Watch The Cash, My Friends, Watch The Cash
One of the things few traders of financial futures take to heart is the cash readings in the underlying instrument. What I mean by this statement is right now traders are looking at 1533 for the SPU as the next upside target. But what they are not talking about is the fact that we are higher in the cash market.
Why is this important? Because this is what option arbs and dealers pay strict attention to. Why? Simple — this is what the arbs are based on — especially on the options side where the SPX settles European style, not American style. Now, as a trader, the question to ask is how do I take this information and use it to make profitable trades?
Today is a great example. Traders came in expecting more of the same dull markets, but there was a spark — a major dealer that came in looking to buy. This creates interest among locals, other institutions, hedge funds and arbs. Now, it doesn’t matter if you know why they are buying, but what is important is that they have gained psychological control of the market. This may last 60 minutes, 10 minutes or two days. It is the traders job to pick realistic targets and let the psychology of the market and the dealer community carry him/her to their trading targets.
The way I look at today is simple. Staircase up. I will buy pullbacks of 200-300 points all day for a move to 1535. Locals and other daytraders will try and pick tops — don’t get sucked into this. When do I know I’m wrong? Simple. If the market ever breaks more than 550 points from a session high, I will not employ this strategy any longer.