Septemeber 25, 2001

My first day on a trading desk was September 10, 2001. Fresh out of business school, I joined Lehman’s equity proprietary trading desk down at the World Financial Center. There is no need to discuss what happened on my second day on the job, but I will fast forward one week from this gratuitous flashback when management and the IT department heroically relocated the entire capital markets division of this once great Wall Street titan across the Hudson to Jersey City. Since there was no time, let alone urgency, to set up the standard squawk box from the equity index floor of the Chicago Mercantile Exchange, I was given the job to stay on the phone all day and continuously call out quotes from the S&P futures pit (the E-Minis were in their infancy) at the Merc. While assigned this role out of necessity, I can think of no better indoctrination into the business, for the primary market I trade and track to this day remains the Spooz.

On September 25, after playing parrot for the equity derivative desk for about a week, I started to journal the daily action in the markets to help add a little trading color to my squawking. At first, I simply recorded open, high, low, and close prints before I brazenly started to apply my own commentary to the day’s machinations. Over the years I have faithfully maintained this spreadsheet, and along the way added classic futures data, such as volume and open interest, along with some homebrewed statistics such as my rolling tick indicator. After last night, I now have 1,968 trading days meticulously logged for historical reference. If you have never thought of doing this, I would recommend it as 10 minutes of extra effort each day can generate the best weapon in your trading tool box. I look forward to publishing my journal with daily updates on the TFG Matrix website in next few weeks.

One of the older statistics I have tracked, but only recently found value in, is the rolling 5-day average daily trading range in the S&P 500 futures. Quite simply, I subtract the day session (9:30 AM-4:15 PM) low from the high to get a level. Since September, 2001, this figure peaked at an eye popping 91.35 handles on October 15, 2008 and troughed at a no less of an outlier of 5.44 points on December 30, 2009. Currently, the average trading range over the past 5 days rests at 11.66 handles, considerably less than the simple arithmetic average of 16.82 taken from entire set of days from my spreadsheet. Of course, the data is skewed from the massive selloff in stocks in 2008 into 2009 as the average over those 15 months was nearly 30 points.

So what’s the point? This 5 day average trading range starts to kick up when stocks become toppy and falls quickly when a bottom is near. For example, this technical indicator more than doubled off the decade low reading of 5.44 despite a 3.5% increase in the SPX by January 19. Stocks then fell over 9% over the next three weeks before my homebrewed indicator peaked at 19.60 on February 10, 3 days and only 40bps off the lows. Levels are always relative to the environment we are in, but for 2010 with the Vix hovering around 20, I would argue that any average convincingly below 12 handles represents low volatility and an optimal backdrop for stocks. As the average climbs to the low teens, it makes a signal of increased volatility along with uncertainty for which a solid pullback is on the horizon. When this range reaches the low 20’s, one should look for a market bottom. Because the SPX is negatively skewed – that is, it falls much faster than it rises, we may see a range well under 12 handles for quite some time which can only be positive for stocks. I look forward to publishing this indicator as well as many others I track on our website for all to interpret as they see fit.

Bernanke goes up to the Hill again today to deliver the same drab speech from yesterday to the Senate. The big action, however, will come at 8:30 AM when Durable Goods and the Weekly Initial Jobless Claims print. I will focus on the latter, for I can never remember a time this critical for this number as four of the last five weeks have been a disaster. Throw into the fray two consecutive days of miserable data from Consumer Confidence and New Home Sales and a bad miss creates a combustible mix of trouble, for 3 of the 4 “horrible” data points produced nasty Thursday sell offs of an average nearly 25 SPX points. Ouch. With a consensus being a fairly optimistic 460K, anything 455K or better should keep the range on the day quite muted and give the market a chance to chop through the next big wood pile sitting at 1111. Another big whiff, however, and the rolling 5-day average daily trading range pops over 12 and makes things once again quite murky.

S&P 500 E-Minis Key Technical Levels
Support: 1093.75, 1090.25, 1086.50, 1079.50, 1065.00, 1060.00, 1057.50
Resistance: 1103.50, 1105.50, 1107.50, 1111.00/11.75, 1120.00, 1125.00, 1130.00, 1138.50