• Models identify systematic traders exiting their long positions over the past week. Notably, Mon May19th, Tues May20th, Wed May21st and Thurs May 22nd all witnessed strong selling in the last 30 minutes of trading from 2pm EST - 230 pm EST.

• Momentum traders bought the break of the high of 3.45 (NGN25) at 0830 am EST on May 21st - only for the market to reverse immediately after entry. These traders exited their positions on Friday May 23rd from 0830 - 0930 am EST as the market broke to a new low.

• Price levels to watch on the upside are 3.8 and 4.1 (NGN25). On the downside, stops are located at 3.6 and 3.45 (NGN25).

• Put open interest fell in dramatic fashion over the past week, as this figure declined ~40% over since Friday May 16th. Call open interest also declined by a moderate 10% over the same period. Implied volatilities remained unchanged over the same period; rapidly declining open interest in conjunction with unchanged implied volatilities precedes a sideways market.

• Models are neutral in the medium-term.

Models are neutral in the medium-term for NGN25.

Systematic traders were exiting their long positions over the past week, notably during the last thirty minutes of trading from Monday May 19th - Thursday May 22nd . It is unclear how much further liquidation of long positions remains amongst the systematic community.

Both call open interest and put open interest declined over the past week; however, implied volatility levels did not change. This is an indicator of sideways markets in the near future.

On the upside, we see stops concentrated between 3.8 and 4.1 in the July 25 futures.

We see 4.1 posing a strong resistance to the upside as there many stops concentrated between 4.06 and 4.15. The 3.8 level poses less of a threat, and could be taken out with significantly less struggle.

On the downside, we see stops concentrated between 3.6 and 3.45 (NGN25). There are minor stops at 3.6; in contrast, stops located at 3.45 are more numerous and of greater size.

In the past week, systematic traders have continued their trend of liquidating their long positions. Notably, from Monday May 19th - Thurs May 22nd there was strong selling in the last thirty minutes of trading from 2pm EST - 230 pm EST.

How do we know this?

Let me explain with an example from the animal kingdom. Let us suppose that you are an avid bird-lover from Michigan and you are desperately seeking to witness an osprey in action (as a side note – ospreys are large, fish-eating hawks that are listed as a species of special concern in several states, one of which is Michigan). A viable strategy would be to wait until a rain storm, knowing that when a rain storm occurs many fish rise to the surface of the water. As ospreys primarily feed on fish, they come out in large numbers during a rain storm, as they understand that they will have an abundant number of fish to prey upon. They simply spot a fish swimming at the surface of the water from the air; then, they swoop down and catch the fish with their huge talons and soar away. In other words, although ospreys are rare, they will become active when their food supply is most abundant.  

There is a wonderful lesson here for all market participants, as the same phenomenon holds true for systematic traders. What is the “food supply” of a systematic trader? The food supply of a systematic trader is liquidity. Liquidity is most plentiful at certain times of the day, and it is during these moments that systematic traders will be most active. As every trader knows, volumes are significantly greater in the last thirty minutes of trading.

As a result - if you want to understand the behavior of systematic traders, it is important to meticulously analyze the last thirty minutes of trading. Were large bids routinely taken? How large were the ask sizes? Were ask sizes replenished rapidly after getting filled? How quickly did prices move during this time? These questions, amongst others, if carefully analyzed, lead to an understanding of how systematic traders are positioned.