Only The Local Knows……

Friday morning I read a number commentaries from highly respected technicians of which most of them called for higher prices. These market opinions came from analysts who have decades of experience and long track records of accurate market calls. Some called for lower prices off the open but most called for high prices into the close in spite of the typical last day of the month afternoon sell off. And why not, we closed on a bullish note on Thursday.

Apparently many other traders who have some sizable accounts were thinking the same thing as these analysts and they picked 1202-1203 area to stake their claim. Paper buyers came in off the open but the real buying came in fast and furious about 10 minutes off the bell as we traded within the OR at 02.00-03.00. Everyone bought! And they bought size! Swiss Bank, who has been unusually active lately, bought 300 cars at 02.00 and another 100 at 02.80 and another 200 at 3.00. This is aggressive buying. Usually big money traders have an opinion about the direction of the market and when they want to add to a position they will patiently wait until the market pulls back so they can buy cheap. This is known as other time frame players stepping in as buyers when prices are trading below value or at bargain prices. However, when these players get aggressive to the point that they are not willing to wait then they just lift the offers in the pit.

In addition to Swiss, the old Solomon desk, (now Barclays or was that Lehman, I can’t keep track?) bought, Goldman bought, First Boston bought, Merrill sold. When all the big houses buy (and Merrill sells) it’s a good sign that we will see higher prices as the Gurus predicted. They were buying before the PMI number at 9:45 ET, (released early to subscribers which I imagine all these houses are). So my guess is that they thought the numbers would be good and the market would continue on its irrational exuberance.

The locals had a different idea. You see they were big time short. So short that they did have to lighten up their shorts by laying off some in the mini but they stayed short. When no big Paper buying came in after the positive number they held their shorts. What was interesting through is that they were so loaded up that they continued to hold short even after prices broke to the 94 area, They will usually cover and call it a good pay day, especially on a Friday when "happy hour" starts at noon.

You can see how they held offer from 10:50 – 12:00ET. Other traders left for lunch, (the ones that get paid by the clock and not the contract) which gave the locals the opportunity to start getting their way. Once they begin pushing lower and the outside world starts seeing lower prints they begin to change their bullish minds. The sell stops they hit along the way just adds fuel to the fire and soon the traders who were sitting on the sidelines start joining the party. These are the trades who thought the market was over bought and were seeking an opportunity to join a sell off. Last day of the month also adds fuel especially when trading below the prior week close. The fund manager’s start thinking they need to save their gain (actually cut their losses) and start covering their longs especially when they realize that we are trading below the close of ALL the weekly closes of April.

The key here is not to have a firm bias going in to the trading day. Fortunately I can read these analysts opinion and know, like any business consultant you deal with, 50% of what they tell you is crap. Your job is to figure out which 50% has value.

For next week I am planning on more downside activity although I am not convinced ..yet… that this is a major trend change as I don’t see a change in the “Continuity of Thought”. All that means is that I will hold my shorts a little longer and take gains early on longs but I will eagerly take the long if the market gives me that opportunity…regardless of all the bearishness I will now be reading from the Gurus …

……as an added note.. Merrill was big time right!!, who would have thought? You see in this game you can never tell who will be right and who will be wrong except the market ....which is always right.

“Go with the Flow and Take Advantage of the Moment” - Leo Melamed

Tim Mack