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MRTOPSTEP.COM: COLLECTIVE INTELLIGENCE

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Unlike many futures and options companies, MrTopStep is not a broker. The company was designed by traders for traders.

MrTopStep does not believe one person can teach you everything about futures and options trading. MrTopStep employs several educators in what we call our “collective intelligence.” In other words, the minds of the many are better than the minds of a few. From the onset of the credit crisis to today there are fewer retail and professional futures and options traders. Unlike years past, today’s retail trader is a lot smarter. Retail traders are adapting and learning to trade around program and algorithmic trading. They are learning that trading more doesn't mean more profits, and most of all they are learning to be more patient.

MrTopStep has some rules that we follow, and one of the most popular is something we invented called the “10 Handle Rule.” The rule came from doing the UBS program trading business and is a byproduct of index arbitrage (program trading). It’s so simple to learn you will never forget it. We see it all the time and we saw an exact match on Tuesday when the SPZ had a 1423.00 low of the day and a 1433.00 high of the day. We believe that the S&P moves in 10-handle increments and that when it reaches a 10-handle move it acts as an inflection point. Sometimes those 10 handles can fall short by half a handle or even be stretched out to 12 handles. Either way, the 10 Handle Rule is part of our daily trading tool box.

Another well-known trading rule MrTopStep employs is called the Thursday/Friday low the week before the expiration. That happens to be today and tomorrow. The Pit Bull taught us over 20 years ago that the S&P futures tend to pull back/make a low the Thursday or the Friday the week before expiration. In most cases we have a reason for a particular type of price action, but in this instance we are not sure why it happens, just that it does.  

We admit that the 10 Handle Rule and the Thursday/Friday low are not sure bets, but what we do know is that in years of following the price action in the S&P, these patterns have been consistent. As we go into the end of the year we expect another pattern to develop, and it’s the year-end slowdown. Low volumes and small trading ranges are all part of the year-end trade. We also know that people are not willing to take on  more risk at year end. Many of the big trading shops and hedge funds are already cutting back. Most of the banks are not making prices like they used to and they don't have the flow either. It’s important to know as traders when to cut back, and we suspect after next week’s December quadruple witching is when things will really begin to slow.

Another item in our trading tool box is the Ned Davis S&P cash study for the upcoming expiration. As you can see, Friday has been up 19, down 9 of the last 28 Dec expirations.

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.

Our view:
The S&P futures have closed higher 5 out of the last 6 trading days. After yesterday's rally and selloff, we think the markets are acting tired. We are going to be playing the Pit Bull’s Thursday/Friday low the week before the expiration, thus we lean to selling rallies. According to the study, tomorrow has been up 19 / down 9 of the last 28 occasion. As always, keep an eye on the 10 handle rule and always use stops when trading futures.

  • It’s 7 a.m. and the SPZ is trading 1426.60, down 0.6; crude is down 61 cents at 86.16; and the euro is down 15 pips at 1.3067.
  • In Asia 6 out of 11 markets closed higher (Shanghai Comp. -1.02% , Hang Seng -0.23%).
  • In Europe 11 out of 12 markets are trading modestly lower (CAC -0.08%, DAX -0.37%).
  • Today’s headline: “S&P futures point to a flat to lower open.”
  • Economic calendar: Today: Jobless claims, PPI, retail sales, business inventories, 30-yr bond auction; earnings from Hovnanian, Pier 1 Imports, Adobe Systems. FRIDAY: CPI, industrial production, Facebook lockup lifts
  • Globex volume:  1.82mil ESZ, 237k ESH and 33k SPZ and 20k SPH traded
  • Fair value: S&P -.25, NASDAQ -2.75

MrTopStep Closing Print Video: http://www.mrtopstep.com/closing-print-12-12-2012/

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DISCLAIMER: The information and data in the following report(s) 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. MrTopStep, its officers, directors and its contributors may, in the normal course of business, have position(s) which may or may not agree with the opinions expressed in this report.