Market Psychology AM Update for 9/20/06

11:15 AM CT - Volume has greatly tailed off here and will likely remain muted going into the Fed announcement. Overall, we've had solid buying interest, but I can't say efficiency has been great: that is, we haven't seen a huge price bang for the volume buck. I personally don't trade off announcements until I can pick up a solid read of who is in the market and what they're doing. Very often the first move after news comes out is reversed. I am alert for the possibility that traders today bought on the rumor and might sell on the news. But as long as we stay above the recent trading range highs with positive TICK, the bias will remain to the upside. Have a great day; update tonite on the Weblog.

9:45 AM CT - Volume picked up on the recent rise and remains solid. No changes in the market dynamics so far: An uptrend, remember, is one in which the market makes successively higher price lows on pull backs in the TICK. So far, that's what we've been seeing. Very strong buying interest, with essentially no negative TICK all AM long so far. As long as that's the case, the bias is to the upside. I'll be getting ready for my Chicago presentation; will likely post later today. Thanks for all the warm feedback re: the blog.

9:33 AM CT - Huge buying interest in the broad market is powering ER2 and NQ as well. Those offers are getting taken in ES, but they're slowing that market's advance, so it lags the other two. Following the TICK has been a solid strategy here, and I would not be shorting this market as long as buyers are lifting bids among NYSE stocks. More on the TICK tonight in the Weblog.

9:27 AM CT - Some big offers continued to sit on ES at those highs.

9:25 AM CT - I'll be talking with the Chicago branch of the MTA (Market Technicians Assn) later today; in Naperville next week; and looking to schedule a teaching session for October with the Teach Me Futures site. I believe they have a Market Delta session scheduled for today; check it out. October is also the publication date for my new book, and November I'll be doing the Trading Summit sponsored by the major futures exchanges in Las Vegas. My hope is that these little morning updates have been helpful in illustrating one way to look at markets. It's not the only way, and for you may not be the best way. There are many sources of mentorship in trading, and I'll touch upon those tomorrow in the blog. The TICK remains positive; I would not be selling this market aggressively as long as that's the case. Note the breakout in ER2 and NQ.

9:15 AM CT - One of the things that got me taking quick long side profits a few min ago was seeing large offers at the highs. It wasn't the kind of fake offers where they flash and pull them. These were large traders willing to have those offers taken. My general experience is that very large traders got to be that way for a reason and, at least for the short run, I won't be the guy who grabs a piece of their 2400 lot. Some slowdown of volume; TICK distribution remains positive, which keeps a bid underneath the market and ER2 particularly.

9:06 AM CT - That non-confirmation from NQ was useful info; again, it's valuable to watch many sectors, not just the instrument you're trading. If we do stay below these recent highs, I wouldn't be surprised to see a volume slowdown and range bound market ahead of the Fed. Do watch that TICK distribution, however. It remains positive, and that means we could see another assault on the highs. A shift downward in that distribution would support the range bound case.

8:59 AM CT - Watch for drying up of buying; if so, and we move back into the trading range, we have the value-based target mentioned earlier. Keep an open mind, watch how volume is flowing. So far, follow through on the breakout has been modest. NQ a bit heavy here.

8:54 AM CT - Whoa, I guess my concern was justified. That was a nice present from the market. My general observation is that when volume is hitting bids in ES but TICK is strong, it means that the ES volume is part of arb trade and not a real sign of weakness. So I'm willing to buy into that. Volume has expanded meaningfully on the move above the highs. Watch ER2 for signs of leading a new rally vs. pulling back into the range.

8:45 AM CT - Some continued hitting of bids in ES, but TICK distribution remains strong so far. Volume moderating and consistent, so far, with a range bound market. It's volume that we get if we approach the 1336.75 highs, however, that would tell the important story. My concern here is that the market might not wait for the Fed to test the upside.

8:38 AM CT - Some firmness in the broad market, with advances well ahead of declines by over 1000 issues and a positive TICK. Interestingly, we're seeing a bit more hitting of bids than lifting of offers in ES as we approach recent highs. I'm watching the TICK and broad market (including ER2) carefully; if the firmness continues, I expect us to break those highs.

8:30 AM CT - I show the bulk of recent trading volume occurring in a band between 1329 and 1331.50, which represents, in Market Profile terms, an estimate of value. If we cannot sustain buying and new highs early in the AM, I'd expect a reversion to this area. So far, however, in the pre-market, we're seeing price firmness in NQ and ER2. I'll be watching volume flows carefully on any attempted break to new price highs. On a different topic, a couple of my speaking engagements are posted to the Weblog: one in Naperville next week; the other in Las Vegas in November. The latter will be Webcast as well. Keep tuned to the Weblog; I'll be doing more teaching of market patterns there in the near future. Back shortly.

8:15 AM CT - The afternoon strength has carried over to the pre-opening market on the heels of lower interest rates and lower oil prices. When you look at a daily price chart of yields on the ten-year note ($TNX) and the oil market (USO), not to mention gold (GLD), you can see what has been keeping a bid underneath this market. The general expectation is for range bound trade ahead of the Fed announcement, although no great surprises are expected from the Fed, given the muted inflation readings. We've seen nice buying each time ES has gone into the 1320s, and I suspect that's part of a short-term bottoming process. (See my previous post on the structure of market transitions). If so, I'd expect us to decisively take out the recent highs before too long, despite the formidable resistance in that 1336-1337 region. More after the open.