Thursday, September 21, 2006

Market Psychology AM Update for 9/21/06

11:57 AM CT - You can see from movements in interest rates (down sharply) and the dollar (weaker vs Euro) that this economic news (weak Philly Fed) was not priced into the market. Those situations are the ones most likely to lead to stock market revaluations, and we're seeing that in the break below the AM (and yesterday PM) lows, with a distinct shift toward selling (negative TICK, dominance of volume at bid vs offer in ES). The 1322 lows represent important support; next support at 1328/9. Have a great remainder of the day.

10:04 AM CT - Well, so far it's a range bound market, oscillating between the overnight highs and yesterday PM lows, with a rough midpoint around yesterday's average price. So that leads me to look at the possibility of fading moves above and below the average that test edges of the range--as long as volume stays muted. The positive shift in TICK distribution continues, though NQ is a bit muted. I'll update again if any major developments; otherwise, my other life as a trading shrink beckons. Have a great AM. Update tonite on the Weblog.

9:50 AM CT - Sure enough; buy programs hit the Street at 9:45 and 9:46 AM. Notice the drying up of the negative TICK on pullbacks prior to that move. We've moved back to yesterday's average price and will see if we can once again test the highs.

9:42 AM CT - For the most part, we're seeing relatively small bid and offer sizes near the market in the book. In the past when this has happened, it's because locals sense the presence of larger institutions in the market and don't want their orders swiped. Could be a temporary phenomenon, but something I watch...

9:34 AM CT - Trying to put in a bottom here, following some buying interest at yesterday PM lows. Patience pays off...not always in profits, but often in keeping you out of bad trades. Chasing those lows wouldn't have worked out well thus far...

9:20 AM CT - I'm playing it very close to the vest here and seeing if we can bottom out (see selling dry up) in this 1332.50 region. I'm also looking carefully at ER2 and NQ to see if they break down below yesterday afternoon lows. Often those more volatile indices will lead the way on valid breakouts. Patience, patience.... :-)

9:17 AM CT - Financial and energy sectors look stronger within the S&P 500 than the other main sectors. Interest rates are down again. We've had relatively little positive TICK sustained, and volume at bid in ES continues to dominate. Testing afternoon lows from yesterday. Need to see volume at bid expand to sustain breakdown.

9:07 AM CT - We're retracing a fair amount of the afternoon gains following the Fed selling yesterday, especially in ER2. Volume has picked up, though not dramatically so, and volume at bid exceeds that at offer pretty handily in ES. TICK has deteriorated thru the AM so far. 1332.50 represents pretty important support; how we trade vis a vis that point and the TICK distribution during that time will determine whether we go back to retest previous days' lows or whether we stay rangebound for the day.

8:52 AM CT - Nice example of a typical trade I make: wait for the bulls to take their turn, buying to dry up, notice the lack of volume, and play for a reversion to the mean. Not all pan out, to be sure, but the basic trade idea is grounded in how the market is trading.

8:49 AM CT - Volume continues light, and so far we're not breaking above overnight highs. That's leaning me toward tests of that average price and ideas re: a range bound market today. Part of the light volume may be due to waiting for the 9am economic report, of course. So let's see how that shapes up.

8:40 AM CT - Volume on the low side, but skewed so far toward buyers, with a positive TICK and more ES volume at offer than bid. To sustain a break above the overnight highs, we need to see more participation. Failure to take out 1340 targets that average price from yesterday.

8:20 AM CT - We've been bumping up against yesterday's highs in the pre-opening. No great reaction to the Initial Claims numbers; 9 AM will be LEI and 11 AM CT will be Philly Fed. ER2 is most off its highs; NQ a tad stronger. Overnight support is 1335; afternoon support is 1332.50; 1340 is the overnight high. Normal expectations would be to test that high in AM trading; if volume is lackluster, expectations are to test the previous day's average price of 1336.25. We've absorbed selling quite well over the past several days, and that leads me to think we have yet to see the highs of this bull move. Still, it's hard for me to pound the bull table when we've made a 20-day price high on only moderate momentum and new high stats (see Weblog). Expectations over the next five days when we have 20-day highs and modest momentum/new highs are subnormal--no bullish edge since 2004. So my leaning is to let the market show its hand and be prepared to bargain hunt if selling kicks in and we get one of those transition patterns mentioned recently. Back after the open.

4 comments:

Bert Hancock said...

Hi Brett,

Fantastic stuff, as usual. I love the way you explain the thought process going into the market's action.

For someone such as myself who cannot currently daytrade due to another near full-time job, I'm wondering if there are somewhat similar ways I can look at market action and deduce relatively accurately what it's saying on a longer horizon, such as daily.

I would suspect there are definite differences in the players on the differing timeframes, but wonder if there may be some consistency in what to look for. I would ideally like to trade from a daily perspective vs five-minute or a longer-term one such as weekly.

Any thoughts would be appreciated, and again thanks for all your highly interesting info.

Bert

PS, one of the concerns I'd have trading on a timeframe such as yours (even if the opportunity was available) would be the concern I'd perceive everything in too frantic a mode and wouldn't be able to think (and therefore trade) clearly. Yet, you seem able to do so while adding to your log every few minutes or so. I find that pretty impressive, frankly.

Brett Steenbarger, Ph.D. said...

Hi Bert,

Thanks for your note. I actually find that talking markets aloud or writing notes about them--as in my updates--keeps me focused on the important stuff.

Analyzing markets on a multi-day time frame is different from tracking moment-to-moment order flow. I find that 3-5 day holding periods test out well with much of the research that I conduct and report on the blog.

Many of the same principles that I use in the updates (tracking support, resistance, looking at volume patterns at edges of range for signs of breakout vs. mean reversion) can be relevant to the multiday time frame. Market Delta, for example, can now be viewed with daily bars and Market Profile to provide longer-term trade ideas.

Brett

Bert Hancock said...

Many thanks. Knowing there's a type of correlation between the varying time frames will help me stay interested even more in your excellent update entries.

Brett Steenbarger, Ph.D. said...

Yes, what I think you can pick up from blogs--not just this one--are ways of thinking about trading or investing. As a rule, traders make more money from *what* they trade than from timing trades. If you have a longer time frame, it makes sense to seek out information about sector and stock performance and valuations that can help you take advantage of market trends.

Brett