinker Toys (SPY)

What a day today was... right? The futures up 500 points by early morning, a massive gap up of nearly 400 points followed by a slow decline all day.. To Joe 3 pack(Joe can only afford 3 brews in this economy) today seemed like a big day. In reality it was not, a lot of smoke and mirrors if you ask me. Whichever trigger happy firm/trader that caused Thursday's sell off was in my opinion was saving face today by taking every single offer in the futures for 9 hours straight. Ok.... that may not be the case but it sure as hell could the case considering the robbery firms have/are getting away with.

Speaking of getting away with robbery... busting trades? Give me a break, the current system was designed by exchanges and approved by regulatory. The system worked as designed, THOUGH either by design or chance the system discovered there were simply no real bids. You gotta hand it to the algo's this "discovery" of no bids is one positive that came out of the crash. Positive because all the world and our oh so intelligent government saw for themselves stocks are held up by tinker toys.

Today was just that, a save face day with stocks placed on a shelf held up by tinker toys (futures market tinkering is what places stocks on a shelf which cannot be knocked off because of the lack of liquidity). The fact remains Europe is still in for slow inflated decade, the Euro short party i believe is still in the organizational faze. The traded in a 1 dollar range the entire day on lower volume than the last 3 trading days, which to me signals liquidity is hiding once again. Do not fret the HFT algo's are still lurking in the shadows waiting to "discover" the next NBBO. Despite the insane "flash crash" the manipulation via ETF's and individual stocks is still very much visible contrary to what all you positive thinkers my assume.

Case and point, Goldman Slacks. There was a clear seller with coviction in the stock today despite the overall markets relative strength. Though, She/He or maybe Goldman is a HeShe, traded down the entire day until the buy programs stepped in the last hour of the day. One can argue she has her own disease(criminal probe, civil charges etc) but I personally believe she is indeed sick AND is still a good sentiment indicator. Think about the sentiment indicator this way; Goldman was/is the smartest guy in the room. You are fool to think other firms did not play follow the leader. More charges will be filed against other firms whom made markets and participated in the MBS market. This sell side negative sentiment pressure will surely weigh on the financial index as well as the market as a whole. Yes you heard it here first.

I am sure you have all been waiting on my example of "very much visible manipulation" so here it is...Focus your attention on the chart above, which is a 1 min chart of Goldman for May 10, 2010. I would like you to focus on the apex of the pennant, specifically the 145.40 level, notice the long green upside wicked candle followed by 3 large down candles. To the untrained eye this means nothing, to a seasoned eye this screams, "TAKE OUT ALL THE STOPS BEFORE WE CRUSH THIS POS".

Why do i say this? Because in a normal trading environment(pre 2008) GS's price would have fallen down out of the pennant in an orderly fashion, but in our tinker toy market whoever was getting ready dump a large sell order onto the market did not realize he/she was just "algoed". The algoing happened as follows:

The algo sniffed out the large sell order coming to market, the algo reacted by buying up GS shares an entire dollar affectively taking out  buy stops (those who had orders to buy stock to protect a short position, which were probably placed above the 145.60 level) ahead of this large order because the algo knows the order it is front running is staggering to the current bid, ie GS share price will drop dramatically once the order hits. This rapid purchasing by the algo has now caused a quick spike in GS stock, traders quickly chase the price higher which the algo then sells shares to them. Now the algo is positioned short about .50-.75 higher then the order coming to market was going to hit. The market falls back to natural bid,  boom the original order hits which the algo front rant, price falls. All this happened in less than 2 seconds.

The original order which the alog front ran hit under 145.40 causing GS stock to drop nearly another dollar. You have been fleeced, again. Hedge Accordingly

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