Thursday, September 28, 2006

Market Psychology AM Update for 9/28/06

9:52 AM CT - I'll have more to say about this in tomorrow's blog post, but notice how my view of the market shifted over the course of the AM. I started with favorable expectations for taking out the highs in ES, given the TICK and ER2 strength. Then, with program selling, I started entertaining the idea of bottoming and rangebound trade. Then I questioned the vigor of the rally and started looking to the downside. The point here is to stay mentally flexible, not get hung up on any single perspective or piece of research. The balance between buyers and sellers shifted over the course of the AM: our job is to pick up such shifts. Important support in the 1343 area from yesterday's lows; it will be important to see if we get any further shifts as we approach those. Have a great day; update on the Weblog tonight.

9:40 AM CT - I'll put out an article on the Dow TICK before too long. I continue to see sell programs hit the market, and that's putting a lid on stocks thus far. Note the continued weakness in TICK and ER2. That's going to need to change for us to have a shot at taking out yesterday's highs.

9:34 AM CT - Just had a computer crash; hopefully all will be OK with this update. The rallies continue to look suspect, and we're seeing some downward tilt in the TICK distribution. I'm entertaining the possibility that we put in our highs for the day and that we might give back some of the recent gains--a pattern that would fit with the research mentioned earlier this AM. Advancing stocks now only lead declines by 250. I'm watching that TICK distribution and ER2 once again. They were leading the market early to the upside and have been waning ever since.

9:14 AM CT - Hopefully you were able to see that short-term bottoming form and, at the very least, not get lulled into selling lows. This is not a convincing rally, however; volume is waning, and we continue to see volume at bid exceed that at the offer in ES. The TICK distribution has stayed relatively positive, however, and it's that dynamic that's keeping us in a range.

9:01 AM CT - Note yesterday's average price of 1347. With the failure to take out yesterday's high, we traded through that, and now we're trying to put in a short-term bottom. We want to look closely for evidence for such bottoming, because that would provide us with a support level in a trading range extending up to yesterday's highs. I'm looking to see if volume picks up or dries up at these levels to handicap the odds of bottoming short term. Let's also see if TICK can hold above its recent lows.

8:48 AM CT - My read, FWIW, is that it's not that we have huge volume in the market; it's that a good portion of that volume is program buying or selling by institutions. Mass buying or selling of futures vs. underlying stocks or futures relative to each other creates sudden sharp movements for a number of ticks and then equally sharp reversals. Note the significant NQ and ER2 selling just since my last post and the several swings in the Dow TICK from very strong to very weak and back again. Because the Dow stocks are included in many baskets for program trading due to their liquidity, the swings in the Dow TICK (TIKI) do reflect program activity. That's how we get significant ES selling without negative NYSE TICK readings. This activity could keep us range bound--keep an eye on buying/selling volume (at offer vs bid) as we approach market highs.

8:40 AM CT - Keep watching TICK and ER2. As long as those are strong, we have good odds of taking out the recent highs in ES.

8:38 AM CT - Volume is moderate; nothing to write home about. TICK remains positive, and volume at offer in ES exceeds that at bid. Near term support at 1347.25; we're testing those highs as indicated a few min ago.

8:34 AM CT - Note that we're opening with ER2 above its previous day's high, TICK positive, and over 800 advancers over decliners. We should test yesterday's ES highs if that continues.

8:20 AM CT - Initial claims came in pretty much as expected; GDP a tad weaker, but we're seeing an uptick in interest rates and a bit of dollar strength versus the Euro. The S&P Index in preopening trading has been hovering near its recent highs, but in a narrow range. As my previous blog post indicated, returns five days out following a string of 20-day highs in SPY have been negative, on average. One thing I'm looking at: ER2 is below its highs from last week and, so far, we've seen fewer stocks make new highs this week compared with last. I want to see if this rally broadens out or stalls. If the latter, I'd expect some pullback over the next week. Back after the open.

8:05 AM CT - This has been a nice lull period for me. Having finished my book manuscript and also finished work with a trading firm I had been helping, I've been able to devote a piece of my mornings to these updates. At the end of this month, however, I won't be able to continue the daily updates. A new writing project beckons, and I will begin a couple of projects with new firms. Beginning in October, I'll continue to update the Weblog and this site daily, with illustrations and historical analyses of tradable market patterns. I also hope to extend the analyses to longer timeframes, for swing traders and short-term investors. I just won't be able to comment on the market in real time on a daily basis. My hope is that the real time updates have given you some ideas of things to look for in the markets, so that you can frame your own trading hypotheses. Thanks for your interest and support. Market update soon to follow.

4 comments:

James said...

Dr. Brett,

I noticed yesterday an above average amount of 5 minute nyse ticks above 1000 throughout the day. I counted over 20. The ticks would hit above 1000, but the es refused to breakout. The price action in the es is somewhat similar to today. However, as you pointed out earlier, the tick isnt nearly as strong. Is that becuase volume is weaker today?

Thanks for the blog,

James

Brett Steenbarger, Ph.D. said...

Hi,

Good question. My sense is that the TICK reflects buying/selling in the broad market and is quite influenced by buying/selling among small and mid cap stocks. Note also that TICK can be elevated during times of program trading (selling the index, buying the underlying stocks), so that price can stay relatively still, but TICK can be positive. It's important to read when there is buying that is part of non-directional arb, and when buying is from longer timeframe traders seeking trending moves.

Brett

yinTrader said...

Hi Brett

I am sure I speak for many of your readers that we shall all miss your daily morning posts on real time trading.

However, it is heartening to note that you will be posting on historical trade patterns and on higher/longer time frames to benefit swing/position traders of which I am aspiring to be one.

Bonne chance et congratulations
Ana a.k.a. Yin

Brett Steenbarger, Ph.D. said...

Thanks Ana,

I appreciate the support and, as time permits, may hold occasional free online "workshops" for reading market patterns and order flow. I'll also summarize some of the lessons from the recent updates in upcoming posts. Thanks!

Brett