Monday, March 26, 2007

Tracking Shifts In The Distribution Of Stock Market Sentiment

Today's market has been such a textbook example of a sentiment-based trading pattern that I had to post it. We had a narrow trading range early in the morning. Then, with the housing news, we had a downside breakout in the NYSE TICK (Point A) and a price breakout from the two-day range mentioned in the Weblog. The fact that the break in equities was accompanied by a strong move down in the dollar and a rally in bonds told us that the news was truly new and that markets were being repriced.

We then proceeded to see follow through selling on the breakout, as volume was hitting bids aggressively (Point B). The downward shift in the NYSE TICK, with sentiment well below the 20-day average TICK level, told us that large traders were leaning to the sell side.

After an attempted rally, we saw program selling hit the Russell stocks, sending the TICK to a new low for the day (Point C). At this point, however, many indices (ES, NQ) and sectors (financials, energy, semiconductors) were *not* making lows for the day. This was our classic pattern of inefficiency: negative sentiment could no longer drag the entire market lower.

This emboldened the bulls, leading to an upside breakout in the TICK (Point D). From that point forward, we saw higher lows in the TICK, telling us that selling sentiment was drying up. We also saw a nice expansion in very positive TICK values. With that shift in the distribution of sentiment (TICK), we saw the markets recapture their morning losses.

Once again, notice how an understanding of the day's action requires an integration of multiple pieces of information, including the prior range, the breakout levels, the divergences at the TICK lows, the TICK breakout, and the changes in TICK highs/lows. Observe how such an integration requires far more cognitive complexity than the usual simplistic advice to buy or sell particular oscillator readings or chart patterns. I will have more to say about this cognitive complexity in my next post.


AnaTrader said...

Hi Brett

From that point forward, we saw higher lows in the TICK, telling us that selling sentiment was drying up. Unquote

On my side, I was tracking the TPO of MarketDelta footprints and 3 min and 20 min charts when the housing news was released. Also the volume chart of IB.

I could have joined in the short selling but decided that by so doing, I could be selling outside the PSZ and in the PBZ.

So I waited patiently for market to settle down to go long instead, which I finally did at PBZ of ESM7 at 1436, I reckoned.

I projected it will go up to near COM of 1447, and sold at ltd order of 1444.5, (9 pts gain) about an hour of market closing, as I was feeling sleepy (Spore time).

I concur with you that we need to integrate our market signals for a good trade.

Hsieh hsieh ni.

Jeff said...

Thank you very much for this post, Dr. Brett! It has been an "aha moment" for me.
Up until now, I couldn't really understand why any intra-day index futures trader would want to follow the tick. I did read your posts and they were very impressive and made a lot of sense, but I could not figure out how I may be able to utilize it in real time. I mean, there is more or less a one-to-one ration between the tick and most popular indices, be it the S&P, Dow or Russell. The price goes up – the tick goes up; price goes down – the tick goes down. So what's the big deal? I over-simplify of course, but still it just seemed redundant, and a waste of precious monitor real estate.
But for some reason – I don't know why – this simple explanation and example of yours has managed to drive the message home for me, like a little moment of revelation, were as your previous, perhaps more thorough and methodical posts on this subject, have not. This of course does not mean that there was something lacking in your previous posts. It must have something to do with the way mind work (or does not work).
Must be interesting stuff for a psychologist I guess :)
Anyway, thank you very much again!

Yaser Anwar said...

Excellent post as usual! Had a Q sir: How do you determine which sectors to monitor for lows? Do you go by the weighting of sector in the S&P- the higher the weight the more importance or?

appreciate your help very much.

Brett Steenbarger, Ph.D. said...

Hi Anatrader,

That patience to go with the larger direction of the market paid off well. Congrats!


Brett Steenbarger, Ph.D. said...

Hi Jeff,

Thanks for the comment. I think you're touching on something important: the difference between getting information and gaining understanding. It is difficult in a blog format to properly illustrate the application of ideas and integration of those. The aha! moment comes when we make those integrations and see things in new ways--


Brett Steenbarger, Ph.D. said...

Hi Yaser,

I look at eight sectors with the S&P 500 universe based on the sector Spyders. These include technology, financial, materials, consumer staples, consumer discretionary, energy, health care, and industrials. You could add utilities for a ninth. I weight them equally.