‘Dark Pool’ Signals Weak Stock Market Rally


Simpler Trading Team

Aug 17th 2022  .  7 min read

In this article:

  • Exposing ‘dark pool’ hidden trades
  • Starting each day with a scanning process
  • Not trusting strength of recent rally

Why would one of Simpler’s traders go against the flow and not trust the recent stock market rally?

He’s watching the dark pool of money effect on the stock market.

Our trader made the call Tuesday afternoon, and the market sold off throughout the day on Wednesday.

Now is the time to be scanning for opportunities.

Options with Bruce Marshall
Futures with Neil Yeager

‘Dark pool’ exposes weak stock market bounce

Internal market signals that began months ago alerted Kody Ashmore, Director of Weekly Options Strategies at Simpler Trading, that the recent rally was suspect.

“I’m finding these prints (confirmations) hidden in the time and sales window (of trading actions) where no one can identify them unless you scan for them and know how to look for them,” Kody told Simpler Insights subscribers Tuesday after the close.

“Dark pool” money wasn’t buying into, or selling out of, the rally. The pool was quiet, as it had been for the most part for months.

The dark pool is a private exchange where institutional investors trade millions of shares without exposure to the general public. These transactions are hidden for 24 hours after trades have been filled.

The upside is that those who know how to follow dark pool transactions can exploit the hidden advantage of institutional investors. This can help traders stay on the right side of market moves influenced by dark pool transactions.

Kody has been following dark pool action as it relates to the SPDR S&P 500 trust (SPY) which is an exchange-traded fund.

“I have not seen the large dark pool buying occur,” Kody said. “This leads me to believe this (recent rally) is just summer trading drifting higher. Without dark pool buying, I don’t have conviction in the rally.

He explained how he sees this movement as a pattern of testing the weekly 50-day simple moving average (SMA) before rolling back down.

The result could be a pullback that tests levels below the most recent SPY low. His plan in this still overextended market, and no dark pool buying, is to be ready for a pullback. With a pullback he’ll watch for dark pool buying for higher positions or dark pool selling for lower positions.

This strategy is not guaranteed to deliver success, and the time frame is not expected to be sudden.

“All our upside targets $410 to $431 from the ‘dark pool signal’ prints have been hit but one at $441.65,” Kody observed. “However, without any large dark pool buying occurring, is this simply a test of the 200-day simple moving average (SMA) before heading down to the signals at $352 to $354, which ironically happens to be the weekly 200-day SMA?”

“Before making a decision up or down, I’m going to wait for the large dark pool buying or selling to occur,” Kody said.

Kody follows dark pool prints, or confirmations, in the millions of shares. This can then lead to a point of support followed by the market bouncing. The volume of shares he follows is sold on any given day, and he has seen only two days with high volume since the SPY low in June.

With the bounce higher appearing to be completed, he’s not observing any push higher in the signals. His assessment appeared fulfilled Wednesday with the market down across all three major indexes. The SPY closed down by .71% at $426.65 today.))

“To me this is nothing more than a low-volume rally,” Kody said. “Even in a bull market there is dark pool buying.”

Kody is watching for continued signals to confirm his expectations of the SPY moving lower.

Kody realizes his assessment may not be popular among market participants zealously seeking a return to a bull market.

“I’ve been scanning the dark pool and I’m only seeing one signal pointing to the upside at 441.65 (SPY),” Kody said, restating his distrust.

“I don’t trust this rally, regardless of what it’s saying,” Kody made clear. “We’ll see if I’m right or wrong.”

In the market today, the Dow closed at 33,980.32 points to slip .50% (dropping 171.69 points on the day). The Nasdaq dropped to 12,938.12 points for a 1.25% tumble while the S&P 500 lost .72% to 4,274.04 points.

The down day ended a five-day upswing across the market.

Why trade alone against the dark pool?

Simpler Trading team members understand the time commitment required to trade well through learned skills and diligent research. 

The Simpler Options online trading chat room was started years ago to help traders find out more about our team and how we operate in the world of trading.

Try this online training and trading chat room today and get access to pro-level traders with decades of real-time market experience.

Scanning for trades starts with question

In this up-and-down market, how can traders search out trade possibilities?

To start the scanning process, traders can simply begin the day by asking the question, “Does this index, sector, stock, appeal to me today?”

Add in a stock scanner and indicators, and the process has begun.

Raghee Horner, Managing Director of Futures Trading at Simpler Trading, reviews a particular market element and follows the “connective thread” – how that element is connected to movement in the rest of the market.

Raghee looks at the indexes (Dow, S&P 500, Nasdaq) first for clear signals of opportunity because they are similarly weighted with the same stocks. She then progresses to look for structure in the indexes – something that indicates the probability of a higher or lower trend, or neutral movement.

She is a strong proponent of starting the day at a time often overlooked by traders. She looks for initial balance – the high or low in the market between 9:30 and 10:30 a.m. – that could show a shift in movement. She’s looking for trends the market picks.

Even neutral trends can be good for day traders who can then use indicators to eliminate one side of the market movement – long or short – from contention, then the possibilities to the opposite side can open up.

“When I’m trading, can I eliminate one side of the trade from contention?,” Raghee will ask as she scans the market. “That just makes the process of deciding that much better.”

While considered a futures trader, Raghee’s principles work across indexes, sectors, and stocks. 

“It’s about being a well-rounded trader and finding opportunities,” Raghee said. “This is going to keep you on a good path.”

Scanning supports traders’ plans

Any leg up in this wild market of sudden shifts in price is needed by traders wanting to stay ahead of the uncertainty.

An automated tool to track key stocks is essential.

Computers can track a variety of stocks around the clock and maintain a trading watchlist focused on a trader’s personalized setups and strategies. Stock scanners work within computer software to evaluate signals on a stock chart that follow specific targets set by the trader.

This edge in uncertainty helps quickly disregard stocks that don’t fit your trading plan so you can  concentrate on stocks with potential.

Stay nimble, aware in market uncertainty

What to trade?

This question gets Simpler’s traders started as they prioritize trends within market elements – indexes, sectors, stocks. From there they prioritize any trends, and begin scanning for specific tickers that suit their trading style.

All the while they keep an eye on market signals others may not see, such as dark pool trades.

With all the market uncertainty, traders in this market do well to stay nimble and aware of all the mechanisms affecting market movement.