Asset 'drift' and return distribution are dynamic forces, constantly changing as market characteristics change on the basis of volatility. Therefore asset sensitivity or amplitude of directional movement is never constant, nor is it linear or 'Brownian'. When trading systematically, I can't just aggregate historical returns over extended time periods and project forward with certainty. I isolate return periods on the basis of historical market condition as a framework of analysis specific to that condition, so as to create future expectations within similar structural conditions. Therefore, return distribution will have differing skew or kurtosis depending on time period selected for. That's my way of assessing strategy 'alpha'; looking at performance within market conditions as independent structural entities as opposed to aggregating broad, historical data samples across time as an annual performance measure.

Volatility begins as changes in levels of activity (price movement) at the smallest unit of time, subsequently embedding into larger time periods as an established bias, giving way to trend or directional movement. Volatility isn't just a linear phenomenon that emerges from month to month - it clusters and scales.

Price sensitivity is not just isolated to a specific trading period (monthly, weekly, daily, minutely, etc) - it permeates the entire spectrum dynamically; heightened monthly price activity is accompanied by increased hourly, and minutely price activity and so adjusting our risk and money management systematically through trading time must be synchronized.

If we take the Nasdaq 100 mini futures contract (NQ) from Feb 11' - July 11' we have an embedded sideways monthly structure or condition with a range defined by price levels 2280-2400 that encapsulated trading activity. August and September (11') monthly trading range expanded to 2395-1972 = 423 points of activity. Traders must now contend with a waterfall effect of volatility into the smaller units of time. This will impact performance (risk-adjusted returns) and return distribution. The May-Aug 2010 market condition in the NQ contract can provide a comparable measuring stick of performance. How did you trade the mini's in that timeframe?

Trading Within A Volatile Monthly Structure

Changing conditions call for slight modification of swing strategies to increase risk-adjusted returns.

The August carnage in global stocks have established wide monthly channel structures that are grounds for changing volatility conditions, trade risk, and expectancy. The current NQ channel ranges 2395-1972 in August, unofficially -- there will be a lot of movement within this range in the coming months ahead, just as the 'crash' of May 2010 was a precursor for movement and consolidation for 3 months. The previous monthly lower boundary for the NQ at 2280 should stand as a resistance level, structurally. See the day chart of the NQ below for context. The 'brown' and 'blue' horizontal overlay lines represent the critical monthly and weekly structure levels and the 'black' trend line links the low prices established in August/Sept 2010.

Short Signal In Stocks

The NQ violates the hourly 3 Day Rolling Pivot Range in yesterday's session at the 11am hour, and continued lower signalling a short position. ES however, does not generate the 'sell' signal, but generates an indecisive close within the 3 day pivot. So, for ES traders waking up this morning to see the gap down move, any rally attempt at the open or through the day can be sold, using the updated hourly pivot channel high as a stop for the position trader.

Managing Trading Stress

Notice what happens to your 'state' and 'behavior' when a small string of losses accumulates in a short period of time. Our hardwired response, designed as an adaptive evolutionary reflex, driven by fight/flight is to try harder, narrow our focus and increase concentration, energy and intensity on the problem, shifting thoughts into 'potential' consequences or impacts. This inherent pattern does not serve a trader very well, and can lead to compounded mistakes because you are in a 'protective state.'

Short Term Up Trend Intact

Despite yesterday's intraday volatility, they were supporting the dip, as the stocks continue to find support and the hourly structure remains stable into today's session.

The stocks put in an intraday 'buy' signal at 9:45-10:00 today, which is again positive for the continuation of the up trend. The hourly pivot chart has also tightened up, which improves the overall risk side of this 'long' trade, making the 'hold' more manageable in the volatility. For NQ, the 3 day hourly pivot range sits at 2188-2181, which is a nice improvement from the 50pt range of risk as of the past few days.

Day Set Up

Markets rolling on weak GDP news Q2 in Germany - GDP only expanded by 0.1% from Q1 as per the headline. As far as trading set up for today, US stocks have sustained above hourly pivots, but have not generated any intraday momentum via 'buy signals' - the last 2 trading days have been effectively 'neutral' despite stability and up trend.
Today's pivot for the NQ on the hourly sits from 2185-2134. Any closing violation below 2134 would imply a short trading signal. The market can close within the pivot structure and still 'read' a long trade, but, in this market, I would suspect imminent weakness to follow.

Day Pivot: Set Up

To date, the market has put in a 'culmination' bottom Aug 9th very early in the morning and since then the market has not returned to those low levels; for the NQ we have a short term low of 2072 and for ES, the low is at 1077 level. These were the culminating low points established by the previous down swing that began uninterrupted July 27th. On Aug 9th, stocks put in a 'neutral' day - meaning they did not return to the overnight low levels mentioned above and they closed within the 3 day pivot range of the hourly chart. As of Aug 11th, stock indexes (US) make a transition day, by breaking above the 3 Day Rolling Pivot range and closing for the day back into the weekly channel structure to negate a continuation of the intermediate down trend established at the end of July. Importantly, the stocks have not sunk to retest their overnight lows of Aug 9th mentioned above, supporting the idea that there is a tradeable bottom in place.

Day Set Up: NQ, ES

The long signal for short term position traders comes in today IF the NQ closes decisively above 2143 (above the upper boundary of the pivot channel). This is also favorable as it implies that the stocks were able to move back into the weekly channel established last week with the lows of the channel at 2128, thus negating the continuation of the intermediate term downtrend implied by the weekly time period that was established in late July. This would be positive considering the market is coming off a deep collapse and multi-week downswing. We can see the chart below with today's overlays showing the current activity and objectives with target blue and brown horizontal lines indicating the important weekly and monthly boundaries.

Short Term Buy Signal?

The hourly chart below shows the NQ's violating the important 3 Day Pivot Range (Pink Overlay) as noted by the blue arrow as the stocks have re-entered the Weekly Channel structure identified below by the blue horizontal line. What does all this mean for now? If the stocks can hold by tomorrow's(Friday) close above the 3 Day Rolling Pivot Range, this would be the first short term 'buy' signal generated in 2 weeks. This would imply taking a position on the long side with expectation to 2280 level, which is marked by the 'brown' horizontal line below, indicating the important monthly lower boundary level that has provided critical support for this market since Feb.

Day Pivots: NQ, ES

Going into today, the stocks set-up with a 'bullish' bias on the back of a strong close yesterday 'above' the '1 day pivot'. This is the first time in 2 weeks that the major indices managed to close above this 1 day pivot level. The 2 charts below show the NQ and ES on a 15min interval. We can see the activity oscillating around the 'pink' 1 day pivot area, which is a visual regression of the previous days trading activity, and with a close above this 'band'.

Adjusting Strategies For Changing Conditions

What ultimately determines trader conviction is a 'sound' trading plan. This involves the development of a back test, through sufficient time and conditions, with a viable money management approach. The key point, I believe, is in understanding and learning about how your 'rules', 'strategies' and money management techniques function in different market conditions. My work to date in markets was borne out of a need to discover a technique that characterizes changing market conditions. Why was I performing well as a trader in 07', but struggling at times in 08'? Or why did my system perform so well from Sept 10'-Jan 11', and since then I've been struggling? Did you think to examine that batch of trades, not just on the basis of nominal P+L, Wins/Losses, but on the basis of 'Conditions' for that time period? What were the conditions for that batch? Trending? Quiet and Up Trending? Trending and Volatile? And how do we begin to create parameters to define the classifications?

August Downswing: Timing the trade with Structure

Let's re-visit the latest turmoil in markets with a closer examination of the Nasdaq 100 mini futures contract (NQ U1). We have been in a long monthly holding structure defined by the 2400-2280 level, that has generated profitable 'swing' trading opportunities for the agile trader. It's important to recognize this condition of the past 5 months as the culmination of multiple successive attempts to generate a monthly closing above the 'psychological' 2400 level. This turbulent failure by the Nasdaq 100 to do so has precipitated the 'violent' collapse that we have seen in this market over the past week (and all markets for that matter).

Trading Recap: June-July Volatility

We have seen increasing volatility defined by short term trending activity within the larger boundary structure defined by the Monthly overlay channel of the Nasdaq 100 (NQ Futures Contract) between the 2400-2280 range. These oscillations have carried the market to 'potential' monthly reversals of the 'Major' trend of the market, but have successively failed, closing within the confines of monthly range (2400-2280) by months end. Thus, the condition of the market to date is a Major, Multi-Month holding structure, which is revised from an outright Bullish to Sideways Condition, given the dated time period of 5 months without any embedded Weekly or Monthly trending. Given this Macro condition, we have to adapt by adopting an agile and maneuvering positioning strategy to capture the whip saws. Here's how:

Micro Market Structure Examined: Part II

We are now going to incorporate the hourly overlay, which is the key time frame used to initiate our position entry/exit algorithm within the context of the larger time periods discussed in Macro Market Structure: Part I.

From the May 11' top to June 11', there have been 5 signals generated: 4 short, 1 long (which I did not take as explained below due to low R-Value/Expectancy). The signals have on balance generated a +7.1R-Value over 8 trading weeks versus the Nasdaq 100 Index -6.8% return over the same period.

Macro Market Structure Examined: Part I

Let's review the most recent downswing in the US stock market, as per the activity in the Nasdaq 100 mini futures contract, on the basis of our 'market-structure', bottom-up dynamic. This approach gives us a strategic window into detecting profitable trading opportunities within volatile, range bound markets, as has been the case since early 2011. In the first chart below of the Nasdaq 100 mini futures (NQ), we can trace market movements within a broader sideways structure since early 2011, defined by shorter term trending oscillations.

Walking A Fine Macro-Monetary Line In China

Yesterday's 'bounce' in the markets can be attributed to a technically oversold condition, with reconciliation today back to the downside across most assets, specifically North American and European Equities. This renewed selling pressure again synchronized the shorter time structure (hourly) with the longer time periods (Daily and Weekly) all re-aligned today to the downside.

And coming off the data details in China yesterday which saw headline inflation tick up month over month again, supported by a rise in all the components. This adds to the heightened anxiety around coordinated 'jasmine' rallies, as social unrest increases due to the disparity gap of rich and poor, causing Premier Wen Jiabao to jack up minimum wage by 20%. But, the labor market outlook in China is also showing 'cracks' with expectations for hiring in Q3 2011 falling from Q2.  When we consider the trend towards growing urbanization over the years tied into the theme of an expanding manufacturing base and export economy, a weak labor market report in conjunction with rising consumer price inflation sends a chilling message to the Premier.

Dollar Index ....A Trend Reversal In The Making?

Let's look at the math behind the spiraling U.S. debt-deficit situation going into 2012:
The projected 2011 budget deficit sits at 1.48 Trillion.
Debt maturing including interest in 2011 is 2.15 Trillion (includes 142 billion in interest).
Less approximately 300 billion of yet to be purchased Treasury Securities as per TARP (900B in total QE2 spending).
This creates a gaping 3.3 Trillion fiscal 'hole' of funding and refunding needs through 2011.

And with monthly U.S. government spending breaking out on a fiscal year to date basis as per Sept 2010 - Sept 2011...no wonder the U.S Dollar has been collapsing as of late. See the weekly chart below of the US Dollar futures contract.

Market Recap -- Sitting On A Structural Precipice

Lets look at the NQ's (Nasdaq e-Mini Futures Contract) over the past month, as my proxy for the U.S. stock market and 'tell' for the domestic economic situation -- that is eroding at a fast clip on the basis of continued labour market weakness as per the latest from the BLS report last week (June 3rd), along with the recent broad-based weakness coming from the ISM manufacturing data -- on all fronts -- new orders, production and price index, all falling off a cliff in the month of May, which bodes ill for the intermediate term economic future.  Lets see if the NQ's are telling us investors and traders anything useful about this and the uncertain global macro-landscape beyond the month of June.