Midday Briefing for November 25th: Cross-Currents

Many cross-currents in the markets lately: yields on 10-year Treasury notes continue to decline (top chart) in the wake of continued Fed ease. That has given the green light for USD selling and strong performances today in the euro and Aussie dollar; it has also supported the commodities, with gold registering yet another fresh high.

All of that is supportive of stock prices, and the ES futures are knocking at the door of their recent bull highs. Still, small cap issues lag and financial stocks (bottom chart) are notably weak. GS, for example, has been making day over day lows with consistency. Today we see fewer than 1000 stocks making fresh 20-day highs across the NYSE, NASDAQ, and ASE thus far. With such a narrow base to stock strength and glaring weakness among banking issues, it's difficult to get too excited about today's strength, in spite of the supportive macro picture.
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Morning Briefing for November 25th: On Breakout Watch

While stocks (ES futures, top chart) remain in their multiweek range, we can see that the euro has broken to the upside vs. the U.S. dollar (bottom chart), with continued strength in gold, but weakness in oil. Both the NASDAQ 100 and Russell 2000 indexes are off their multiweek highs, suggesting we'll need to see solid breadth to create a valid upside breakout. With the holiday looming, it may be difficult to muster the volume for such a push up. The distribution of the NYSE TICK early in the day will give a good indication as to whether we can sustain a directional push.
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Goal Setting and Well-Being: Antidotes to Frustration

Note: Previous posts in this series are:

* How to Overcome Frustration in Trading

* The Well-Being Hypothesis: A Framework for Addressing Frustration in Trading

In the most recent post in this series, we saw that frustration generally only disrupts thought and behavior when it occurs against a backdrop of diminished well-being. If people don't feel fulfilled, happy, and satisfied with their lives, they're more prone to react--and overreact--to the normal frustrations of daily life.

What is well-being? A previous post outlined four pillars of positive psychological experience. That post concluded: "The wise trader structures his or her day to maximize experiences of well-being: that is what sustains motivation, concentration, and the ongoing learning needed to adapt to ever-changing markets."

This is an important principle: how we structure our trading determines the level of well-being we are likely to experience.

Consider the recent article that I linked about basketball superstar Kobe Bryant. At 31 years of age--and after 14 years in the NBA--he can no longer sustain his old feats of athleticism. Surely that would have to be a source of considerable frustration to such a competitor.

The article makes clear, however, that Kobe is not beset with frustration in the least. Rather, he has focused on developing new aspects of his game that compensate for his lost abilities. This positive focus is what sustains his well-being, balancing any frustrations that he encounters from game to game.

Check out the linkfest on goal-setting; it makes clear that goals cement learning and development in trading. When we have goals, we have tangible yardsticks for measuring our progress. Those yardsticks, when properly chosen, provide the basis for joy, satisfaction, and energy: they move us forward, even as we encounter day-to-day and trade-by-trade frustrations.

My experience is that the vast majority of traders do not set daily, weekly, and longer-term goals. Even fewer concretely track their progress toward those goals and make needed adjustments. In short, they are not pursuing their careers the way that a Kobe Bryant or Tiger Woods might.

This absence of goals and structured development not only prevents a trader from excelling: it robs the trader of potential positive experience. Every bodybuilder knows that specific goals--whether they be goals to lift particular weights or goals to improve the definition of certain parts of the body--are what sustain competitors through grueling training. Without the opportunity to achieve goals, physical training (like training in trading) is mere drudgery.

Few traders make the link between discipline problems and the absence of performance-oriented goals. You can do all the psychological exercises in the world, but if you're not structuring your development process to yield well-being, you'll miss out on the optimism, drive, and determination that propel elite performers.
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Quick Tuesday Reads

* Here's a questionnaire to assess your mood during trading;

* High frequency trading would get a lot less frequent if Congress passes a .25% trading tax;

* Two qualities we find among successful traders;

* Feeding government and starving private enterprise;

* 23% of mortgage borrowers are in trouble;

* Looking for a resolution of a triangle pattern;

* What happens when you buy new 10-day lows in the S&P 500 Index?

* What happens after extreme earnings reports and other good reading.
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Midday Briefing for November 24th: Slow, Range Trade

Stocks (ES futures, above) have settled into a range, as trade has become quite slow. We broke below the 1100 area mentioned this morning, but since have consolidated just above that . Small cap stocks are once again underperforming large caps, and we're seeing weakness in oil; the dollar vs. euro is also range bound. The multi-week range outlined this morning is the important big picture across markets: the break from that range should be significant. I continue to focus on how we trade around that 1100 area as an important tell as to the direction of that break.
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Information Processing, Learning Styles, and Trading

One frequent experience I've had as a writer is to begin writing about a topic and then discovering new ideas about the topic that I hadn't intended to include in my article or book. It's as if the writing became a kind of brainstorming, helping me arrive at insights that otherwise would have never emerged in day to day thought.

Similarly, I have seen fresh ideas emerge among traders as a result of discussion. Each trader will bring a novel perspective to the dialogue, sparking a new look at markets. In such cases, the whole ends up becoming larger than the sum of the parts: out of new pieces of information can emerge an entirely new and promising trade idea.

All of us process information in a variety of ways. We learn in different ways (see this post for more details and a link to an online questionnaire; see also this self-assessment post), but often don't make use of our different styles of processing data.

One way around that problem is to make sure you process your trading plans in at least two modalities. For example, you might write down your market ideas and plans, but also talk them aloud. You might plot your buy and sell points on a chart, but also write down your reasoning in a blog.

The idea is that processing your ideas in multiple ways will provide you with multiple perspectives on markets. It is different to see your ideas, think them, and hear them spoken aloud. Many times, what makes sense when we're thinking an idea does not make sense when we flesh it out on paper or share it with someone else.

Creating multiple modes of information processing can provide us with the experience that I've had as a writer: in elaborating our ideas, we can often generate new ones.

And it is much more difficult to act impulsively if we have to not only think through our ideas, but spell them out for others to see or hear.

More on generating novel perspectives in my next post in this series.
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Morning Briefing for November 24th: Continuing in the Range

Pre-opening GDP and housing numbers did not move the market significantly, and we remain in the multi-week range (ES futures, above). The area around ES 1100 level has been important support this morning and has been a significant level during the multi-week range. We need to hold above that level to test the range and bull market highs. If we can hold that level with corroboration from other risk assets, we could get a nice upside breakout move. Failure to hold 1100 would target the range lows.
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The Well-Being Hypothesis: A Framework for Addressing Frustration and Lapses in Trading Discipline

The first post in this series highlighted the link between frustration and loss of discipline in trading. Stated in a different way, lapses of discipline tend to be state-dependent: we enter a frustrated, angry, confused, or discouraged state and that colors how we process and act upon information. A major way in which these states disrupt decision-making is by interfering with the cues that provide an experienced trader with his or her "feel" for the market. One of my best posts details how this happens.

There are many psychological techniques for quelling frustration, from cognitive techniques to change our thinking to behavioral, relaxation methods. Ideally, however, a trader's goal should be to prevent frustration in the first place.

This brings us to what I will call "the well-being hypothesis". (See this post for a detailed presentation of emotional well-being and its components). The hypothesis is that frustration tends to occur against a backdrop of diminished well-being. That is, if we are generally happy and satisfied in life, normal events that interfere with our goals will not be experienced as overwhelming frustrations. It is only when such well-being is relatively absent that the frustrations of normal life become emotional focal points.

Relationships are a good example. A happy marriage can weather the frustration of an occasional disagreement or conflict. I can think of plenty of disagreements in my own marriage, but I can't recall a time of yelling, arguing, or fighting. The disagreements occur against a backdrop of general goodwill and connectedness. If we lacked the well-being that comes from common values, shared experiences, and an emotional bond, it would be easy for those frustrations to accumulate and fester.

Similarly, when I'm having a good day and everything seems to be going my way, getting caught in traffic is but a minor annoyance. I turn on the music in the car and make the most of my wait. If it's been a day without gratification, however, the traffic jam just might be the straw that breaks my emotional back, causing me to fuss and fume throughout the wait.

Happy, satisfied people, on average, don't experience frustration to such a degree that it will dominate thought and behavior. Indeed, for a reasonably fulfilled person, stresses can actually contribute to well-being over time.

If the well-being hypothesis is correct, then an important way to prevent frustration--and hence its disruptions of trading--is to maximize positive emotional experience. Said in another way, the problem with discipline may be as much about a lack of positive experience in trading as the presence of overwhelming negatives. Instead of working to eliminate frustrations--probably an impossible task--we need to find ways to sustain well-being during the most challenging market periods.

The next post in this series will address this challenge.
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Monday Perspectives and Observations

* Important post on making adjustments to changing market conditions;

* Disgust as an important element in the psychological change process;

* Which days are bullish around Thanksgiving?

* Good look at health care stocks and other ETFs;

* Put/call ratio got pretty low during the market's morning rise today;

* PIMCO buying government debt, avoiding mortgage debt;

* Expectations that bond yields will hit 5.5% in 2010;

* Continued concerns over asset bubbles in emerging economies;

* Excellent overview of economic indicators.
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A Look at a Trading Range Across Markets

Here we can see a broad trading range in the S&P 500 e-mini (ES) futures (top chart) and in the euro (bottom chart). A look at commodities (DBC, for example) shows similar rangebound action.

I noticed that we made a little over 1000 new 20-day highs across the NYSE, NASDAQ, and ASE; that's down from over 1400 at last week's peak. We're also off last week's peak in the advance-decline line specific to NYSE common stocks. I will be watching the breadth and new highs carefully this week to gauge the odds of breaking out of this range to the upside vs. falling back into the range and possibly retesting the lows.

Keep an eye on the Twitter posts; I'll be using them to update indicators (follow the Twitter stream here).
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Midday Briefing for November 23rd: Reversal

What started out looking like a trend day to the upside in stocks (top chart) faded out, as the dollar strengthened vs the euro (bottom chart) and Aussie dollar and commodities beat a hasty retreat.

Interestingly, however, we still have over 1500 more advancing stocks than decliners, as we remain above Friday's close. The reversal sets us up in a wide range between today's high and Friday's lows: a range that may hold if trading slows down during this holiday week.
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How to Overcome Frustration in Trading: Part One

A while back, I wrote on the topic of steps to take to break patterns of frustration in trading and suggested resources for traders who find that frustration is interfering with their trading.

Much of what is viewed as a loss of discipline is actually the result of impulsive decision-making under conditions of frustration.

What that means is that you can best work on mastering frustration when you are actually in a frustrated state. It is difficult to prepare for making decisions in the heat of battle when you're in a cool and collected state.

This is where guided imagery is particularly helpful. By mentally rehearsing frustrating scenarios (such as missing a trade or getting stopped out) and including in the rehearsal a mental walk-through of what you want to be doing to handle the frustration, you can prepare yourself for adverse scenarios. This is very helpful in avoiding impulsivity, as you gravitate toward the positive coping that you've been rehearsing each day.

There are a range of brief therapy techniques that are effective in combating frustration. Check out this earlier post on short-term change methods, as well as Chapter 7 of The Daily Trading Coach, which describes behavioral techniques for overcoming stress.

In my next post on the topic, I'll address frustration from a different angle.
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Morning Briefing for November 23rd: Staying Above Key Levels

The purple horizontal lines show some of the price levels I'm focused on this morning in the S&P 500 e-mini (ES) futures. We broke above the 1095 resistance area overnight on good volume and momentum, supported by a weaker U.S. dollar and stronger commodity prices. After some consolidation, which held the area just below 1100, we broke higher still and have so far held above that consolidation high around 1102. As long as we continue to see dollar weakness and firm commodities and ES prices holding above that 1100 area, the bulls should control the session and have us making a stab at the highs from early last week.

Failure to hold above that 1100 consolidation low would signal a reversal and keep us in the trading range defined by last week's highs and lows. Volume at the market offer has so far exceeded that at the bid, supporting the bulls.
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Think Like a Price Maker, Not a Price Taker

Adam Warner has an excellent post up illustrating the volatility assumptions of $VIX and $VXX. To summarize in Adam's words: "longer term volatility assumptions just keep eroding."

With a holiday period around the corner, followed by a holiday period next month, traders begin to pack it in for the year.

I notice that Friday's volume in SPY was the lowest in over a month. The next lowest volumes? Tuesday and Wednesday of this past week.

With contracting volume comes contracting volatility. Tuesday was an inside day. Friday traded within its overnight range.

As portfolio managers pack it in and take their volume with them, that leaves market makers--including those infamous algorithmic programs that operate close to the market--as the dominant players. If you don't understand how they trade, you're likely to be on the other side of their trades.

Look for places where bears and bulls are loaded up, but can't push prices lower or higher. They are the ones that will have to flee their positions, giving good prices to those market makers. That means picking your spots in slow, range markets; it also means thinking like a price maker, not a price taker.

It is possible to make money in slow markets *if* you can slow yourself down and become the sniper. Thinking like a price maker, you will take money from those that play for expanding volatility in a contracting environment.

More:

Trading Like a Sniper

The Power to Not Trade

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Trading Views: Volume Two

After posting some big picture viewpoints yesterday, I thought I'd add a second collection of trading-related posts from around the Web. Lots of good stuff out there!

* Questions to ask when you're trading in a range; see also VWAP and range trading;

* An indicator that shows backtested promise, with lots of good links for background;

* Excellent post on adapting to changes in the market created by algorithmic programs;

* Nice video (click on video and maximize You Tube screen) illustrating prop trading of CL;

* Three trading lessons from baseball great Ted Williams;

* A look at professional portfolios, updated from SEC filings;

* Linkfest on the difficult topic of trading addictions.
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Waning Momentum and Strength: A Look at Two Indicators

After once again topping out ahead of price--a common pattern--my short-term measure of market momentum (bottom chart) has moved to neutral territory, but is above the levels that have been recently associated with market bottoms.

We're also seeing new 20-day lows among NYSE, NASDAQ, and ASE stocks running ahead of new highs. Note how new highs vs. lows lagged significantly at the recent price highs. As long as new 20-day lows exceed new highs and short-term momentum is weakening, my stance on the market is defensive.
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Sector Update for November 22nd

Last week's sector review noted strength among large cap stocks, but weakness within specific sectors and among small caps. This past week failed to see a broadening of the market rally, and we moved lower as the week progressed. That left the eight sectors that I track weekly (above) in a mixed Technical Strength status.

(Recall that Technical Strength is a proprietary short-term measure of trending and varies from a very bullish +500 to a very bearish -500, with scores between -100 and +100 indicating no significant directional tendency).

What we see is that Health Care stocks are the only group in a strong uptrend; Financial shares remain in a downtrend. Other sectors are either non-trending or weakly trending higher. The greatest week-over-week decline in strength occurred among Consumer Discretionary and Energy stocks, as economically-sensitive sectors weakened overall.

Here is how the sectors looked as of Friday's close:

MATERIALS: 220
INDUSTRIAL: 120
CONSUMER DISCRETIONARY: 80
CONSUMER STAPLES: 220
ENERGY: -40
HEALTH CARE: 320
FINANCIAL: -200
TECHNOLOGY: 80

We can see from the chart above that Financial stocks have been in a negative strength mode for several weeks running. This bears watching: it is unusual for a sector to not show greater rotation during a period of generally firm index prices. Such persistent weakness suggests that investors may be anticipating further bad news from this key sector.

Overall, however, the sector readings are neither meaningfully overbought or oversold. They're consistent with a consolidating/correcting market that has moved significantly higher since late October, but are not at levels that have been seen at recent intermediate-term bottoms. As always, I will be tracking market trending via my basket of stocks each morning prior to the market open via Twitter (follow here). For a listing of the stocks that go into my sector-based baskets, check out this post.
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Intraday Put/Call Ratios as Short-Term Sentiment Measures

If you take a look at my recent post on the CBOE equity put/call ratio, you'll get a sense for what an average ratio has looked like lately.

Those ratios, however, can also be informative on an intraday basis.

Here we see Friday's trade in the S&P 500 Index (SPY; blue line) plotted against the CBOE equity put/call ratio for each 30-minute period of the day. Note how a very high level of bearishness accompanied the early market action, as we held above the overnight market high and then rebounded in the afternoon. Note also how the ratio turned bullish as we leveled off late in the trading day.

While there isn't a one-to-one correspondence between tops and bottoms in the put/call ratio and bottoms and tops in stocks, the ratio does do a nice job of telling us when the bull or bear sides are becoming crowded. Those are occasions where we're most likely to see short-term reversals.
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Learning to Shift Emotional Gears as a Trader

A worthwhile blog post written by Richard Friesen describes what happens to traders when their brains downshift into flight or fight responses. In the post, he suggests a breathing and visualization exercise to achieve control of both body and mind. As I noted a while back, an effective way to prevent yourself from going on tilt in your thinking and trading is to exercise physical self-control.

Still another way to exercise self-control after a difficult trading period is to strictly control your trading size and the risk taken per trade. Large increases in position sizing magnifies the variability of profit/loss swings, which in turn magnify our emotional responses. The drama created by the increased risk creates potential trauma emotionally; once we're scarred from negative experiences, we end up trading scared.

A little while ago, I hit a high water mark in my yearly P/L and then took a full-sized position in a longer-term trade idea. Now, of course, we can increase the risk of trading not only through position sizing, but also through holding periods: the longer we hold a position, the greater the variability in returns. After all, the market moves up and down more in a week than in a day; more in a day than in a 20-minute period.

By trading full size over a much larger time frame (my average bread and butter intraday trade lasts less than 30 minutes; this one was a hold for several days), I increased my risk significantly. I felt justified in doing so, because I was confident in the trade idea.

Was I emotionally prepared, however, for a possible 20 point ES futures swing against me? Not at all. Instead of thoroughly thinking through that scenario and making sure I could live with it, I allowed my confidence to blind me to the possibility of being wrong.

And wrong I was. I took my largest loss of the year in a couple of days, erasing the gains of the prior two weeks.

Worse still, the experience left me frustrated and wanting to get back to my high water mark. The next day, eager to get back into the market, I forced myself to sit and watch. When I returned to the market, I limited myself to a single trading setup (a variation of my trusty transition pattern) and my short-term (intraday, under one hour holding time) framework. My trading size was kept moderate, so that potential losses would be entirely manageable.

Within a week, I recouped the loss and returned to my high water mark. I did so by chipping away at the drawdown, focusing only on my highest probability trades. The key was turning the frustration of the bad trade into a doubling-down of my determination to trade well. To accomplish that doubling-down, however, I needed to shift gears emotionally. Hitting the sidelines for a day and lowering my risk per trade were central to that effort. Had I tried to trade while I was hot, using size to recoup my losses all at once, I surely would have dug myself a deep hole.

Even though I've traded since the late 1970s, and even though I'm a psychologist who works with traders and all too familiar with trading pitfalls, I make the same mistakes--and am subject to the same biases and faulty decision making--as everyone else. No psychological techniques eliminate bias and bad trading. The best we can do is learn to shift gears, control risk, stay emotionally intelligent, and play to our strengths. That's what builds a trading job into a long term career.
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Weekend Views: Volume One

* Traders often don't succeed, because their processing of market information does not play to their strengths;

* A good look at the dollar carry trade;

* The correlation between equities and gold and other good reading;

* Interview with Jim Rogers on his success; see also this post on the dynamics of success;

* How much has stimulus helped the economy?

* Signs of risk aversion at the short end of the Treasury curve;

* Is the business model for broadcasting broken?

* Hysteria over government debt and its consequences.
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Handling the Stress of Trading

One of the most common questions I get from traders is how to deal with the stress of work. Here are some posts that might get you started; I'll follow up with a post on the topic this weekend:

* Using Biofeedback to Help Trading Performance

* A Dozen Thoughts on Trading Stress and Emotion

* Stress and Coping in Trading

* Stress and Trading Performance

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Two Reasons I Like Volume Bars in Market Charts

Here is the day's trade in the ES futures, with each bar representing 50,000 contracts traded. I find this to be a useful perspective on markets for several reasons:

1) The bars draw faster in busy market periods and slower in low volume periods. Because I look for trade ideas by comparing successive bars on the chart, this has the natural effect of slowing me down when markets are thin and keeping me involved when markets are moving.

2) The bars separate the effects of volume on volatility. Because each bar represents the same volume traded, we can see markets gain and lose volatility through the day and readily identify when volatility is correlated with market direction. I'll post more on this topic later; it's quite important.

In general, I find it helpful to view charts in different ways over different time periods. Many times, a hypothesis will jump out from one perspective that could not be seen with a different view. The idea is to stay fertile and flexible in thinking and adapt to shifting market conditions.

More:

Denominating Charts in Volume Units

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Midday Briefing for November 20th: Range Trading Near the Lows

Here's an update to this morning's chart. You can see that we've neither taken out the overnight lows nor sustained an upmove into yesterday's range. Rather, we're trading within the overnight range as trade slows down ahead of a holiday. A nice tell that we'd have trouble sustaining the downside has been firmness of major currencies against USD and firmness among commodities. Once again, this appears to be a stock market correction, but not necessarily a revaluation of risk assets more broadly.
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Morning Briefing for November 20th: Watching Price Levels

In overnight trade we've broken below yesterday's lows in both the ES (top chart) and euro (bottom chart) futures. In a valid breakout, we should not re-enter the prior trading range with any meaningful volume. This morning, I'm watching to see if yesterday's support becomes resistance for today's trade. Thus far, as I write, we are back in yesterday's range in ES, but not in the euro. Failure to sustain trade below yesterday's ES low around 1086 would target yesterday's pivot level (see recent Twitter post for pivot and other price targets) to the upside.
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Simulation and Making Sound Trading Decisions

My recent post described how traders can use information within the bars of Market Delta footprint charts to make short-term trading decisions. I notice that the newest version of Market Delta supports trade entry and management from the chart itself; it also includes a simulation module that enables traders to practice making trading decisions from the chart data.

Let's go back to the chart from yesterday morning's post. If you look at the last three bars of that chart, you'll see that we've consolidated in a tightening range after having moved steadily lower through the early morning hours. Your job as a short-term trader would be to profit from a break out of that several hour range. You would begin with a bigger picture view: How is the morning trade comparing with the trade from the prior day?

You would see that we've broken below two-day support and are now hovering near Monday's day session lows. You'd also see, within the morning session, that the volume-weighted average price (VWAP) is moving steadily lower and that we are building value steadily lower (side histogram). That tells us that, on the chart's timeframe, we're looking at a downtrend--but that it is also the start of a potential breakout move and longer-timeframe downtrend.

Now we look within the bars. Note at the top of each of the three most recent bars how trade has shut off as we've approached the 1100 level. Note also how trade has shut down around the 1098 level. At the time of the chart snap shot, we were trading at 1099.75. If you did not see volume building and lifting offers at 1099.75 and above, what would your trading decision be? Clearly, you'd be a seller, expecting at least a rotation back down to the 1098 level.

If volume dried up as you approached 1098, what might you think of doing? If you saw volume accelerate as you approached 1098, what would you want to do? The information within the bar would be key to deciding whether to fold the trade or hold (and maybe add to) it. Such decisions are based on real demand and supply data provided by the marketplace; not by untested assumptions regarding chart patterns or mystical numerological sequences. All those decisions can be practiced in simulation mode, scanning incoming data, processing the data, pausing the flow of volume, and rehearsing your reasoning.

One value of simulation is ensuring that decision making is coming from the executive centers of the brain; see the link below.

But, of course, there is more that goes into making good trading decisions. We'll take a look at some of those elements in the next posts in this series.

More:

Inside the Trader's Brain

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Today's Trade Across Asset Classes: Catching Intermarket Correlations

From 12 N CT forward, it was easy to look for a second leg down in the ES futures (top chart). Note, however, that the correlated asset classes--euro (middle chart) and gold (bottom chart)--had already rallied and taken out their morning highs. That suggested that the drop in stocks was not part of a fundamental revaluation of risk assets (as I had hypothesized), but rather a "puke" stimulated by the break of the multi-day trading range. If that is the case, the current action is more likely to be a correction in an ongoing bull market, rather than a reversal of those bull dynamics (much of which are rooted in the weak U.S. dollar).
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Midday Briefing for November 19th: Bearish Sentiment

As regular readers know, the NYSE TICK is one of my favorite measures of short-term stock market sentiment. Here we see TICK on a 3-minute basis; note how the bars largely stay below the horizontal zero (purple) line. A quick look at the distribution of TICK values is afforded by the moving average of TICK (blue line), which has stayed below zero through the session, but has recently firmed.

As a rule, values above +800 suggest significant buying sentiment--many stocks upticking simultaneously, a sign of program buying--and values below -800 show significant selling sentiment. In today's trade thus far, we've had no readings above +800, but quite a few below -800. That's a sure sign that institutions--those executing the program trades--have been strongly leaning to the sell side.
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Stocks Moving in Lockstep

The recent post highlighted the market's breakout move; those same qualities are common among trend days. Note from the FinViz spectrum display that stocks within the major sectors are almost uniformly lower over the day. That tells us that stocks overall are undergoing revaluation; this is not mere sector reallocation.
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Morning Briefing for November 19th: A Legit Break

This morning's trade has given a great example of a breakout trade, as we moved below the range of the prior two trading sessions on expanded volume--and volume transacted at the market bid price. The skewed advance-decline ratio, very negative NYSE TICK, and dominance of volume at the bid all suggested that this break attempt (unlike ones yesterday) was legit. If so, we should not trade back into the overnight range.
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Using Information Within the Bars on Market Delta Charts

If you click on the Market Delta chart above, you'll see the numbers within the 60-minute footprint bars. These numbers are quite helpful in managing positions in the market.

First, however, let's go over some basics:

Inside the bars, at each price, are two numbers. The first is the volume at that time transacted when that price was the market bid. The second is the volume at that time transacted when that price was the market offer. When volume transacted at the bid exceeds that at the offer (sellers more aggressive), that price level is color-coded red. When volume is transacted at the offer exceeds that at the bid (buyers more aggressive), the price level is color-coded green. The shifts of color within the bar show how buyers and sellers have behaved at each price level traversed during that period.

You can see that each bar has one price level and number pair in a box. That represents the high volume price for that period. By looking from bar to bar for the boxed prices, we can see where the market has been facilitating trade over time. In a downtrending market, the boxes will occur at successively lower prices; in an uptrending market, the boxes will occur at rising prices.

To the left of each bar is a vertical line that is either colored green or red. If the bar is color-coded red, the period's closing price was below the open. In such a case, the top of the bar represents the open price for the period; the bottom of the bar represents the closing price. Conversely, if the vertical line is green, that means that the close of the period was above the open price. In that case, the bottom of the line represents the open price; the top is the close.

That way, we can gauge the market open and close relative to the highs and lows for each period.

When we look at the numbers vertically within each bar, we can track where active trade occurred and where trade was shut off. This is very important: if trade is not facilitated as we're moving higher or lower, that means that we're running out of buyers or sellers at that time. Savvy short-term traders can use that information to gauge market exits.

When we look at numbers horizontally from bar to bar at particular price levels, we can see if trade is being facilitated at those prices from period to period. If volume shut off at a price in period one and then expands at period two, we know we're seeing market acceptance of that price as value. That can be very helpful information for entries and exits, as it tells us whether the flow of orders is going for or against our positions.

In coming posts, I will illustrate concrete trading applications of these data, with an eye toward better execution and management of trades. (Please note: I am not commercially or otherwise affiliated with Market Delta; the charts are tools I use and have found valuable in my trading and coaching.)

More:

Trading Logic: Accuracy and Execution

Two Ideas RE: Trade Execution

Reading Market Delta Charts on TraderFeed

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U.S. Dollar Bottoming: A Turn in the Risk Trade?

Recently, I've highlighted non-confirmations in the stock market, as new stock highs in the large cap indexes were not followed by highs among small caps and many stock sectors.

What we also see is that the recent highs in large cap stocks have not been followed by new dollar lows against the euro (top chart), yen (second chart from top), Canadian dollar (second chart from bottom), and Swiss franc (bottom chart).

With these major currencies topping out against the U.S. dollar and stocks showing divergences at highs, we may be seeing a major turn in the dollar-fueled "risk trade".
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Learning and Developing as a Trader

In an excellent recent post, John Forman points out that trading education is not just about the divulging of trading systems. Books such as the Market Wizards texts can be useful, he points out, because the "...value to be found in books and other educational resources is not in specific trading systems and like. It’s in how the resource guides us in the development of our own unique way of taking on the markets."

As a trading coach and therapist, I am of value only if I can help traders see their challenges in new and promising ways. Everyone first tries to learn and grow on their own; it's when they become stuck in their progress that they typically reach out. Often, they are stuck because they're locked into a particular way of viewing self and markets. When a new view becomes available, it opens the door to novel ways of thinking and fresh ways of engaging markets.

So it is in trading education. It's not necessary that you learn "secrets from the masters." What *is* necessary is that you learn new ways of viewing market action, formulating trading ideas, and managing the positions that come from those ideas. A good book or course puts you in the head of the writer or teacher: from that perspective can come new insights, new skills.

The best traders I know seek out fresh opinions about markets; they also seek to learn new ways of engaging markets. It is by pushing themselves outside their comfort zones to look at things in new ways that they keep developing--and stay one step ahead of markets.

More:

Learning How to Trade

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Identifying Range Trade

The tight value area (right histogram), relatively flat VWAP (red line), and mix of volume transacted at offer vs. bid (bottom histogram), and reduced overall volume all are useful tells for a range market. Another important tell: mixed strength/weakness among sectors. For most of the day today, the number of stocks in my basket trading up from their opening prices has been close to the number that have been down from their opens.
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Midday Briefing for November 18th: Staying in a Range

Here's a follow-up to the chart shown in this morning's briefing. You can see that we traded back toward yesterday's low in the ES futures, bounced significantly higher back into Tuesday's range, and now have consolidated near the day's VWAP (red line) around 1106.25. So far, Wednesday has been trading inside Monday's range, as did Tuesday. As of my most recent count, 18 stocks in my basket have traded up from the open, 22 down. Financial issues have been relatively strong; we've seen relative weakness among raw materials shares, tech stocks, and small caps. We can also see mixed sentiment in the balance of volume trading at offer vs. bid (bottom histogram) and in the NYSE TICK.

The ES 1110 level represents important resistance; 1100 represents near-term support. I am watching intraday sentiment and leading sectors (large caps) for indications regarding the eventual break out of this trading range.
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Morning Briefing For November 18th: Trading Higher

8:19 AM CT - I added the top chart to show how the ES futures are trading after the morning numbers. We initially sold off, then bounced back toward the day's session VWAP around 1107.50. Going back to yesterday afternoon, the 1104/1105 level has contained market selling. We're also seeing intermarket themes--weak dollar, strong commodities--supporting equity prices. As long as we stay above that 1104/5 area, we should make a move at testing bull highs. A move below 1100 would reverse yesterday's and Monday's firmness and suggest larger toppiness in the market.

This Market Delta chart, with each bar representing 125,000 ES contracts traded, shows how we're setting up going into the housing and CPI numbers this morning. Note how we held the 1100 area yesterday (which represented Monday's breakout level), and now we're trading above yesterday's range, building value higher. I'll update this with another chart and detailed commentary prior to the market open.
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More Large Cap Outperformance Among U.S. Stocks

Once again, we're seeing evidence of large caps outperforming other indexes and market sectors. The Dow Jones Industrial stocks (DIA; top chart) have been roaring to new bull highs, even as Russell 2000 issues (IWM; second chart from top) remain below their September and October peaks.

Meanwhile, regional banking stocks (KRE; second chart from bottom) and homebuilding shares (XHB; bottom chart) remain notable sector laggards in the wake of continued concerns over commercial and residential real estate markets.
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Tuesday Viewpoints

* Thanks to a sharp reader for this article on pushing ourselves beyond our comfort zones;

* Key idea: We change by adopting new roles;

* Very nice blog site that looks at framing the day with historical probabilities;

* Any biofeedback unit for traders that comes with an "emo bracelet" is definitely for me;

* Unemployment will continue to weigh on the economy;

* Credit contraction continues;

* Ending the "doom loop" for banks;

* A mixed picture for retail sales;

* A wave of mortgage defaults in the near future.
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Markets in a Range

Note that we haven't gotten large moves today from most of the major asset classes and markets, as the Heatmap from the Barchart site displays. That has been one excellent tell of range trade in stocks thus far today: when traders are not revaluing related asset classes and moving them in trends, it's unlikely that stocks will be revalued.
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Midday Briefing for November 17th: Range Bound Consolidation

Here we see a Market Delta chart in which each bar represents 100,000 contracts in the ES futures. What we see is that we have oscillated around the volume-weighted average price (VWAP; red line) around 1104 in a range trade. Once the market could not take out the day session lows from Monday, we moved back into the preopening range, with the 1107/1108 area important near-term resistance.

Among the stocks in my basket, I show 27 up from the open, 13 down, but nearly 700 more stocks are declining than advancing on the NYSE relative to Monday's close. New 20-day highs thus far handily outnumber lows, but we're seeing less than half of the new highs registered yesterday. All told, thus far, we're seeing a range day and consolidation of Monday's strength. If we're going to continue that strength, I would expect to see this morning's lows hold on selling.
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Morning Briefing for November 17th: Building Value Lower

Here's how we're setting up prior to the open in the ES futures. The Market Delta chart will require some explanation. Each bar is drawn to represent the volume distribution within the period; each period represents 200,000 contracts. We see yesterday's and this morning's market, but the cumulative volume histogram at right is for the current day's session only.

What we see is that we've been building volume overnight below yesterday's volume bulge around ES 1108-1109. I will be watching how we trade relative to the overnight range closely, to see if we can sustain yesterday's strength or retrace much of the move. Note that we're seeing U.S. dollar strength, which, if sustained, could weigh on stocks during the regular trading session.
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Hypothesize, Strategize, Revise: Viewing and Trading the Market Open

Here's a mental mapping process that helps me trade the early morning session:

Pretend the market open is 12 midnight.

Prior to the market open, see how Asia has traded and how U.S. stock index futures traded during Asian market hours.

Then see how Europe has traded and how U.S. stock index futures have been trading during European market hours.

Then watch how the U.S. stock index futures--and correlated asset classes, such as oil, gold, the U.S. dollar, and interest rates--behave on the release of any preopening economic numbers.

Then formulate your views as to whether U.S. stock index futures are trading in a range or with a directional bias. Identify price targets you think the market could hit in early trade if your view of the market is correct.

Then treat the market open as a news event, just like an economic release. See if the opening price action changes your view as to whether we're trading in a range or with a directional bias. Revise your views of market targets accordingly.

Repeat this process for any economic releases that follow the market open.

Hypothesize, strategize, revise: Updating your mental models of the market keeps you flexible--and keeps you on the right side of market moves.

More:

Ten Lessons I've Learned From Traders

Changing Your Mental Maps

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How to Interview For a Job: Three Keys

Mike at SMB Capital recently posted his ten interview tips for those pursuing positions with proprietary trading firms. Really, they're good tips for any position you might be interviewing for.

Here are my tips for interviewing, two of which dovetail with Mike's:

1) Outprepare Everyone - Know more about the firm you're applying to than any other applicant. Read about them, talk with people about them, know what they do--and be prepared to explain to them, specifically, why you are interested in *them*. Companies want to find a good fit between the interests and skills of applicants and the demands of the positions. Show them that you recognize that fit.

2) Don't Just Talk About Hard Work - Instead, show them hard work. Show them your achievements and efforts. Losers talk about their interest in trading. A winning interviewee will bring in his or her trading account statements and trading journal and *show* the interviewer the fruits of real labor.

3) Make a Connection - Here's where I might differ from Mike: research tells us that an interviewer's first impression really counts. Dress well. Make the most of eye contact, a handshake, and just plain good social skills. Looking and sounding good won't get you the job, but making a bad impression can lose you the spot. Remember, you're going to be part of a team. On average, people would rather have teammates they like than those they don't like.

Preparation and hard work: sound familiar? The same elements that make for a good interview also make for successful trading.
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Monday Musings and Inspirations

* Super post: what it means when NYSE TICK starts the day strong;

* Great insights into how to interview for a position with a prop firm;

* Important topic: Turning goals into consistent habit patterns;

* Excellent economic overview: unemployment keeps the Fed on hold;

* The need to kill off the Chimerica monster;

* A look at the looming disaster in commercial real estate;

* Calendar effects in the stock market and other good reading;

* Repairing the American dream;

* Concerns over deflation in Japan;

* Eye-opening look at expanding government spending.
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Quick Way to Track ETF Intraday Performance

A nice way to track intraday ETF performance is through the ETF heatmap published by FinViz. The map covers U.S. stocks, international indexes (see above), currencies, and commodities. When the entire map is largely green, it's generally a sign that risk assets are in demand.
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Midday Briefing for November 16th: Building Value

We moved back to VWAP on selling in the wake of Fed chair Bernanke's comments regarding the dollar, but promptly moved back to--and above--the prior market highs, as dollar strength abated. Interestingly, those new highs were not confirmed by the NASDAQ 100 and Russell 2000 indexes, and we've since moved back into the morning range.

Notice the volume histogram at the right of the Market Delta chart above; it summarizes the volume of ES contracts transacted at each price traded through the day. You can see that volume has built between 1108 and 1109, telling us that this is where the market has reset value following the morning rally. If we are going to either continue the rally or reverse it, we should see a rejection of that value level in NYSE TICK and volume transacted at offer vs. bid. If we do not see strong or weak numbers in those indicators, that value area becomes a fresh fulcrum for a range trade.
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The Volume Dynamics of Market Consolidation

If you click on the chart above, you'll see how very significant volume entered the market in the ES 1109 area (red arrow), with the expanded volume occurring at both market bid and offer.

This is one of the first signs a market gives that a one-sided, directional market has finally attracted participation on the other side and is becoming two-sided.

That doesn't necessarily mean that the market move will reverse, but it does generally signify that buyers have found resistance at that price. Sharp short-term traders will use such market-generated information to help them figure out where to take profits on their positions, as the balanced demand and supply generally yields a period of consolidation.
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Morning Briefing for November 16th: Looking Firm

9:29 AM CT - I added the top chart to show the impressive breakout move during the first hour of trading, as intermarket themes got in gear and buyers remained aggressive throughout the hour. I'm watching the distribution of TICK and Delta to see if that continues, and if that might support an upside trend day.

Here's how the ES futures market has been shaping up going into the open; shout out to Market Delta for the chart. Note that, following the retail sales numbers, we've moved back into the overnight range and are now trading near the day's volume-weighted average price (VWAP) at 1099.25. We continue to see U.S. dollar weakness and commodity strength, supporting stock market strength. Per the recent post, I will be watching market breadth closely early today to see if the market firmness can carry over to small caps and lagging sectors, especially financial issues (which are up over a percent in premarket trade).
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TraderFeed Twitter Post Update

I'll be working with traders in Chicago all week, which means that I'll be following markets closely and seeing if we can make the most of intraday moves.

While I may not have time for full blog posts as markets are moving, I will try to send out alerts via Twitter if interesting developments present themselves. These alerts are meant more for decision support than as actionable signals in themselves. Many will focus on intraday sentiment (NYSE TICK, Market Delta) and the evolving structure of the market day (trend, range, breakout, reversion), as well as the behavior of key sectors and correlated asset classes.

For those interested, the last five tweets appear on the blog page under "Twitter Trader". Alternatively, subscribing to the Twitter feed is free via RSS, and you can follow the stream on my page. As always, I appreciate the interest.

More:

Making the Call on Day Structure

VWAP and Day Structure

Historical Observations on Day Structure

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Large Cap Strength, Small Cap Weakness: Nifty Fifty Redux?

The S&P 500 Index (SPY; blue line above) hit fresh bull market highs this past week, but not that the number of stocks registering fresh 20-day highs barely exceeded the number making new lows during the week. Steadily fewer issues have participated in the rally since September, reflecting a narrowing of the bull market's base.

Much of this weakness reflects the relative strength of large cap stocks compared with smaller cap issues.

For example, I took a look at the excellent Decision Point site and noticed that fully 97% of Dow Industrial stocks are trading above their 20-day exponential moving averages (EMAs). For the S&P 500 large cap stocks, that percentage is 72%; for the NASDAQ 100 large caps, the proportion is 75%.

When we look at the broad NYSE Composite Index, however, the percentage of stocks trading above their 20-day EMAs is 59%. For the NASDAQ Composite, it is 41%.

Although 72% of S&P 500 large caps are trading above their 20-day EMAs, that percentage falls to 61% for S&P 400 midcaps and 45% for S&P 600 small caps.

One logical explanation is that U.S. dollar weakness is benefiting large cap companies (which often have international operations that benefit from a weak dollar) more than small cap companies. If that is the case and U.S. dollar weakness continues, we could see a repeat of "Nifty Fifty", in which market strength is largely driven by the largest cap stocks.
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