Pre-Pre Market

If I had to make a guess right now it would be that we make a test of Fridays lows. Depending what we find there we set the tone for the next meaningful move. We bounced off that 50% retracement and closed well enough below the OR and the prior weeks settlement to suggest more weakness. Its Sunday morning and Globex hasn’t opened yet so I’m working on Fridays settlement information only.

The market will decide if we just “1 Tick” the low, find nothing there and head back to the 1203-1204 area. Or we find aggressive sellers which will auction the price lower by taking out the bids. The 1 tick is a common trick of the trade of locals. I will cover it in great detail in a later post.

Nevertheless, it doesn’t matter what my opinion is or what any technician’s opinion might be. What will happen is either the collective opinion of traders who have the ability to move markets will be likeminded or they won’t. That will influence the open and often the day.

Here is an example:
If Merrill Lynch is a big seller on the opening bell and there are no other sellers, the locals will be long from selling to Merrill. As long as no other Sell Paper enters the market, the locals will bid the market up selling 1 lots along the way up. When a trade occurs the participants signal a clerk at a podium overlooking pit. The clerk enters the price and this is then transmitted to screens around the world.

The outside world (Paper) sees the higher and higher prints. They think “gee wiz the markets are rallying north - gotta get long, gotta get long!!!”. This is just what the locals are looking for. Remember they are long and are looking to cover their longs by selling them to paper at higher prices for a profit.

With prices auctioning higher, the buyer enters the market. The locals know that Paper are like terminates, if you see one, you know more are nearby. Its funny, they will get very aggressive after that first buyer comes in because they have some assurance that the outside world wants to buy and they are more than willing to sell to them at the highest possible price they can manage.

They also know that the first Paper entering orders could be a seller. They don’t know if their efforts bidding the price higher will attract buyers. No one knows, I repeat NO ONE knows, All you can do is take a shot and watch very closely for signs if you are right or wrong. If you are wrong it’s no big deal because NO ONE can predict what Paper traders are thinking or about to do. This is a game of “probabilities”. So if you are long like the locals in this example, and you are above the OR and you don’t meet Paper Sellers, the “probability” is that the market will continue to auction higher and higher.

The longer the market stays above the OR the more the outside world will “probably” believe the market will continue to trade higher and buyers will continue to enter the market. Locals will continue on their mission pushing the market higher until they have a reason to sell. Sometimes after finding those buyers they flatten up. The market will quiet down and trade in a tight range. If you don’t have Paper entering the markets and the locals don’t have a reason to be aggressive on one side or the other, the market will rotate in a range where buyers and sellers agree on price or both sides find “value”.

Locals are standing in the pit to do only one thing - make money. So its time like this that they will often gun for the high or low, whatever is near by, to see if they can generate activity. Usually there are stops near these levels and they are masters at picking them off. As they saying goes… “No stop in the S&P ever goes untouched” that story is for a later post.

Also I will provide a view on how the electronic market (which I trade) and how the “Dentists from Iowa” influence the market. Theses too will be another post so stay tuned for more tails from the pit.

Tim Mack