For today: A failure on the close and a big sell imbalance has set the tone this morning.  Let's face it, the S&P is struggling  ...

When the S&P 500 futures go up as they have all year, it presented a one-way trade. If you were fast and up to the task you could "sell the early rally and buy weakness," but on many occasions if you sold the e-mini S&P it kept going up. As we have seen all year, the algorithms have been locked and loaded on the upside, but in the last few weeks there have been some big two-way moves, a big jump in volume, and a large increase in program trading.

Follow the money

If you have wanted to know the direction of the S&P this year, all you had to do was follow the money. The No. 1 driver of the stock market has been the exceptionally high level of money flowing into mutual funds and exchange-traded funds (ETFs). Right from the beginning of January it was one big buy imbalance after another, and it hasn't slowed all year until the last two weeks.As you can see by the closing imbalances, there has been a shift to sell-side imbalances. While the overall dollar value is small compared to the billions put to work this year, it does show that some profit-taking has been taking place. The shift to sell-side imbalances has played a major part in the late-day weakness recently. Out of the last 10 trading days there have been 2 imbalances to buy and 8 days in which we have seen sell imbalances.

Thursday May 30 MOC sell $870 mil

Wednesday May 29 MOC sell $900 mil

Tuesday May 28 MOC sell $400 mil


Friday May 24 MOC sell $620 mil

Thursday May 23 MOC sell $150 mil

Wednesday May 22 MOC buy $520mil

Tuesday May 21 MOC Sell $150 mil

Monday May 20 MOC sell $650 mil

Friday May 17 MOC buy $1 bil

Thursday May 16 MOC sell $250 mil

Learning a lesson

There has been a lot made out of the imbalances this year, and while all the mutual fund inflows have been a great guide to where the S&P has been going, it also can work in the other direction. Yesterday we firmly called the ESM higher. Late in the day the ESM traded up to 1659 and pulled back a few handles and rallied again. There were several 2- to 3-handle pullbacks, but each was followed by a new high. Over years of following the S&P there are certain patterns we watch late in the day to gauge the closing direction. Both yesterday and Wednesday I thought the S&P would make new highs late in the day, only to have the MrTopStep Closing Imbalance Meter prove me wrong. Both days the S&P was "attempting" late-day new highs and on both days the imbalance meter showed big to the sell side and the S&P sold off.

View gallery


Stark example

At 2:00 when the MrTopStep closing imbalance showed -71.75% to the sell side, the S&P was trading on its high of the day. Every 10 minutes the imbalance meter increased to the sell side, peaking at nearly 90% by 2:30pm. The ESM made several new lows into the 2:45 imbalance and right into the 3:00 cash close. As the level of stock for sale on the NYSE increased, so did the selling in the S&P. It is, as we say, a stark example of how the imbalance meter can work. Whether you're a stock trader looking for an edge or an index futures or options trader, the MrTopStep Closing Imbalance meter is a must-have tool.

What we do not want to do is have people think that this is a sure bet. Only by studying and using the meter on a daily basis can one gain its true value. As always, please use stops when trading futures. Know your risk and own your trades.

You can follow the new MrTopStep Imbalance Twitter feed at @MrTS_Imbalance

View gallery


Our view: A failure on the close and a big sell imbalance has set the tone this morning. Asia closed mostly lower and Europe is down across the board. Let's face it, the S&P is struggling as we head into the last trading day of May. Our guess is that the S&P bounces, but we have to admit the late-day price action is very telling. Of the 20 Fridays this year, 15 have closed higher and 5 have closed lower. You take it from there.

As always, keep an eye on the 10-handle rule and please use stops when trading futures. It's the only way to stay in the game.

  • It's 8 a.m. and the ESM is trading 1645.75, down 7.75 handles; crude is down 78 cents at 92.83; and the euro is down 48 pips at 1.2998.
  • In Asia, 7 out of 11 markets closed lower (Shanghai Comp. -0.74%, Hang Seng -0.41%, Nikkei +1.37%).
  • In Europe, 11 of 12 markets are trading lower (DAX -0.42%, FTSE -0.81%).
  • Today's headline: "S&P Futures Fall as Investors Wait on Data"
  • Total volume: 1.77mil ESM and 5.9k SPM
  • Economic calendar: Personal income and outlays, Sandra Pianalto speaks on financial stability analysis at joint conference with Fed board in Washington, Chicago PMI, consumer sentiment and farm prices.
  • Fair value: S&P -7.01, NASDAQ -12.73
  • MrTopStep Closing Print Video: https://mr-topstep.com/index.php/multimedia/video/latest/closing-print-5-30-2013

Danny Riley is a 34-year veteran of the trading floor. He has helped run one of the largest S&P desks on the floor of the CME Group since 1985.


Follow us on Twitter @MrTopStep http://twitter.com/mrtopstep

Sign up for our free mailing list at http://mrtopstep.com/ for full report.

DISCLAIMER: The information and data in the above report were obtained from sources considered reliable. Opinions, market data, and recommendations are subject to change at any time. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any commodities or securities.


View Comments (0)