Good Day Bloggers! This week I am going to test your observation skills. There will be a lot of “have you noticed?” type thoughts today. Have you noticed the large moves in your favorite equities? I have noticed that some of my favorite stocks have moved much more in the daily time frame than I have expected in recent memory. Is this just a bias in my head or is there something to these thoughts I am having? That is something we will explore today. Have there been bigger moves in your favorite commodities? It sure seems to me that in almost all the commodities the movements have been accelerated. There are several examples of this in the metals space like gold, palladium, platinum, and silver as well. The energy space had its own large movements, mainly in crude oil and less so in the natural gas space. The question becomes, is this a thing, or is this just my own personal bias? Another question might be are these moves related in the separate asset classes or is this just a coincidence? Lastly, is there something that could be causing this situation or is this just regular market movement? Lots of questions and now let’s go and explore some thoughts and maybe find some answers?

Take a look at the chart below. This is a chart of the gold futures contract and you can see a couple of periods of really large aggressive candles. The first thought that pops up is this is just normal movement, right? Well, the answer to that is maybe?

This is not the only chart that has these exaggerated size candles but I thought it would be the best one to illustrate what I am trying to convey. I know what you’re thinking, don’t the candles always get bigger when they fall? The answer to that is yes, but as common as that is when panic selling begins is that the case here or is there something else at play? It would be almost impossible to quantify the size of candles according to specific drops or rises as the market doesn’t really play that way. However is there something else that may affect the size of the moves other than just the general supply and demand of the participants? Perhaps this next chart can shed some light on this subject.

Check out this chart below, it is also the gold futures but a 30-minute chart instead of the daily chart above. The thing to notice is the movement of the past Sunday night opening of the futures market. One can see that the vast majority of the down move was shortly after the markets re-opened that evening after the weekend. This is unusual for a couple of reasons. First, the volume on a Sunday evening after a weekend is usually somewhat muted as there are fewer participants because the other world markets have not yet opened at this time. This is also unusual because if someone is trying to sell large positions then trying to dump them when there are fewer participants is going to affect the price that one can get for those shares.

It is this lack of participants that can account for some of the larger price movements. This is so because there has to be a buyer and a seller for each transaction to take place, this is called price discovery. If there is no seller or buyer then the price moves until one is found and this can make for a much wider price range. This is part of the liquidity equation. Less liquidity usually translates into more erratic price action. In the case of the chart above the lack of liquidity can be blamed on the overnight futures but to truly explain the wider price movement I think there is another related issue that can help us figure this out.

There is one other thing that we can and should be looking at when it comes to determining why we might be seeing some strange or just different price movement. That metric is the volume profile. When we think about liquidity we need to think about the market participants. As we stated above, if we have fewer participants then we are more likely to see adverse price movement and we can see that in full effect in the volume of charts. We can compare the volume day by day or we can look at seasonal volume to see how different times of the year affect volume totals. It is not unusual to see lower volume in the summer months because that is when many market participants especially the big players like hedge funds and mutual fund managers are taking vacations. This can definitely affect overall liquidity.

So, as the title of this blog says, the summertime blues for traders can mean a couple of things. It can mean less liquidity in the near term and it can also mean exaggerated price movements. Sometimes these adverse movements can work against us and sometimes for us but it is wise to understand why they may be occurring and then we can act accordingly.

Trade Well,

Coach “Old Money” Holmes