Thursday, December 27, 2012

The problem with “fireman’s poles”

The “fireman’s pole” is a common technical phenomenon of recent years; it’s essentially a conspicuous intraday reversal.  It can be seen in the daily charts of many actively traded stocks and indices, with the most recent example of one occurring in the Volatility Index (VIX). 

Fireman’s poles are creations of hedge fund and High Frequency Trading (HFT) market operations and involve quote stuffing and excessively large in-and-out trades made over the course of a single trading session.   A fireman’s pole is visible whenever the stock price (or in this case, volatility) spikes upward early in the trading session, only to reverse toward the lower end of the day’s range at the close of trading.  The latest instance of a fire pole can be seen in the VIX chart shown below.

The significance of a fireman’s pole is that it paves the way for the same funds/HFTs which created it to ride it back up or down in the immediate term, much like a fireman slides down a pole when responding to a firehouse call.  This corresponds to a re-test of the previous high or low of the trading range.

In the present case, VIX looks like it could easily re-test the intraday high of Thursday’s (Dec. 27) trading range seen in the above chart.  Assuming this happens, it will put some temporary downside pressure on stock prices.  Traders are encouraged to remain aware of this possibility and adjust short-term stop losses accordingly.

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