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Stocks hold firm, despite multiple sell programs

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We've had some fun this morning in the market monitor as stocks opened "hot," but have since traded off their best levels of the session. The "fun" has probably come from my side as today's 09:00 update regarding some "buy/sell" program execution levels and several "sell programs" this morning quickly had the Dow Industrials (INDU) 8,334 +0.72% trading off their best levels of the session when the Dow was at an early session high of 8,460, but gave back some of those gains to trade a morning low of 8,282. That's a rather decent 178 point range, which looks to have been greatly influenced by some program trading. So far this morning, I haven't received an alert for any "buy programs."

It should be noted that these "buy/sell programs" are nothing more than a risk management type tool (talking in generalities here). Some programs are set up based on scenarios, but for the most part, these programs are simply used on a daily basis to manage inventory risk. Short-term traders will use these "program alerts" to set up some intra-day trading, but they're not necessarily to be used for predicting any type of longer-term trend.

I do think it would be interesting to try and track the number of buy/sell programs that are generated on a daily basis and perhaps make for an interesting "thesis" study if your attempting to achieve a masters or doctoral degree in "market analysis" at a college level, but other than that, they're very short-term oriented.

However, that doesn't mean a trader can't try and use the influence of buy/sell programs to see how certain trades are working as it relates to the very unemotional and disciplined computer generated programs.

For instance, two stocks I've mentioned as bearish in recent sessions are seeing very different results. With multiple sell programs being triggered this morning, a trader can be testing their bullish and bearish thinking as it relates to trades.

The two stocks I've mentioned from the bearish side recently have been Verizon (NYSE:VZ) $28.50 -4.58% (telecom sector) and Amgen (NASDAQ:AMGN) $44.80 +1.28% (biotech sector). As we saw yesterday perhaps, Verizon (VZ) did act more "bearish" and follows through today, while Amgen (AMGN) traded bullish yesterday, and further bullish again today.

So lets look at AMGN, as I probably need to make some adjustments near-term to past bearish thought. "It isn't over till its over," as the saying goes, so lets see if the MARKET is telling me/us anything different and how much trouble I've gotten myself/us into. I currently hold a bearish position in Amgen (AMGN) in the September $45 puts. Original target was the $38 level, but with some DIVERGENCE and the stock trading a little stronger than expected, I may need to raise my bearish target a little. However, by buying some time and "in the money" puts with volatility high, I haven't taken too much heat in my puts.

Amgen Chart - Daily Interval

I started out with bearish thoughts on AMGN via the point and figure chart as the stock rallied to its bearish resistance. That had me placing the above retracement on the bar chart, and I really liked the way the stock has traded retracement in the past. Starting to the left, you and I can place ourselves in the market makers shoes and perhaps see how he/she would have traded the stock. Taking in some inventory and providing liquidity to sellers at the $54.18 level, but when broken (oops) immediately turns into a "sell side" bias. Over time, market makers sure seemed to trade the various levels, offering support again at $45.34, but when broken, then "sell bias" again.

Now what we've seen in recent weeks is a retracement level at $38.19 get gapped higher. Thinking becomes, all bearish inventory below $38.19 is in trouble, buy all bullish inventory above $45.34 also in trouble. Kind of a 50/50 situation. However, market makers don't really panic. My current thinking is AMGN hold up well as market makers that are short inventory below $38.19, try and get things under control. For example if inventory is short 1 million shares at average cost of $38.19, then probably going to buy 250K worth of stock at current levels, get that risk under control, because if stock moves much above relative high, risk for bear becomes $49.76.

However, with a keen eye on order flow (something you and I can't really get a feel for) and perhaps Treasuries (monitoring potential cash supply/demand) stock still has potential to pull back to $38.19, where market makers will most likely have a more "bullish" stance and really try and get an short inventory back under control.

At same time, market makers are most likely having "modest" sell bias at $45.34 if bullish bias is at $38.19.

For you and I, with stock holding up rather well and not falling as well as a Verizon (VZ), I would get a little more "conservative" right now with my bearish target. Instead of potentially competing with market makers at $38.19, I'm going to move may bearish target up to $40.05 right now. If the stock were to fall sharply on "bad news" to the $38.19 level, then that's probably not a "coincidence of support" and the bearish trader most likely locks in gains immediately.

Jeff Bailey
Senior Market Technician
Option Investor

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