Wednesday, August 23, 2006

Market Psychology AM Update for 8/23/06

10 AM CT - Hopefully you caught the market's change of character, as volume continued to pick up, including volume at the bid, taking us to new day's lows as the distribution of the TICK went quite negative. Catching those shifts in market character is essential to short-term trading success. My comments from 9:30 still hold, but note here that we're at the low end of the market's recent range and need to see downside volume continue to dominate if this is going to yield a breakout move to the downside. Have a great day; update on the day's action tonite on the Weblog.

9:30 AM CT - The housing data really knocked the wind out of the stocks, and it was across the board. Volume picked up, and it picked up at the bid, hitting small caps particularly. The distribution of the TICK also went southward. We remain rangebound, but we'll need to see some sustained willingness of large traders to lift offers if this market is going to surmount its early AM highs. My leaning is to sell strength as long as volume at offer cannot match volume at bid and as long as the Adjusted TICK runs negative.

9:10 AM CT - We continue to see modest volume and the sudden runs and reversals typical of ES markets dominated by locals. So far, we're inside the previous day and we're seeing a modest dominance of volume at offer vs. bid and a positively sloped Adjusted TICK line. I'm continuing to treat this as a rangebound market, needing the market to show me expanding numbers of stocks making new highs and expanding volume at the offer or bid before I'll assume any breakout move. As I write, weakness is showing up in the TICK and in the small caps; worth keeping an eye on.


Paulo de León said...

Tx, you´re changing all of us. together with own measures i´m looking at the market in another way more dynamic (from a mechanical way), actually i´m "reading" the market. i have a question in how to determine profit target and stop losses. My experience or the way i view this is putting this two variables as a % of the average high minus low of the last days (kind of ATR).
For this way of trading, what % of ATR you think is recomendable for both variables?.....
Elder in his book Come into My trading room, says that if you catch 30% of the ATR you are doing above avg.....i´ll like your comments on this very important issue, since this determine your PL.....tx, again....

Brett Steenbarger, Ph.D. said...

Thanks, Paulo, I appreciate the feedback. Your point about the importance of reading the market is a very good one. For that same reason, I exit trades based on market reading, not on ATR, etc. If I'm short and volume is continuing to hit bids, I'll stay with the position. If I see that selling dry up, I'll exit.

I do think Elder's point is well taken. Rarely do I catch tops and bottoms. I sell *after* the market has started to show weakness and I cover the short *after* the market's selling has dried up. So, yes, with good trading, you do catch the meat of a move, but not the whole thing.

Trying to catch exact tops and bottoms, in my experience, is frustrating and unrealistic in its perfectionism.


James said...

Dr Brett,

Ive noticed the PC ratio is sky high this morning. I tend to mistrust selloffs when the ratio is around 1.50 In a slow light volume market I fell that the bigger players lean against small put buyers. I mention this because you were talking about it your commentary.


Brett Steenbarger, Ph.D. said...

Hi James,

Very good point and an excellent heads up re: the current market. Thanks. Let's see how the day's ratio winds up and what that might hold in store for tomorrow and the near term. Thanks--


NStone said...

I see you find the Market Delta data very interesting, as indeed to I. I have some graphs showing only the cumulative bid and ask activity over 100 contracts a trade. It does take some of the local noise out of the picture. My main question is how can this be predictive? The graphs are very good for agreeing with why the price is moving - most of the time. I think you stated that when the bid is hit hard but the market does not move that is a sign of reversal. Indeed the second graph shows this. This is the only predictive way I see to use this. The other point is one that I have found with Market Delta. You state that at the extreme of a move or bar the bid or offer are lighter. This will always be the case in retrospect as the market tested these area and failed. Also each market delta bar is effectively a mini bell curve of bid and offers. The centre should be the highest.

Your insight into some of these points would be very useful.

Regards Nick

Brett Steenbarger, Ph.D. said...

Hi Nick,

You raise some good points. In general, I find that it is *patterns* of the NYSE TICK and volume at bid/offer that are meaningful, not individual readings. Because many daytraders/locals need to exit positions quickly (due to leverage they swing), it sets up many trades where buyers who lifted offers or sellers who hit bids have to puke out of their positions, creating reversals. Conversely, my research finds that breakout moves are more likely to continue in their breakout direction if volume expands and the ratio of volume at bid/offer significantly expands in the direction of movement. Today's trade is an excellent example of that.