Monday, August 21, 2006

Market Psychology AM Update for 8/21/06

9:15 AM CT: We came into Monday's market with a bearish edge from the historical models (see posting to the Trading Psychology Weblog for today and my earlier blog post here). The market traded weaker overnight and, from the open, we saw little buying pressure. The Adjusted TICK values were below zero, indicating that a majority of stocks were trading at the bid price, not the offer, indicating greater aggressiveness among sellers. Similarly, in the ES contract, the first half hour saw over 7700 more contracts trade at the bid than the offer. The problem is that *no one* was being truly aggressive this AM, with below average volume after the first five minutes of trade. Because volume corresponds to volatility so well on an intraday basis, it means we haven't had a lot of movement since the open. This occurs when it is a market dominated by locals, with relatively little institutional participation. Those days tend to not be trend days. Unless we see a pronounced pickup in volume this AM, we could see a pretty narrow day in a low VIX market. I pull in my horns in such market environments and, when I do trade, am quick to take what the market gives me. I'll add another update to this post if something more exciting materializes.

9:49 AM CT - So far, the sellers aren't getting it done, but neither are buyers. Here are the net number of contracts transacting at bid vs. offer on a fifteen-minute basis so far (negative numbers mean more contracts at bid than offer, and vice versa): -4444, -3267, +551, -1436, +2096 (as I'm writing). Quite simply, so far, we're not seeing ES traders hitting bids like they were in the first half hour. Volume, meanwhile, continues subnormal. ES 1303.50 - 1304 represents the immediate pre-opening highs. If we can test that area, I'd look to see if volume picks up, especially at the market offer. If not, I'd look at the overnight range as our current trading range and be very cautious playing for breakouts unless I saw expanded volume confirm moves to range highs or lows. It's one of those days where I've made exactly one trade, putting me up a whopping 3 ticks, and I'm pretty much done for the day unless something fresh materializes. "Take what the market gives you," is one of my favorite mantras, and if you can stay afloat in the rangebound, choppy markets, you'll be well-positioned to ride the larger moves when they do materialize. I'll post more if something meaningful comes up; otherwise, have a great rest of your day. Thanks for your support of the blog. The emails and comments have been most gratifying, and they're deeply appreciated.

1:55 PM CT: Tonight in the Trading Psychology Weblog, I'll post a chart which shows ES price vs. the cumulative line of number of contracts transacted at offer vs. bid. When the cumulative line is falling, we know that more volume is being done at the bid, meaning that sellers are more aggressive. As of my writing this, you can see the steady selling pressure through the day with the weak cumulative line. Volume also continues weak, however, which is contributing to what, so far, is an inside day in ES. We could get some volume pickup if we're able to take out Friday's low, but otherwise the day is shaping up pretty much as the 9:15 AM report suggested. Have a good evening.