Monday, November 27, 2006

Observations for a Down Monday

I hope that some of the themes from the recent morning sessions have been helpful to you in trading today's market. Notice that we have seen consistent hitting of bids across the broad universe of stocks, as seen in the weak NYSE TICK readings. We have also seen consistent hitting of bids within the S&P futures contract (ES), as measured by the Market Delta program. Note how, during periods of extreme weakness such as this, bounces in the TICK/Market Delta provide selling opportunities. You want to think of those indicators themselves as being in a downtrend. Once you make that identification, the move is much easier to trade.

My preliminary measurements show that we have a lot of stocks across the board that are trading below their lower volatility envelopes (my measure of Supply on the Weblog). If we close that way, there is a tendency to get a small bounce higher before further weakness sets in. Of the 18 similar negative momentum days since 2004, 8 have been higher and 10 have been lower five days later in SPY, for an average loss of -.01%.

It's tempting to go bottom fishing when we see such weakness, but as long as large traders continue to hit bids rather than lift offers, this is (and has been so far today) a losing proposition. It's when declines lose downside momentum that they offer superior returns--not when there is broad participation to the downside.

Hope that's helpful. I'll do another AM session early in Dec. and hopefully can illustrate these ideas further. Have a great day.


yinTrader said...

Hi Brett

May I add, go with the flow of the market, or trade with the trend, irrespective of what the pundits say!

Monday is a case in point!

Brett Steenbarger, Ph.D. said...

Hi Yin,

I think you're right; the distribution of the volume was to the sell side all day long. You can do quite well if you can identify a potential trend day relatively early in the session--