Market Psychology AM Update for 8/22/06

8:45 AM CT: Just a quick historical note. Monday was an inside day, and in general there are subnormal expectations in the next 1-2 days following an inside day. Since 2005, we've had 18 inside days in which the prior five days were up by more than 1%. The day after the inside day we were up 7 times, down 11 for an average loss of -.06%--weaker than the average one-day change. In general, inside days since 2005 (N = 61) have had weaker than normal expectations going out 1-3 days.

In the preopen, the market was living up to this expectation, following the European averages lower on the heels of a weaker than expected ZEW report on investor confidence in Germany. But the volume at the bid progressively lightened from 5:30 AM CT forward, and we rallied solidly out of the open. As my previous post noted, early AM volume should provide us with a good reading on whether we're likely to get a breakout from yesterday's range from this action. Thus far, 15 minutes into the trading session, we have pretty average volume but over 11,000 more contracts trading at the offer than the bid, with barely a negative NYSE TICK reading. Despite the above historical tendency, I am reluctant to short this market as long as large traders are dominantly lifting offers and pushing prices higher. More to come...

9:25 AM CT - Despite backing and filling and a slowing of buyers lifting offers, we continue to see more contracts trading offer than bid and an upside breakout in the NYSE TICK. As mentioned before, it's tough to short such a market for anything more than a scalp. So far, we're inside an inside day, but volume has been picking up to the upside.

9:50 AM CT - It's pretty discouraging for the bulls that the buying we've had thus far hasn't gotten the job done and lifted us above yesterday's highs. Volume has really tailed off since the move to day session highs. I'm looking for sell setups, but no rush to get in.

10:25 AM CT - Volume has tailed off, and we continue with an inside day within an inside day. The key from here is to see on moves up or down if large traders participate and volume significantly expands. We've seen little of that follow-through so far, but what we have seen has been more with the buyers than the sellers. We need to see much more aggressiveness among sellers if any downside is to be sustained today. That would show up as a downward shift in the distribution of NYSE TICK values. So far, however, the TICK is relatively strong. Have a great rest of the day. Wrapup on the Trading Psychology Weblog tonite.