Algorithmic trading: exploring the edges of market mayhem

In yesterday's US trading, the first part of the session was in effect a well orchestrated ambush by the bears to spook the prop trading desks and funds which have been playing the reflation/cyclical recovery theme. Weakness in Europe from more abysmal data in the UK relating to very weak business investment, ongoing headaches about Greece and a plunge of 2 cents in sterling as well as several other currency pairs testing fairly critical levels was also infused with worst than expected unemployment claims in the US. The result was a large opening gap downwards which brought the S&P 500 index down to test key support at the 38% retracement level of the 2010 swing high/low. Using the 240 minute chart it can easily be seen how the second half of the session showed an almost perfect technical recovery to bring the index back above the 50% level.

In reviewing the coincidental levels of the Ichimoku pink cloud boundaries, the customary levels on the fibonacci grid, and the rather remarkable reversal in the second half, I find it hard to resist the conclusion that the US equity market is more or less completely dominated by algorithmic trading programs predicated upon exploring the edges of market mayhem and then mounting last minute rescues. It reinforces my view that there is little to be gained, for the time being, in position trading this index (i.e. holding on to positions overnight) but rather going with the intraday flow and reversing when key technical levels (clouds and fib levels) are tagged.