Tuesday, August 29, 2006

Market Psychology Update for 8/29/06

10:00 AM CT/updated 10:38 AM - Sorry Blogger has been down for a while. Here's a useful market application. I track a basket of stocks representing the major sectors in the market. The program Trade Ideas alerts me every time one of those stocks makes a five minute new high or five minute new low. The market was selling off at 9:54 AM CT, but only a few of the stocks in my basket were participating with new lows. By 9:55 AM, we started to get a spate of five-minute highs. This was a great clue that the selling at that moment had dried up. I'll be in Chicago working with traders the remainder of the day; have a great trading session. Market wrapup on the Weblog tonite.

9:25 AM CT - The downward shift of the NYSE TICK and the expansion of volume at bid vs. offer continued after the release of the number, pushing the market below its overnight range. As long as we see this shift continue, we can expect a lid to the upside. Volume has picked up, and the large traders are hitting bids. Note the move back into the prior trading range of the past several days, setting up a probable test of the midpoint of that range around 1297-8.

9:01 AM CT - We had below average volume going into the consumer confidence number and, as a result, a range bound trade typical of that dominated by locals. Note the return to yesterday's average price. We've been seeing positive NYSE TICK, but somewhat more ES volume at bid than offer. Note the shift down in the TICK as a result of the number. Let's see if that continues and if we get a fundamental shift in the dollar and bonds as a result. Those moves tend to be most significant.

8:30 AM CT - My morning post took a look at mean reversion trading and how often we trade back to average prices for a given time frame. The odds in general are around 70%--much higher under certain market conditions of reduced volume, volatility, and momentum. This odds-based approach to hitting certain levels in the market can be tested for any price level, not just the average price. For instance, given yesterday's pattern of trend and momentum, among other things, the odds of our exceeding yesterday's price highs are somewhere around 67% or two-thirds. These are a couple of levels I'm looking at in the early AM trade.

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