Wednesday, November 22, 2006

Thanksgiving Morning With the Doc

10:20 AM CT - I'm not trading any more today, but if I were, I'd think about the AM highs and lows forming a range and fading moves toward the edges of that range. I don't see enough selling pressure at present to sustain a downtrend, but I'm also not seeing good volume participation on rises. Hope this has been informative. We'll do it again early in December. In the interim, have a great Thanksgiving, and please give thanks to the family and friends who contribute daily to your happiness and success. Trading is important, but it isn't life. Thanksgiving calls on us to take the big picture and remember the blessings we have, regardless of P/L. I'll update the Weblog tonight and both sites through the long holiday period.

10:15 AM CT - Carbon copy of the first trade! I saw selling dry up after the initial retreat from highs and went long ES to take advantage of a return to the day's average price. The problem was that the move took a while to materialize, leading me to take a small profit before the market eventually went further my way. After each day of trading, I like to evaluate what I did right and wrong and use those to frame goals for the next session(s). What's clear to me from today is that I need to stick with my basic method of exiting positions: entering with enough size that I can take quick profits on one piece but let the other piece breathe and take advantage of a possibly longer move. I was too much in the mindset of "This is pre-holiday; just take what the market gives you". As a result, I didn't benefit as much from the patient, good entries as I should have. The point is to always be learning. Figure out what you do well and extend it. Adjust what you're not doing well. Today I did entries much better than exits. One last post before breaking for the day.

10:05 AM CT - OK, I'm done for this AM with the trading. I had gone back to breakeven and didn't execute the stop, seeing that the other indices (Russell, NAZ) were holding up, as was the TICK. The next bounce had little volume to it, so I took the little bit that I could. Volume has really slowed here, and we could get a pretty slow day from here on out as traders leave for the holiday. Back with a wrapup in a few minutes.

9:58 AM CT - Took half pt profit. flat

9:52 AM CT - Volume has been unimpressive on the buying. My stop is up to breakeven and we'll see if any buyers come in. As long as that TICK distribution looks shifted positive and we're not seeing big traders hitting bids in ES, I'm sticking with the long position. Once again, had I been trading larger size, I would have taken a profit on the first move up with one piece and let the other one ride. What I'd like to see is a buying spurt over 1000 TICK to take me out.

9:40 AM CT - When we got an ES low at 9:31 AM, nothing else was making a low and we weren't getting an expansion of selling from large traders in the ES. Indeed, only 308 more contracts traded at the bid than offer during that five min bar. The TICK also wasn't expanding in a negative direction. Volume, however, has been tailing off and we're not seeing buyers jump into the market. So I may scratch here if nothing develops soon.

9:32AM CT - Long small ES position.

9:25 AM CT - I'm looking to go long a small ES position if we pull back and can't get expanded selling when the bears take their turn. Still watching that TICK distribution closely. I'm also noticing that, so far, we're establishing value at a higher price than yesterday, which has me questioning the downside.

9:18 AM CT - Notice that we got the move back to the 1405 value area in ES. The general rule is that market rises that fail to lift many of the most volatile stock sectors are more likely to reverse than rises with broad participation. It's one reason that it's *so* important to watch the whole market, not just your particular trading instrument. That's probably the best learning lesson of this AM's session. Our next price target in Russell and ES would be yesterday's lows. I'd wait for buyers to take their turn, push the TICK higher, and see how prices respond. If we don't get good upside price movement, that could provide an opportunity to reinstate the shorts. Note the downward distribution of TICK since the early market high. Still, we haven't had very negative TICK readings, which says that buyers are covering and going away; it's not broad selling. I'd expect a range bound market out of that dynamic, not a broad trending decline.

9:12 AM CT - OK, I'm going to stop trading for now, just to focus on explaining what I did and why. The market moved higher on very strong NYSE TICK. Volume in the ES expanded on the move. So far so good for the bulls. The problem was that neither the midcaps nor the small caps made new highs on that move. Neither did the semiconductors. So my reasoning is that, if we're not getting economic/fundamental reasons for an upmove, if we're in a pre-holiday session, and if major sectors of the market aren't participating in the move, then I want to fade that move. And I chose the weakest index at the time: the Russell. As it happens, I could have held that position longer and taken more out of it, but the TICK distribution just didn't look negative enough to me, so I got out with what I had at the time. Generally, if it's not a preholiday and I can watch every tick carefully, I'll bail out of part of the position and hold the rest for a move back toward the day's average price. That's been a sound idea even in this preholiday trade.

9:02AM CT - Took a 1.5 pt profit, now just watching the mkt. Back in a couple min.

8:52 AM CT - Of course, what I'm looking for with the short Russell position is a failure to move to new highs, followed by selling that would make the longs puke their positions and move us back toward that value area. Risk reward ratio is good on the trade, though if the TICK stays persistently high, I'll need to bail out. Ideally I'd let a selling burst to negative TICK take me out of the trade. Note that the NQ is heavy here.

8:45 AM CT - FWIW, I'm short a small Russell position here.

8:42 AM CT - Notice how staying on top of the distribution of NYSE TICK kept you out of any premature short ideas. We're seeing steady buying, and I wouldn't short this market until we see a shift away from that. Notice also how volume expanded greatly on the rise to new highs. If this breakout is for real, we should stay above the overnight highs. Note, however, that we *didn't* make new highs yet in the Russell.

8:35 AM CT - Remember, volume correlates with volatility and ultimately determines how much we can take out of a trade for a given holding period. So I look at the volume every five minutes to see if we're doing more or less business than average. This being a pre-holiday session, I'm not expecting big volume. That means that the locals and black box traders could dominate price action. I also look at the distribution of the NYSE TICK in early trade to see if buying or selling sentiment dominates, and I look at the Market Delta distribution of volume at the bid vs offer in ES. So far, TICK is positive and advancing stocks lead decliners by about 500 issues. Volume is predictably modest.

8:20 AM CT - Just heard from Wiley that there will be a Japanese translation of my new book, Enhancing Trader Performance. On this Thanksgiving, one of the things I'm thankful for are the many traders/readers who have supported this blog and the book. I appreciate your comments and ideas and hope that these morning sessions help model one way of looking at markets. Your task is to take away from what I write what's helpful to you and leave the rest. Integrating other people's perspectives and methods into what you've already learned is how you ultimately develop your own trading style--much as artists or writers develop theirs. Back after the open. If I don't see good strength early in trade, I'll be short for a move back toward the 1405 value area.

8:10 AM CT - Just a quick note; we retreated a bit further from the overnight highs before bouncing a bit; clearly there was nothing bullish for stocks in the economic reports thus far. Note that the dollar made multi-week lows against the Euro on the weak housing data. When you get a chance, do read this important post from Barry Ritholtz. I think it goes a long way toward explaining why we've been seeing strong stocks of late, as well as firm commodities. The growth of money has meant that liquidity has had to find a home. The loser in such a scenario over time is the dollar. If I had to guess--and it's only a guess--I'd say that we're trying to pre-empt a housing-led recession by easing monetary conditions aggressively. Hence the inverted yield curve, but the sharp recent rise in large cap value stocks. As long as that persists, that should put a bid under commodities and a lid on the dollar. The risk is that we could stoke inflation (drop in the dollar; boom in commodities) at the same time that economic weakness kicks in, creating that old stagflation scenario that is bad for stocks. That's why watching the dollar, interest rates, and commodities is so important--even for the short-term trader. The big trends are created by those who trade global macro developments.

7:45 AM CT - Good morning. I'm writing this on the heels of the unemployment numbers coming out at 7:30 AM. We had mortgage applications drop during the latest reporting period despite lower interest rates; refinancing also dropped. That report, suggesting continued housing weakness, took the stock indices off their overnight highs. We still have University of Michigan consumer confidence numbers coming out at 9:00 AM CT. Note that subscribers to that number get the data ahead of the general public and thus get a jump on trading any significant change from expectations. Initial claims for unemployment came in pretty much in line with estimates; no great movement in stocks from that. Bottom line is that we're up relative to yesterday's close, though a bit off overnight highs. The average price we've been oscillating around has been 1404.50 in the S&P futures; my only trading yesterday faded moves above this value. Remember, in a range bound market, you want to fade moves to the range extremes if you see that volume (and especially the hitting of bids or lifting of offers by large traders) is drying up as we move away from value. So our big job this AM, should we continue to the upside relative to yesterday's close, is to figure out whether we're going to break out of this five-day trading range or settle back toward the recent average price. It's pre-holiday trading, so I don't expect a lot of volume or volatility. If you check the Weblog, you'll notice a directional bias to the next five days based on recent low volatility. Also check out this morning's TraderFeed entry that finds better movement in the Russell 2000 Index than in the S&P 500. I'm noticing that, while the S&P 500 hit contract highs this AM, the Russell has not so far. Let's see how much strength we get at the open and how broad it turns out to be. More before the open.

13 comments:

Anonymous said...

Good Morning Dr. Brett. Happy Thanksgiving to you and your family (including your kitties!).

Thanks for sharing your thoughts via this format. Please keep it up!

Your posts provide remarkable insights into your methods and thought processes -- something that is very valuable for an independent trader like me.

Sometimes it's rough being your own coach and your work provides helpful examples for learning. It’s great to have a real “go to” guy like you.

Thanks for all your work,
Scott

voodster said...

Brett,

Can you expand on what you saw in the Tick? Maybe show with the chart. Good short. Thanks.

voodster said...

Brett,

Are you looking at the Tick for several sectors or just the NYSE?

Brett Steenbarger, Ph.D. said...

Thanks, Scott; the family and kitty cats have a lot to be thankful for. I appreciate the note. It *is* difficult to always be your own coach, and it's easy to go stale. One reason I love reading blogs is that I get a constant flow of new ideas and ways of looking at markets.

Brett

Brett Steenbarger, Ph.D. said...

Hi Voodster,

I'm using the NYSE TICK not sector TICK measures. I'll post a chart on my personal site tonight to illustrate the idea. Thanks--

Brett

yinTrader said...

Congratulations, Brett, on the Japanese translation of your latest book!

Would not surprise me that Wiley might do a Chinese translation as China is now a big player.

Glen said...

Brett,

Glad to note you have cats... I'm a serious cat lover myself.

A little criticism: a man of your stature and expertise shouldn't be using the 'p' word as in:

"8:52 AM CT - Of course, what I'm looking for with the short Russell position is a failure to move to new highs, followed by selling that would make the longs PUKE their positions and move us back toward that value area."

You've used the word elsewhere, too. Do you need to be so vulgar? Yeah, I know it's part of the vernacular of the low class trader cohort, but everything I see on your blog, everything I've read about you, suggests you're a cut or three above the churls.

Best,

Glen Jones

Brett Steenbarger, Ph.D. said...

Thanks, Yin; I would welcome an edition in China and the opportunity to meet more traders there. Language is such a barrier; I would love to see much more crossing of cultures in trading blogs.

Brett

Brett Steenbarger, Ph.D. said...

Hey Glen,

Thanks for the note. We have three cats, and they're great friends and companions.

It's always fascinating to see yourself through another person's eyes. I am *much* more "vulgar" in person than in writing, and indeed had a reputation as a medical school instructor as the faculty person with the most off-color lectures. They were also rated as highly informative and were well-attended.

I purposely tone down my language in writing because I know it can offend and can be taken out of context, without the nonverbal humor cues. It honestly never occurred to me, however, that "puke" might be considered offensive. But apparently it is! I appreciate the feedback and will take it to heart. Thanks--

Brett

yinTrader said...

PUKE often means to vomit, to spit.
Even Shakespeare wrote: "At first the Infant, Mewling, and puking in the Nurses armes.." Therefore, I cannot see the vulgarity of the word.

For an American, your writing does not match blatant vulgarity often encountered in American books or movies.

Just semantics.

Brett Steenbarger, Ph.D. said...

Hi Yin,

Having just returned from Las Vegas, I am all too aware of American vulgarity! It's a real trip to visit other cultures and see how your own country is viewed. Thanks for the note--

Brett

LB said...

Good Morning Dr. Brett. Happy Thanksgiving to you and your family….Thanks for sharing your thoughts.

What is you opinion about the VIX, Seeing where it is… What is its significance, and how does this compare with the situation in 1993 when the VIX was at a similar point.

LB

Brett Steenbarger, Ph.D. said...

Hi LB,

Here is a post on low volatility: http://traderfeed.blogspot.com/2006/10/what-historic-low-volatility-means-for.html

It has been rare for large corrections to come out of very low volatility.

Thanks for the question, and have a great holiday--

Brett