MODULE 11 - UNWRITTEN RULES AND TRADING STRATEGIES
If you wish to receive more information about Blueville Academy please email your request to email@example.com.
- Don’t Trade in a Closet
- Turnaround Tuesday
- Active Months
- The 10-Handle Rule
- Counter-Trend Friday
- The Thursday-Friday Low of the Week Before Expiration
- The 5-Minute Rule
- Bus Too Full
- Everyone is Too Long or Too Short
- No Stops Go Untouched in Spoo
- The Walkaway Trade
- Thin To Win
- The Unchanged Game
Don’t trade in a closet!
Our number one rule is, “Don’t trade in a closet.” What does that mean?
People seem drawn to the myth of the lone trader in front of his bank of computer screens, brooding overhis charts and quotes and news feeds, bending his genius towards unraveling their mysteries in ways ordinary mortals cannot.
He’s the 21st century successor to the legendary trader Jesse Livermore, who had a vast office on Park Avenue, accessible by a private elevator, with staff who were forbidden to speak during trading hours
Tuesdays are also part of the early week strength.
Markets tend to rally early in the day and early in the week
This especially applies during a bear market. Shorts may try to get out. Longs may buy into rallies. You see a number of motivations converging.
Again, this is something to watch for and be aware of, not necessarily something to trade into or out of.
The BEST 6-month performance period for the stock market begins in November and lasts through April. This includes the Nasdaq, Russell 2000, Dow Jones, and the S&P 500.
There are many reasons and many theories why this is. Seasonal traders often use this period. Many institutional and individual traders simply take the summer off, leading to the old adage, “Sell in May and go away.”
The holiday shopping season, fuel prices going into winter in the Northern Hemisphere, the end of the gold buying for the wedding season in India—all of these are cited by various authorities as factors.
Whatever your trading style or strategy, it’s good to keep an eye on the calendar..
The 10-handle rule
Over many years of watching the S&P 500, we have found that the index often moves in 10-handle increments. It’s a market tendency to watch for. For example, the S&P opens unchanged at 1194, trades up or down and ends up at either the 1204 area or the 1184 area. That is when the 10-handle rule goes into effect.
After about 10 handles, the index will reach an inflection point and reverse as some exhaustion sets in after the first test of the new level. How many 10-handle increments play out depends on the market volatility, but each 10-handle move creates a short term high or low.
This happens in both upside and downside price action and continues through the trading day. If the last trade is 1215, up 20 handles on the day, and that 1215 could be the midday high, we would then look to trade the 1205 or 1225 area as the next likely place for the market to go and take a rest.
These 10-Handle moves are like stepping stones towards a larger move.
This trade works best on unemployment report Fridays when the S&P futures gap way up or down. You see oversized, pre-market GLOBEX volumes of 400k to 600k ES traded before the 8:30 open. This is what is called a “bus-too-full” trade.
Example: The S&P is down 6 handles at 06:00CT and then down another 8 or more handles after the jobs number is released. Now, the S&P is down 14 handles or more on the 08:30CT open.
With over 400k eminis traded before the official open, we know that traders have already voted. Depending on the price action the tactic is to buy a sharply lower open or wait for another 2-5 handle drop just after the open. You will often see that the opening range has already been predicted by the electronic market.
Since it is Friday, most traders can’t hold the futures over the weekend. So they put in buy stops. With all the selling used up before the open, the ES will start to short cover into the buy stops that have been programmed already. This will lift the offer (buy) side and may present a new buying opportunity.
As always, timing is paramount. Just knowing why a move might be happening is not enough (unless you’re just a commentator). Traders have to plan their entry and, most importantly, have an exit strategy that they stick to.
The Thursday-Friday low the week before expiration
This is one of Marty “The PIT BULL” Schwartz’s trading rules. One of the original “Market Wizards” in Jack Schwager’s classic best-seller, Marty has been a friend for years and a valuable source of insight into the markets as only someone who turned a small account into a mult-million-dollar fortune can be.
The S&P tends to make a low on the Thursday or Friday the week before the expiration of the nearest futures contract. Remember that the large and emini S&P have quarterly expirations as well. This rule applies especially to the quarterly expirations.
Look to buy weakness on that Thursday or Friday, looking for a low to hold into Monday or even into the expiration itself.
Generally, the trade is to buy on Friday and hold into Monday. Combine this with the 10-Handle Rule and others to plan your exit..
The 5-minute rule
The 5-Minute Rule for pivot traders helps you to avoid being stopped out only to find the market turning back in your direction. It requires a pivot to be settled or converted above or below on a 5-minute basis chart.
It is just a filter to avoid that humbling situation of being out, but right. It’s also a good reminder that traders watch the X-axis of the price chart as well as the Y, meaning both the price and the time the market has spent getting or staying there..
Bus too full
This is a street guy’s term for when the markets are overbought or oversold. When everyone is bearish, for example, and the markets are going crazy, we are looking for buying opportunities. We sometimes use “the bus is too full,” instead of the terms “oversold” or “overbought” to remind ourselves that the bus tends to accelerate to extremes in either direction.
Think of it this way, it’s much harder to stop or turn around a bus that’s full of people, because the added weight gives it more momentum. It’s the same way when too many people have piled onto a price movement.
That acceleration, marked by changes in volume and volatility, is a sign to watch for. A related term we use is…
Everyone is too long or too short
We use these terms when traders in the pit and retail have gone from long into the rally to short into the decline. This generally means we think the markets are nearing a top or bottom, at least in the short term. This would be where we would look to fade the crowd. The market is susceptible to snapping back against its current direction.
Example: The S&P moves 8 or more handles and the locals and small paper gets long during the rally or short on the decline. Remember The 10-Handle Rule (pg. 8)? The market may be temporarily overextended.
You have overbought or oversold conditions in a thinly-traded market. Even though the price might be at a relative high or low, it lacks the momentum and strength to punch through it and go further
No stops go untouched in the S&P
Over the years, both in the open outcry and electronic markets, there has been a tendency to “run the stops,” as most traders can certainly attest. Scalpers tend to use 3-5 handle stops. When the markets are moving they trail the stops up or down based on the direction of the move.
Most algorithmic and program trading systems are set to move in the direction of those stops on a daily basis. The short-term stops are the easiest targets to reach, but eventually, mid- and long-term stops fall like dominoes.
We like those extremes because it turns small moves into longer, more profitable moves. Just make sure you’re on the right side and in control.
The walkaway trade
This is an end of the quarter trade. On the last day of the quarter, the portfolio managers have a tendency to run out of money after marking up stocks earlier.
So, by 12:00-1:00ish CST the S&P is susceptible to a decline through the afternoon. Traders look to set up a short position in the early to midafternoon, as the professional money managers walk away, leaving the equities ready for an afternoon fade.
As with a lot of trading rules, use your awareness of this tendency in combination with proper chart analysis and a solid trading plan.
Thin to win
This term is our shorthand for a situation when the volume is thin, yet the price is moving fast and far. Without the counterweight of other participants, a small group of traders or algorithms can push markets much further than they would otherwise go.
While the lack of volume makes it harder to fill large orders, smaller orders can get filled at greater profit if they are lucky or well-timed. And of course, an attractive price can bring in new volume, despite the thinness of the move.
The unchanged game
This rule comes from one of Wall Street’s largest OTC desks. Because big bank desks make prices for options and stocks, they have what is called a “Long and Short” book.
Example: A large hedge fund calls the bank’s desk for a price on 500k shares of IBM. The desk makes a price and if the hedge fund likes the price the bank’s desk sells the 500k shares.
When the trade is made, the customer is long the stock and the bank desk is short the stock.
When the S&P futures are up, the long side of the book doesn’t need adjusting, but as the market goes higher, the short book needs to buy protection. The desk trader has two choices:
- Take some profits on the long book, which actually adds more upside risk, or
- Buy S&P futures, if the S&P sells off to unchanged or lower.
This is the main reason that sometimes there are so many big bids around unchanged. If the markets continue to fall or rally, they buy or sell the necessary protection for the long/short book on the 3:00 CT cash close.
Fair value premium drives buy and sell programs
Fair value is the premium of the futures over (above) the index. Fair value is exactly what it implies; a value where futures are ‘fairly’ priced relative to the stocks themselves, which is the underlying ‘commodity’ for this type of commodity futures contract.
The Program trading in the ES gets going when speculators “bid up” or “offer down” the ES above or below FV (Fair Value)
The idea behind this is simple: when speculators bid up the ES well above fair value it makes it possible to make a profit buying the stock and selling the futures, locking in the spread at a profit. Years ago this was done by hand signal but today is mostly automated.
September 13, 2019