Tuesday, September 19, 2006

Market Psychology AM Update for 9/19/06

11:55 AM CT - Quick note. After today's trade, review *how* the market traded when we finally broke those levels of support in ER2 and NQ. You'll see an expansion of volume, but more importantly, an expansion of large trades hitting the bid. New sellers came into the market, and that has pushed us to a short-term downtrend as long as we stay below the breakout level (1328.75 in the ES). A short-term downtrend means that we look to sell bounces when buying dries up. That having been said, I don't anticipate a lot of downside from here. My longer-term research (which I don't post to my sites) suggests that we are likely to break those May highs in the large cap indices, so I expect some bottoming before too long. Have a great remainder of the day.

9:32 AM CT - So far the averages are holding and volume is not picking up to the point where we can make an easy transition from a range bound market to a breakout/trending one. I'm watching ER2 most closely for indications of downside breakout vs. holding support. Very often, on breakout/trending moves, the more volatile averages will lead the way. Once again, I'm looking to see if TICK and ER2, NQ can hold above their lows on subsequent selling bursts. I'll be preparing for a talk tomorrow to a group of traders, will update later in the day if any major developments. Have a good trading day!

9:25 AM CT - Volume has picked up to the downside; interestingly, fewer declining stocks over advances now than earlier in the AM. We need to see positive shift in TICK distribution to hold above support.

9:20 AM CT - Lots of hitting bids in ER2 and NQ as we approach important support.

9:17 AM CT - We got the rally attempt, but follow through is poor, esp in NQ. I had to bail out of a long trade. Let's watch those support areas.

9:09 AM CT - Trying to make a bottom in that 1330 area given non confirmations of downside by TICK and ER2 and NQ. Move back to that average price likely if we can hold.

8:58 AM CT - That 730 area is very important support for ER2. Ditto that 1644 region in NQ. A break of those with expanded volume/participation hitting bids would be meaningful. Conversely, I expect us to stay range bound as long as selling dries up in those areas. That's the main thing I'm watching this AM. I'm also looking to see if TICK and ER2, NQ hold above early AM lows on this pullback.

8:49 AM CT - Notice we're around important support on ER2 and NQ. I'm watching carefully to see if that holds. So far, it's a muted TICK distribution. ES volume picked up on the decline; now it's time to see if heavier volume continues. So far not. I'm sticking with a range bound expectation, but have an eye to the downside, given the research posted and the market's tepid response to the good economic news.

8:37 AM CT - Volume is quite moderate; mostly local involvement. Some big bids trying to hold the market up here. ER2 and NQ have retraced much of the pop on the news, and declining stocks actually slightly lead advancers. Not an auspicious response to what should have been excellent economic news IMO. Volume at bid exceeding that at offer in early going in ES.

8:20 AM CT - From 1334.50 to 1336.75 represents a zone in which we've seen considerable selling. The question now is whether or not the favorable economic news (lower inflation, weaker than expected housing starts) that is driving interest rates lower (and dollar lower) will be sufficient to take out that level and catapault us to new highs. If news that favorable can't break the resistance, I'd expect a move back to that average price and a likely retest of range lows. Early volume should tell us a fair amount about *who* is in the market--and that will help us handicap the odds of an upside breakout.

8:00 AM CT - Good morning. The ES market moved below yesterday's lows in pre-opening trade, but both the ER2 and NQ stayed above those levels. A nice bounce on the economic news has taken us well back into the recent trading range. So far, we're seeing good support for the indices during bouts of selling and, if that continues, I'd expect a nice move above the recent market highs. For now, however, a couple of pieces of research suggest we might get a bit of weakness over the next day or two. We're also seeing waning market momentum on the Weblog measures, so I'm not looking for an imminent breakout to the upside. Let's keep an eye on early volume patterns and see if we continue with the rangebound action that we saw yesterday. Note that the average price from the last two sessions has been 1332.75; if we stay range bound, I'd look for failed breakouts of that range to return to that price region--as happened in the pre-opening market this AM. Back after the open.

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