The Trader Daily

 | Apr 01, 2014 | 7:30 AM EDT  | Comments
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Stock quotes in this article:

DIA

,

spy

,

QQQ

,

IWM

On a normal day, CNBC would likely have devoted every on-air moment to the monstrous snap back rally in the Russell 2000. But thanks to Steve Kroft's interview of Michael Lewis the night before on 60 Minutes, Monday was anything but a normal day. 

For those that missed the 60 Minutes interview, the big headline was the Michael Lewis statement that "The United States stock market, the most iconic market in global capitalism is rigged." Lewis asserted that the major stock exchanges, big Wall Street banks and high frequency, algorithmic traders have all managed to pull the wool over the public eyes. In the process, he said, these speed demons had successfully been shaving hundreds of millions, if not billions of dollars of profit (one penny at a time) from each and every one of our stock transactions.

I do not believe the entire U.S. stock market, is rigged. That sort of sensational statement is great for selling books and capturing the attention of a TV audience. But beyond that, it's of little use.

Is Lewis lying? Has he fabricated this whole HFT story to create buzz around his newest (and no doubt soon to be best-selling) business thriller? Absolutely not. Discretionary traders have been dealing with, and adapting to the effects of HFT for years.

Having been an active, screen-based trader for the past 15 years, I can say without a shadow of a doubt that Lewis is not fabricating the impact that HFT traders have had, and continue to have, on the electronic marketplace. If you're a high volume or large block trader (executing your own trades), I suspect you can attest to the difficulty in executing a large order at the national best bid and offer (NBBO).

Similar to what was discussed by Brad Katsuyama in the 60 Minutes interview, I also have witnessed countless instances where five or ten thousand shares will be displayed for sale. But when I move to execute an order for more than a few hundred shares, that supply either vanishes or is instantly lifted. Was my order front-run, or was I just a slow human? Lewis is asserting the former. 

The burning question, in my view, is whether anyone operating outside of the day timeframe really cares?

If sufficient evidence exists that HFT traders are front-running orders, then for the sake of the structural integrity of the market's execution system, I hope the regulators do their job and address it. If, however, this is a matter of speed, then I'm afraid we slow humans will just need to be a bit more creative.

I simply do not know whether enough participants, with enough political clout, are interested in poking their noses around this issue. Only time will tell.

With that out of the way, let's get back to trading.

Away from the Russell's scorching performance on Monday, the rest of the market was horrendously dull. The SPDR S&P 500 ETF (SPY), the SPDR Dow Jones Industrial Average (DIA) and Power Shares QQQ (QQQ) all traded in a relatively narrow range. With the DIA and SPY finishing close their highs, while the QQQ, adversely affected by continued selling in past momentum favorites, finished near its lows.

Beginning with the SPY, my primary area of interests are 187.25/187.35 and 186.15. As long as the SPY is trading within those bounces, short-term traders will want to look for continued rotational trade. A sustained break (which I generally define as a 15-minute or 30-minute bar close) above 187.35 encourages buyers to make a run for 187.70 and 188.25, while a break of 186.15 kills Monday's bullish momentum and sends us back down toward 185.54. 

5-Minute Volume Profile SPY
eSignal

Of our major Index ETFs, the QQQ was Monday's weakest performer. Tuesday's major area of concern on the QQQ is going to be 88.15/88.25. Any rally that fails to close above that 10-cent area will find me lurking on the offer side of the market. Realistic day timeframe (downside) targets include 87.55 and 87, with 86.47/86.57 being the more extended and lower probability target.

Any bullish scenario hinges on the QQQ catching a bid into or above 87.55, and driving through 88.15/88.25. A sustained break above 88.25 shines a light on 89.

15-Minute Volume Profile QQQ
eSignal

Whether the iShares Russell 2000 (IWM) can repeat Monday's powerful performance will hinge on the depth of supply near 116.70. A sustained break above that level would be expected to send short sellers back to the bench, as the odds would favor a continued drive toward 117.60 and 118.10. If, however, buyers fail to push through 116.70, I'd be on the lookout for sellers to re-emerge and sell the ETF back down toward 115.40.

15-Minute Volume Profile IWM
eSignal

Any trading or volume profile related questions can be posted in the comments section below, emailed to me at parkcityyeti@gmail.com or posted to my twitter feed @ByrneRWS

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