Analysis, Perspective, Trading Strategy
Ghosts in the Machine: Are the Algos Changing their Ways?
Duarte in the Money Options
Behavior is an interesting thing. People develop habits.
And those who observe them and interact with them develop a sense of security
from the general predictability of the patterns of their interactions.
So after a while, marriages become comfortable, business interactions become
mostly automatic, and market analysis tends to fall into a predictable
groove. Until, of course, things change.
A funny thing happened to me at the bank last week. As I went in for
a routine lunch time deposit, the place which is usually packed at that
hour was deserted. As I made my deposit, the usually “all business” teller
started chatting me up. In fact she asked me if I needed a home equity
loan, a new CD, or even a line of credit. When I politely declined, she
seemed to be at a loss for words. In fact, for a flicker in time, I sensed
a bit of anxiety in her demeanor.
That was the first time I had experienced such as thing since the depths
of the old subprime mortgage crisis days when panic was the modus operandi
for bank tellers and executives. So I had a look at the banking stock index
and what I found was troubling to say the least. As the chart below clearly
shows, the venerable BKX is tracing a lower low, lower high trading pattern.
Even more concerning is the fact that this bearish trading pattern is now
possibly on the verge of starting what could be a new and perhaps decisive
I base this final conclusion on the fact that BKX has failed in its latest
bid to rise above its 200-day moving average and that all the technical
indicators corresponding the current price trend in the index are also
flashing caution. Of course, things could change. But if they don’t we
could be in the early stages of something completely different than what
we’ve seen since the election of Donald Trump.
Stocks Look Ready for a Pause
The New York Stock Exchange Advance Decline line (NYAD) is still within
striking distance of making a new high. And given the fact that this indicator
has been nearly 100 percent reliable since the 2016 presidential election
in predicting the trend for the stock market, we have to consider that
the trend, at this point and until proven otherwise remains to the up side.
Nevertheless, even though it may be a fleeting thing, I don’t like the
rising volume on down days that I’m seeing on the S & P 500 (SPX) and
the Nasdaq 100 (NDX) indexes. Pay special attention to the rising volume
registered on Friday’s generally flat trading in NDX and SPX while breath
was slightly negative on the NYAD.
I especially didn’t like what I saw on July 20th where selling volume
picked up fairly briskly as the day went on. This one particular volume
event contributed to last week’s general softening of both the Accumulation
Distribution (ADI) and On Balance Volume (OBV) indicators on both NDX and
SPX. What concerns me is that together, the general trend in NYAD, paired
with the OBV and ADI indicators for these two indices have been excellent
predictors of the general trend in the market. The fact that all three
are now flattening out simultaneously suggests that the market is starting
to synchronize its behavior and may be ready for a change in the long term
Are the Bots Changing the Game? We may be witnessing a change in the programming
for trading algorithms. And if that is indeed happening, this market may
be headed for some trouble.
As I’ve said before, we remain in a bull market. Yet, some eerie comparisons
to that venerable pre 2007-2008 market crash period of time are increasingly
evident. And even though this time may be different, it is still concerning
to see that just as in 2007-2008, bank stocks are struggling, and perhaps
are on their way down for a good period of time while tech stocks and the
rest of the market, especially the NYSE Advance Decline Line, the Nasdaq
100 Index and the S & P 500 are still within striking distance of new highs.
In other words, we may be seeing the first stealth raid by the bears starting
So I’m not bearish at this point. I’m just trading. But anyone who recalls
2007-2008 will remember that BKX was in well established down trend for
months before the rest of the market joined it in earnest. Therefore, unless
things change, I am suggesting that it is plausible to consider the notion
that something different may be emerging from the digital brains of Wall
Street’s Algo Machine.
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