Friday, September 15, 2006

Market Psychology AM Update for 9/15/06

10:00 AM CT - Very early on we saw the top of a range formed when buying hit the brick wall, and then we made a low of the range when selling dried up in ER2. For now, we seem to be oscillating in that range, and the advice of my previous post is relevant. But, alas, dudes and dudettes, it's time for Dr. Brett to head for Chicago and attend to other traderly things. Have a great weekend. Update on the Weblog tonight and thru the weekend as always.

9:54 AM CT - Hopefully you could see how the buying dried up and we came back to the middle of the AM range. That's why I tell my student traders that, at the top or bottom of a range, there's always a good trade if you can read order flow. We'll either break out of the range and attract new participants/volume, or we'll revert to the mean of the range. It's a helpful heuristic.

9:40 AM CT - Let's see if buying continues to meet resistance and dry up at those AM lows. I've been selling moves to the highs and covering on moves down in the TICK. Not a way to get rich, but it covers the overhead... :-) Eventually if those highs hold, we should test the average price of the AM range at the very least, which is around 34.25.

9:12 AM CT - File that one away. Notice how you can follow order flow in the weakest market index and, when the selling dries up, you often will see a turnaround across the board. Just another example of how it's important to follow more than just the index or stock that you're trading.

So here's the answer to the question for you advanced dudes and dudettes. When volume at bid is high in ES but the TICK for the ES stocks is relatively strong, it means that institutions are selling futures and buying stocks as part of an arb trade. It is not a directional trade and the selling you see on Market Delta is not necessarily a sign of a downtrend. Indeed, those contracts generally get bought back. Yet another example of how you need to know *who* is in the market and *what* they're doing--not just sitting in front of the screen looking at chart formations and oscillator readings.

Let's see how we do at the AM resistance.

9:07 AM CT - OK, I'll toss a bone to you advanced traders out there. What does it mean when the volume at the bid is much higher than the volume at the offer in ES, but the TICK that is specific to the ES stocks (number of issues trading at their offer vs bid) is relatively strong? BTW, the tick specific to a particular index is available via the NeoTicker program. Answer in a few min. ER2 trying to put in that low, per the last post.

9:01 AM CT - If I were to play the long side here, I'd wait for the sellers to take their turn, drive the TICK down to negative territory, and see if the weakest of the 3 indices (ER2) holds its lows well. That would start me thinking about selling drying up and looking more closely at ES volume patterns in Market Delta. Let's see if that pans out, or if weakness continues.

8:50 AM CT - If you look at the volume on a five min by five min basis here, you'll see numbers considerably elevated above recent norms. Folks, I work with prop traders/locals. I know local-driven volume when I see it. This ain't it. Some longer timeframe traders--institutions--are selling into the strength, quite possibly as part of options expiration related strategies. It does not make sense to buy dips when the volume at the bid is far exceeding that at the offer.

8:45 AM CT - Interesting...a lot of those contracts bought on the way up after the CPI news have been puked out on the recent weakness. ER2 has retraced more than half its AM gain. My best judgment here, FWIW, is that that AM high might pose some stiff resistance, we could see us put in a low this AM, and then get range bound trade much of the remainder of the day. Just a hypothesis I keep in the back of the head. But if I suspect a range developing, I'll use volume-at-price (left side of Market Delta, the histogram) to try to identify the midpoint of the range and look to buy below and sell above once I see selling/buying dry up. That's a short-term trader's game; not for everyone. The selling into the pre-opening strength is apparent in the fact that the TICK has never gone above +600 so far. The selling was that "brick wall" effect I mentioned a while back.

8:37 AM CT - As you'd expect, the TICK opens with a positive distribution, advances lead declines by over 1000 issues, expiration-related volume very high. Normally, you'd think about buying pullbacks in the TICK, but some traders may elect to stand aside in the expiration-related cross-currents. ER2 still looking heavy, another cautionary note for those tempted to chase highs.

8:30 AM CT - *Very* early disparity in strength between NQ/ES and ER2, with the latter weaker. Just something I'm watching. You'd think a breakout rally would carry the broad market.

8:10 AM CT - On the heels of a benign CPI report, stocks have rallied above Thursday's highs. As Jason Goepfert of the excellent Sentimentrader site notes, expiration Fridays rarely turn out to be highly volatile, wide-range days, so we may see some cross-currents here. As long as we stay above the 1331 pre-opening high from Thursday with a positive TICK distribution and ES volume skewed more toward lifting offers than hitting bids, we have to go with the short-term uptrend noted in the Weblog the past couple of days. If you haven't read my latest Weblog entry on Odds Maker and the identification of regimes, you may want to check it out. It's an idea I'll be refining and hopefully posting next week. Back after the open.

4 comments:

yinTrader said...

Hi Brett

At 830 ET when Bloomberg TV announced the CPI and core CPI figures, I rushed to my PC to see reaction of MarketDelta and trading platform for ESZ6.

I put in a limit order to buy at 1332.25 and exited at 1335.5. At about 10 ET, decided to buy another at 1336.25 but within 10 minutes the Delta footprints showed a U turn which prompted me to exit at 1335.5. This third round, I decided to short at 1334.75 and by 1120 ET which is 1120pm here, decided market is range bound and exited at 1331.75, netting just 5 points in about 3 hours of hard work!

Whatever, I join you in calling it a day/night.

Thank you for your posts which I will print out to add to my journal.

John Cook said...

Brett,

Today's updates have been the best so far. Keep up the good work. I know that you trade the equity indexes and that the underlying stocks and other tools provide solid clues if the institutions are in the market. Do you have any ideas on how to determine if they are in the market in bond, corn, or crude futures besides using Market Delta?

Cheers,

JTC

Brett Steenbarger, Ph.D. said...

Congratulations on the nimble trading; sounds as though you were flexible enough to recognize and profit from the market turn--

Brett

Brett Steenbarger, Ph.D. said...

Thanks, John. You're asking a great question, but my exposure to those markets on a minute to minute basis is not sufficient to give a proper answer. Bonds are more like the stock indices, in that the size in the book and the amount traded relative to the norms for that time of day will give clues as to institutional participation. I'm less certain of those other markets--

Brett