We use a 1 min chart of NYSE $TICK, which indicates how many issues on the NYSE are upticking at the same time, in much the same way other traders do (topic for another post).  However, we also plot a standard 14 period Volatility indicator (out of the can in TradeStation) and tend not to trade when it’s under 250.  What this measures is how much resistance there is to a move.  If it’s low, that means there is little participation and a trend is unlikely to develop.  Usually, $TICK Volatility begins high, trails off in mid-day and then becomes very strong toward the end of the day.

Adding an alert for the 250 level, then, can be a good way to stay out of chop.  We’ve also added a new alert for the 125 level, which indicates that there is something potentially wrong with order flow in the NYSE.  This level was breached today and June 12, the last time there was a major order flow problem.

We won’t be trading again until after 1:00 pm and until the $TICK Volatility gets above 250 again.

10:29 am EDT:  The ES headed lower initially and broke (but not matierally) the combined day/night session daily pivot at 999.75, which was our holdout point for being bullish the first hour.  If we get a strong 30 Year auction at 1:00 pm as we expect, the market should close lower between 994.00 to 1,000.  Otherwise, the reaction depends on where the ES is at that point–above 1008.50 and it could break to new highs.  We would fade a move up from 1005.00 to 1007.00 (retesting  as we write), not hanging around short above 1008.50.  Above there, longs will be difficult unless and until there is a breakout to new highs, so we’ll probably stay out in that case.

The Precise Take – Overnight strength reversed slightly – eyes on 30 Yr Auction today

FOMC Meeting:  Overall, a neutral announcement.  Equities were able to rally after an initial hit, capitalizing on previous momentum.  The extension of quantitative easing (QE or POMO) through the end of October is interesting and unexpected to us.  While this won’t support the Treasury market (and it did indeed take a hit yesterday—though not critically), it will also have the effect of making less frequent the equally damaging tape painting closes and POMO-induced buying frenzies in equities.  Our view that equities need to correct is largely based on the fact that allowing Treasuries to go too low is the worse of two evils.  If equitie go higher, but at a less frenzied pace, Treasuries may be able to be kept under control.  This will become increasingly difficult as the funding requirements become higher and higher—the last week of August will be the next test.  But, for now, it appears the Fed is willing to take its chances and not spoil the equities run.  Perhaps it believes it will correct on its own.

News Today and Tomorrow:  The 30 Year T-Bond auction at 1:00 pm will be closely watched.  If it goes poorly and equities continue their run, Treasuries will lose much ground into the next funding week at the end of August.  Therefore, we believe that it will likely go well.  If it does not, then we will be suspicious of any equity gains short term.  As to CPI, while it is important from the perspective that it is closely watched, we believe it will merely confirm the existing move.  If it comes out moderately above expectations, equities should head higher on expectations of an improving economy.  If it is materially higher than expectations, it’s potentially bearish as it could set up expectations of FOMC tightening and increased production costs.  Anything below expectations should be bearish.  The reaction to the data will be key, and we will report on it tomorrow.  As we write, the 8:30 am reports of Retail Sales, Jobless Claims and Import/Export Prices have disappointed and equities are lower.

Time Profile:  Yesterday’s FOMC Time Profile was nearly perfect and many advisory services had noted the bullish tendency, so we do not see the rally as overall strength and need for it to be confirmed today or tomorrow.  For today, as we wrote yesterday:

We have also run a Time Profile for the last two years (n=17) for the post FOMC day, and have found that it has a generally bearish bias [for the day], with a slight bullish bias for the first hour.  For the period covering the March rally (n=3), there has been a stronger bullish bias for the first hour, with a slightly bearish bias for most of the rest of the day.  This seems logical because most FOMC days are big range days, which tend to be consolidated the following day.

Trading Today:  In light of the Time Profile and because we are heading lower, if the ES opens between yesterday’s settlement of 1001 and 1005, there should be an early attempt to …

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