On the last FOMC decision day, I watched with fascination as big money left its footprints behind on one-minute charts. I've long been an advocate of the work of Tom Williams, author of Master the Markets
. Williams' work emphasizes combining volume and price action studies to discern those big footprints.
We're talking about manipulation of the markets. Williams denies that syndicate traders, institutional traders and market makers gather in smoke-filled rooms to plot their strategies. Some coordination may occur, but mostly the efforts appear coordinated only because big money's goals are similar.
Sometimes big money finds itself holding inventory it accumulated at a lower price, and that inventory's prices are hitting resistance. Big money might want prices to go higher, through that resistance, without big money spending a lot of money. One of the tools big money uses in this instance is to gap prices above key resistance levels.
Annotated 1-Minute Chart of the SPX on August 12:
You'll notice that the volume study is blank on the SPX's chart. Unfortunately, my charting program doesn't allow for volume studies on cash-based indices such as the SPX, but when watching that morning, I used the SPY as a proxy for the SPX, as imperfect as it might be. I noted volume spikes in the SPY, of the kind indicative of big money's presence, at each of those time periods.
What did I know, watching this? I knew that big money wanted prices higher, probably into the FOMC decision. In my scalping days, I might have scalped a trade on the first gap, but I wouldn't have held onto it long, not on an FOMC day. While I might be seeing big money's footprints all over that graph, I didn't yet know their motive for being active. Was it to keep prices higher as they anticipated a rise above Friday's high? Was it to keep prices higher so big money could sell into any post-FOMC rally and unload some of the inventory accumulated in the recent rally?
Annotated 1-Minute Chart of the SPX Post-FOMC Decision:
The "there" mentioned in the annotations was the 1012.50 zone.
So, do I assign malicious motives to syndicates, institutional traders and market makers? Honestly, if I were handling the kind of money--and, more importantly, the kind of risk--that institutions, big money handles, I'd want to do all I could to achieve my goals, too.
So what's the lesson? Recognize, as Williams does, "that professional traders can do a number of things to better their trading positions: Gapping up or gapping down, shake-outs, testing, and up-thrusts are all money making manoeuvres helping the market-makers to trade successfully, at your expense--it matters not to them, as they do not even know you" (46). Learn to recognize their footprints. Try to step in those same footprints rather than trading against them. Although I didn't know the ultimate goal of big money that day post-FOMC decision, I could certainly see what big money intended to have happen before that decision. Markets were going to be supported at higher levels.
Also, however, think with some skepticism about their goals. On the morning of August 12, as we've established, big money wanted prices higher. Was that because they had bought lower, intended to hold on for a long while yet and wanted us retail traders to send prices higher for them? Or was that because they were already unwinding positions and wanted to prop up the markets a while longer as they did so? We didn't know that day, did we? We were to find out that some selling was going on at the 1012.50-1014 zone, selling that eventually resulted in a pullback to 978.51 before the markets took off again.