Wednesday, August 30, 2006

Market Psychology Update for 8/30/06

11 AM CT - Just a quick note to point out that we did indeed get that negative distribution shift in the TICK, and that preceded our retracement to the bottom of the AM range in ES. As before, however, it's the ability to sustain expanding volume at the edges of the range that will prove decisive re: any potential breakout. If we continue to see the negative shift in the TICK, we could get a nice break below the AM lows. Volume, however, is quite low, so I'm not in the mode of chasing either weakness or strength. Have a great day.

10:07 AM CT - And yet more of the same, with a net positive TICK and difficulty sustaining market retracements. Volume still modest and locals still dominant. I'm watching for a possible downward shift in the distribution of the TICK, but if that doesn't materialize, I do think we'll continue to establish value at these higher levels. Have a great remainder of the trading day; update tonight on the Weblog.

9:35 AM CT - More of the same. Volume has continued moderate, and that made it difficult to sustain new highs. But we're not really seeing aggressive selling either. The result is a whippy market, typical of that dominated by locals. The Cumulative TICK is quite positive, which makes it difficult to sustain selling when stocks are trading at offer rather than bid. That will need to change to sustain a downside breakout.

9:15 AM CT - Selling volume dried up before we could pierce the lower end of the overnight range, setting that up as an important level. The NYSE TICK has remained positive through most of the session, reflected in strength in the Russell, and volume has remained moderate. That's contributed to what I mentioned in the previous update: a range bound trade so far. We have the upper end of the range at 1308 and the lower end at 1304 (short term) and we'll need some expansion of volume at those extremes, with large traders lifting offers or hitting bids, to get a breakout.

8:55 AM CT - That "tell" at 1307.75-1308 proved pretty good so far. Volume early on typical of a local driven market; no signs of institutions coming in to push for new highs despite bond strength. What volume we've had has been skewed toward hitting bids, leading us to retrace the pre-opening range. If volume continues low, I'd expect a range bound day; right now I'm looking for signs of expanding vs weakening volume as we print lower.

8:20 AM CT - A couple of large traders tried to push a breakout move at 1307.75 and quickly were rewarded with a few ticks in their face; they most puked out at halves. But what that does is tell us that demand wasn't there at 1308 even. Now if we see demand materialize at that level, we know it's new buying interest. This is an important way of viewing markets and levels.

8:05 AM CT - It's tough to argue with the macro picture here: Since mid-July, we've seen oil prices take a dive, bond yields retreat, and stocks rise. When the Fed offered a pessimistic tone in yesterday's minutes, the market rallied. The anticipation of interest rate restraint exceeded the fear of economic slowdown. That thinking may prove short-sighted in the long run, but it's part of the market's current psychology for the time being.

We're at the top of a multi-day range in the S&P 500 Index, with continued indications of buying interest and strength among stocks, as detailed on the Weblog. Under these conditions, the odds of taking out the prior day's highs are quite good. As always, however, we want to see how volume looks if we can print new highs. If we see signs of enhanced institutional activity lifting offers, that's when a meaningful breakout move can occur. Failure to print or sustain new highs would have us looking for a retreat toward the midpoint of the several day range. As I mentioned in my last post, the key is identifying what is happening as markets consolidate, not predicting. I'm happy to keep an open mind, even as I anticipate some carryover of recent strength.

6 comments:

James said...

Dr. Brett,

How are you determining that locals are the only ones in the market? By volume or some other measure. Thanks.

James

Brett Steenbarger, Ph.D. said...

Hi James,

Good question. It's not that locals are the only ones; just that they are dominant. I tell that by volume levels, price movement patterns, and DOM patterns.

Brett

James said...

Dr Brett,

Thanks. I thought you were using the trader ID tag or something else. The offer in the ES increased by a couple of thousand contracts above 1308. I guess there werent enough big players to lift those offers and run the market to new highs. Have a great day.

James

Brett Steenbarger, Ph.D. said...

Hi James,

Yes, volume expanded at that point, and then some automated selling hit the market hard on the sell side. Once that occurred, the volume at the offer really dried up.

Brett

Steve F said...

You said "I tell that by volume levels, price movement patterns, and DOM patterns". What are you using for price levels, how do you analyze patterns and what do you look at on the DOM's?
Steve

Brett Steenbarger, Ph.D. said...

Hi Steve,

Thanks for the opportunity to clarify.

In general, significant elevations of volume above and beyond what is normal for that time of day are indications of institutional involvement. Institutions tend to not work large orders continuously in the book; large locals do. Institutions won't swipe the market several ticks at a time by pulling orders from the book; locals will. Local driven markets are choppy, with many runs and reversals. Institutionally driven markets are much more likely to persist in trending. Most experienced locals can just look at how a market is moving and see what's happening in the book and tell you who, in general, is driving the market. Not something that is picked up by following charts or traditional technical indicators.

Brett