Tuesday, December 19, 2006

Another December Morning With the Doc

10:15 AM - Let's wrap up. As I mentioned earlier, I'll write a separate post on the early AM trade. Today pretty much showed the gamut. I had a plan to trade the premarket range and indeed sold the Russells when we broke down. For a time the trade went with me, but then reversed strongly and I got out with my point loser. I saw a real shift in the buying dynamics and, after we pulled back, went long the ES targeting the premarket range high. I let the market take me out on a high TICK move for a 3 point winner. My strategy at that point was to wait for a pullback, see how the ES traded, and then go long again for a breakout of that range. That turned out to be not such a bad idea, but the Russells and NASDAQ pulled back more than I wanted to see, leading me to scratch the trade. I decided to use a bit of patience and, when I saw the TICK jump and the Russells not respond, I went back to the shorting mode. Of the four trades for the day, only that one was really not a good trade. There was no selling in size hitting the ES throughout the pullback, and I would have been much smarter to keep my nose in the volume flow and stick with the initial idea of ES breaking out of its range. So I took a point loser to teach me a good lesson.

The challenge I find (which doesn't get easier when you're trying to blog and trade at the same time!) is to keep my eyes on everything. For the last two days, I've looked to the Russell to lead and that's made me money. On that last trade today, the Russell certainly did not lead. The support and buying were in the large caps. I was focused too much on what had worked before and did not stay grounded in my bread and butter, making the market's volume--and its distribution--tell the story.

So there you have it. All in all it was a nice opportunity to demonstrate a few things: 1) getting out of trades quickly if the basic idea isn't panning out; 2) taking what the market gives you when you're right; 3) staying flexible and changing positions in the market as the participation in the market shifts; and 4) always using each day's trade to figure out what you've done right and wrong and learn from both. Have a great day; market wrap up tonight on the Weblog and another blog post to follow today.

9:59 AM - OK, that last trade was an admitted longer shot. I was looking for growing weakness in the TICK and didn't get it. I'm not about to let a winning day turn into a loser, so that's it for me unless something really hits me in the eyes. A wrap up will follow.

9:55 AM - Out of that one with a point loser as well.

9:50 AM - Short Russell

9:43 AM - Scratch; don't like how ND and Russell are trading.

9:36 AM - Bought some ES here; tight stop.

9:25 AM - I'm flat, looking for a place to get long if sellers can't do damage to the recent runup. I'll do a blog post later today explaining more about that long trade. Many important market principles touched upon by both my losing trade and the winning one. I'm in a patient mode here. We just got a burst of buying in the TICK, but not a great price response in ES. Not what I wanted to see.

9:17 AM - Took my 3 pts more in a bit I might enter again on breakout above range

9:10 AM - As long as we see a positive shift in the TICK and lifting of offers by big traders above the 29.50 price, my leaning is to test the upper end of the premarket trading range mentioned earlier (1433 area). The initial buying struck me as short covering, but the second burst had some real size to it and was buying Russells and NAZ.

9:05 AM - Long some ES here.

8:57 AM - Buying solidified, taking me out of my short position with a point loss. The TICK has strengthened noticeably, and the ES returned back into their premarket trading range. The last trade in a trend following mode is always going to be a loser; the key is to keep the losses reasonable. Let's see if we can put in a bottom in ES after the rejection of the move down to the 1426 region.

8:47AM - I added some Russells on the recent bounce; my leaning in this situation is to "dance with the one who brung you" and Russell has made me money the last few days on my short trades. Obviously, I want to see this market stay below that trading range mentioned earlier to stick with the short idea. There was definite short-covering going on during the recent bounce, with large traders lifting offers and getting out. So far, however, I'm not seeing broad based buying in the NYSE TICK. If that TICK distribution goes solidly positive, I'll be out of the Russells. They're sensitive to the TICK for obvious reasons.

8:38 AM - We've opened with weakness; over 1000 more declining stocks than advancing; NYSE TICK negative, but not dramatically so; lots of whippy action. NASDAQ and Russell leading the downside, continuing the recent pattern. We've broken the lows in ES, triggering my selling a small Russell position. Volume above average for this time of day, suggesting institutional participation along with the locals and verifying that we're likely to see some volatile trade.

8:22 AM - The dollar and rates have pretty much stabilized following their moves after the PPI news; no big trending action has continued. DAX also remains above its sessions lows. Basically, I'm viewing this market as in a premarket trading range between the 1433.50 and 1428.75 levels. A move above 33.50 could easily trigger some stops and some short covering. I think we'd see some frantic selling if the DAX makes new lows and the stocks fail to hold the 28.75 level. So my job as a short-term trader is to see if I can handicap the odds of a move outside this range and get in at a good enough price to profit. If buying dries up without us breaking the upper range, I'll lean toward selling. If selling dries up without decisively taking out the lower end of the range, I might buy a little for a countertrend move. My leaning is to be patient and let the distribution of volume tell me what the large traders are doing. No need to get whipsawed early in a trading day. Based on the premarket activity, there should be decent movement in the AM and perhaps through the day. Back after the open.

8:00 AM: Ok, we have producer prices up sharply and home sales up as well, with housing permits a tad weaker than expected. Interest rates jumped on the PPI news , with the 10-year rate moving over 4.6% (though off initial highs). The dollar gyrated on the news and is weaker vs. the Euro, though also off its lows. Stocks fell on the news, with the ES getting as low as 1428.75, nearly ten full ES points off its average trading price from yesterday. The short-term trend is definitely down, but I am hesitant to chase lows after we've come so far below the average trading price. My leaning is to let bulls have their turn and see how much genuine buying vs. short covering we get. I'm watching the DAX, which did not make session lows on the economic news. It has led some nice moves in ES the last couple of trading sessions. Back in a few.

7:25 AM: Good morning. Looks like lots is happening on the heels of yesterday's decline. Here is a report from the excellent Barchart service:

Thailand's SET stock index plunged 14.8% today after the Thai government imposed currency controls in order to clamp down on short-term foreign investment and prevent undue strength in its currency. The Thai government announced that foreign investors will only be able to invest 70% of the funds they transfer into Thailand and will only be able to withdraw their cash if the cash is kept in the country for longer than 1 year. Withdrawals of cash that has been in Thailand for less than a year will be subject to a 10% penalty. The move by the Thai government caused concern that other emerging countries might follow suit. Emerging market stocks in general took a hit today and Asian stocks today generally fell 1-2%. However, the Chinese yuan was little changed today and the Chinese stock indexes today closed higher, illustrating that concerns didn't extend into China which already has very restrictive currency controls.

Notice the hit to emerging nation markets, an interesting development in light of my most recent post. We've got housing starts and PPI on the docket in a couple of minutes; back after the numbers to digest everything. Remember: a volatile premarket tends to bring volatile trade in the morning hours. Let's see...

6 comments:

matt c. said...

this is outstanding commentary. i was directed over here by brian at alphatrends.

Brett Steenbarger, Ph.D. said...

Thanks, Matt; I appreciate the comment and appreciate Brian's mention. My hope is that the session helps traders in how they think about markets and also in joining me in learning from both good trades and not-so-good ones!

Brett

Mike Roznowski said...

I don't know how you have the time to post on this blog when you are trading short time frame es? Really a sacrifice on your part which benefits us!

Putting your trades out there really takes an attitude i certainly don't have at this point in my trading career.

Thanks for all the great info over the last year!

Brett Steenbarger, Ph.D. said...

Thanks much, Mike. Today it got a little tough at the end there to keep up the commentary and keep up with the market. :-)

These AM sessions are still a work in progress. I'm still tweaking to figure out what's most useful for traders. My leaning for the next session in January will be to trade less often and spend more time just on the commentary re: the market volume, TICK, levels, large trader behavior, etc.

Thanks again for your interest!

Brett

Michele said...

I'll second those comments. Trading tends to be a pretty solitary activity for those of us who can't be out on the floor. It is exceptional to find commentary of this quality and even more so made available without wanting an arm and a leg for a subscription. Keep up the good work!

Brett Steenbarger, Ph.D. said...

Thanks Michele,

I think you're right. It's easy to get isolated as an individual trader. At firms, there is a natural flow of ideas and new technology. Individual traders tend to lack those advantages. With many of the Web 2.0-style resources now available, however, it's easier to find good input, as well as trader communities. Best of luck!

Brett