Con-tango

It’s about time!

On Friday, my ass was handed to me in a platter.

Why? I got caught in a shallow market with a market maker shark.

Shallow waters
As I’ve mentioned before, the market maker is the big fish in thetrading pond; and he gets his name because… ‘s so well bankrolled that he’s able to move the markets; he usually uses the market’s direction to strengthen his own bidding, as wrestler’s use their opponents push and pull to their own advantage. But, if the market is weak, because traders have left for the weekend, then the market maker can do as he pleases with the market – the rest of us.

That’s exactly what happened to me on Friday afternoon. The chart shows that at 2:03 PM ET  CL0604 dropped to continue in a yo-yo mode for the next 10 minutes.

So, the first lesson is to avoid trading during shallow markets; you never know who may be lurking out there. In my experience, CL is very tricky on Fridays.

By the way, traders do leave early prior to holidays; it’s often that the exchanges close earlier too – don’t get caught off guard, all exchanges publish their holiday schedules (NYMEX schedule here).

The trading day
Let’s talk about the trading day.
Volatility
First, it has been proven that volatility increases with more trading activity.

If we look at the activity during a normal day, we find very active openings and closings, with volatility dwindling around midday; when traders in general have established their positions, and/or step out to lunch.

During the opening, prices need to adjust to the events that occurred last night, and the closing reflects price adjustments due to traders forward looking into the events that may affect their positions during the coming night. In this context, Monday openings and Friday (or Thursday) closings should be the most active.

On the hourly chart, notice how volatility shrivels prior to closing on Friday February 17, when the market closed early due to the following Monday’s President’s day holiday.  Also, note the extreme
volatility of the opening on the next Friday February 24, after the Saudi blast report.

Openings and closings
Another important aspect to consider is that the opening direction behaves wildly, and usually reverses on a dime, while the direction entering into the last half hour usually does continue into the closing.

In other words, the opening is usually a head fake, while the closing reflects the true direction of the market.

The opening is not only the time to adjust to yesterday’s news; but also, the time to take profits from yesterday’s trade, a time of discovery, and yes, a time to fake the orders placed by all those newcomers that made up their minds last night to buy first thing in the morning, and, as we saw with Taylor, a time to inflict pain on all those holding losing trades…

So, I insist, the opening tells us very little about the following direction of the underlying (with exceptions, of course); although, after the opening there are many breakout methods, which claim to indicate the direction of the underlying, such as the volatility method mentioned a while back, the breakout of the half hour opening range, Muddy’s, and such.

(We’ll have a chance to look into these very simple methods later on)

On the other hand, usually half an hour before the day’s closing all new information has been digested, and traders decide if it’s worthwhile to risk staying in the trade, or call it a day by closing their positions; so the direction discovered around 2:00 PM, usually follows through into the 2:30 PM ET closing time for crude oil.

During the day
During the day, announcements are made, which jolt the underlying – making it safer to stay in the sidelines. You’ll find that Bloomberg’s excellent calendar will be enough to help you stay abreast of all major announcement schedules.

I also consider important the closings of the hourly bars; especially when prices are failing to continue, – a breakout to the low (high) when advancing (declining) is a significant breach of continuation, which is a sure sign of a reversal.

Notice in the chart, how tests of support or resistance help to confirm hourly reversals.

Tips
A couple of final observations on the opening:

It is highly probable that an opening gap will be filled in; if it’s not, the underlying is very strong.
• If the opening is almost the same as the previous day’s closing, expect reversals on supports and resistance.

Finally, – I almost forgot, the 3rd Friday of every month is option’s expiration date; if buyers or sellers are feeling the pinch, it may get very volatile around these days for the stock market. Then on triple witching day, when option contracts and futures contracts expire on market indexes, the simultaneous expirations often set off heavy trading of options, futures and the underlying stocks, which can cause large fluctuations in the value of all of them.

Trade carefully.