Wednesday, December 06, 2006

Early December Morning With The Doc

10:10 AM CT - OK, I would have loved to have seen a more exciting day for our morning session, but as always we take what the market gives us. My research suggested subnormal returns going forward and my read of the volume and TICK suggested a range bound day. That had me shorting early in the session when we traded above the prior day's average price. That was a very nice trade idea, but it paid out only moderately, which again clued me into a slow, rangebound day. When I saw institutions jump into the market and the TICK distribution go positive, I decided to enter in the direction of the market trend from the last two days as long as TICK stayed healthy. I knew that such a trade was flying in the face of the rangebound thesis, but my risk-reward was pretty good. As it happened, the market did slow down and I had to bail out with a small loss when the TICK no longer looked healthy to me. The main thing for today was using research and market data to figure out what kind of day it was likely to be and then to frame trades patiently rather than chase moves that reverse. Tomorrow's a fresh day...and we may see more slow trade ahead of Friday's numbers. Hope this morning's session has given you some ideas for how to track markets. Let's do it again later this month. Have a great day!

10:00 AM CT - Well, our AM range has been about 4-3/4 points on ES, so the range bound notion has held up so far. I decided to let that last trade breathe, but buyers just didn't come in on the heels of the program trades. We know that from the diminished volume and weak price action on bounces in the TICK. My trading is finished for the day. I'm just not seeing enough opportunity to continue, given the likelihood of trade slowing down further as we head into the midday hours. Back with a wrap up in a few.

9:55 AM CT - OK, lost half a point on that one. Back in a few.

9:50 AM CT - Sticking with the long position, but have my stop in place. As long as the TICK stays skewed to buyers, I'll stick with the position. We've been treading water with lower volume since those buy programs hit. I'm seeing if we can test those overnight highs in ES.

9:26 AM CT - Long some ES

9:21 AM CT - Buy programs hit the market in force; that was institutional and with solid volume lifting offers. One idea to toy with is that we've made our low for the day. As long as the buyers remain in the market lifting offers, we should see a test of the preopen highs.

9:15 AM CT - It's trading more and more like a local-dominated market. No real trend. Note that we made new AM lows in ES and Russell, but not in NAZ, and then we reversed the selling. Those types of thrusts up and down with frequent reversals of the moves are typical of markets dominated by locals. It's dangerous to chase such moves, which is one reason I wasn't selling the ES on that recent move down. Note also how the TICK is starting to turn upward. Let's see how things look on the next TICK pullback.

9:06 AM - Dollar weakening, rates dropping; take a look and let's see how stocks react.

9:04 AM CT - There's a seller's skew to the NYSE TICK and the TIKI and we continue to see sellers hitting bids in the ES. That has to turn around for me to take the long side this AM. Put/call activity remains bullish, though not quite as much as at the open. TRIN is still a touch below 1.0, but drifting higher. Declining stocks lead advancers by 765. My leaning is to sell bounces that occur on successively lower price lows.

8:55 AM CT - When we look at what the large ES traders are doing, we're seeing that there isn't a huge amount of large trader activity so far this AM, but what there is remains skewed to hitting bids. Note that semiconductors and NAZ did not make fresh AM lows on the very recent selling. I'm not seeing a big selling push among institutions so far, and yet there's no substantial buying either. That keeps me on the sidelines. If I have to content myself with one trade for the day, so be it. I don't trade unless a solid idea in line with my research presents itself. That's the discipline part of trading. Waiting like the sniper for the one good shot.

8:46 AM CT - Took profits; not much, point and a half. All this so far is consistent with range bound, pretty slow action; nothing fundamentally driving the market. We're not seeing decisive selling in the TICK and that had me taking what the market gave me.

8:37 AM CT - Note the bullish put/call ratio, but we're not seeing decisive lifting of offers either in the ES (Market Delta) or among the broad list of stocks (NYSE TICK). Declining stocks lead advancers by -525 as I write and volume is not outstanding. This is consistent with a range bound day so far. We already hit the avg price from yesterday on my trade. That was first target.

8:32 AM CT - Small short position in ES here.

8:20 AM CT - Here's the link to the Mortgage Bankers Association weekly survey of mortgage applications. Note that we're seeing an uptick in mortgage loan application and an uptick in refinancing. The dollar initially strengthened vs. the Euro on the news, but has since fallen back. Stocks initially rallied, but also fell back and since have stabilized. Interest rates are up and are hovering at those higher levels. The important thing is that we're not seeing a move outside yesterday's trading range in the equities. So the market is not treating the housing news as being of fundamental importance to stocks. I will be looking closely to see if the ES can move above the 1417.5 level that was rejected after the news came out. If so, with meaningful volume, that would be fresh buying and worth following. Conversely, an inability to surmount that pre-opening level would target yesterday's average price and yesterday's trading lows. These are the kind of what-if scenarios I play with prior to the open. The goal is to anticipate various situations and to be ready to act decisively if and when they occur.

8:05 AM CT - SOX to be you...notice how the semiconductors have lagged during the recent runup in stocks. I'll be watching the semis this AM. As I noted in today's Weblog, we're also seeing lagging action in the European bourses. If you missed my post on what I look for in the initial minutes of trading, do check that out. My main focus initially is simply volume: how much we're getting and how it's distributed. That will tell us who's in the market and which way, if any, they're leaning. So far, we're retracing some of the recent action: dollar up, interest rates up, gold down, oil down. Let's see how stocks respond. Back before the open.

7:40 AM CT - Good morning! We'll be talking a bit about the equity put/call ratio this AM, so check out the chart on the Trading Psychology Weblog and the recent blog post on the topic. As the Weblog noted, my research finds subnormal returns in the near term following periods of bullish intraday sentiment. This also fits with the put/call research mentioned in the blog post. We've got some strength in the dollar and a rise in interest rates prior to the open--both retracing movements from the last few days. That's weighing a bit on stocks in the pre-opening market, which are trading back toward the average price from Tuesday (1414.5). We see overnight resistance at 1417.5 and some support from Tuesday AM at 1412.25. There are no major numbers out today, although we will see crude inventories reported at 9:30 AM CT. The big unemployment numbers are due Friday, so we could see trade slow down as we approach that time. I'll be watching volume early in the session to see who is in the market and how much participation there is. My initial leaning is to expect a relatively slow, rangebound day, as we digest good gains from the last two trading sessions. We've had good participation on that rise, so it will take some distinct bearish intraday sentiment--traders aggressively hitting bids--to get me short for anything other than a short-term trade. I am going to be especially alert for market rises that either fail to breach the overnight resistance or that test the highs with poor participation (i.e., many sectors failing to make new highs). Those will be candidates for fading. Back before the open.














4 comments:

trader190 said...

Hi Brett,

Very interesting. Thank you for sharing. Where did you put your stop?

Thank you.

Brett Steenbarger, Ph.D. said...

Hi,

Thanks for the note. My stop was based on weakness in the NYSE TICK, not based on price. We went below the point I wanted to see on the TICK, I waited for a little bounce, and was out. Many of my stops are based on how the market is acting, not just on price.

Brett

yinTrader said...

Hi Brett

You hit the nail on the head with:

Quote
That's the discipline part of trading. Waiting like the sniper for the one good shot- Unquote

As in the Army , where I learned from my son who had to do his National Service at 18 before he could go abroad for his studies, the need for snipers as part of the war strategy.

I am beginning to learn to have patience waiting like a sniper , prefering not to take a trade when I saw ES heading for a rangebound day using MarketDelta footprints alone, and garnering snippets here and there ....

I did enter a long trade for EurUsd when there was an upthrust for a short swing trade in view of the numbers coming out on Friday.

Which brings me to make a request : would you consider doing a live trading on currency pairs? I know it is hard to look for volume on cash currency, but currency futures could take its place for volume anaysis, I believe.

Merci.

Brett Steenbarger, Ph.D. said...

Thanks, Yin. I think a live trading event with currencies would be fascinating. Because I don't trade currencies, however, I would not feel qualified to offer such a session. I do think that the time will come (it's not here yet) when futures volume in FX will more closely approximate total market volume. That would open the door to very interesting trading strategies--

Brett