Thursday, September 14, 2006

Market Psychology AM Update for 9/14/06

10:25 AM CT - Note that our last TICK pullback took us to 1325.5. We need to hold above that level for the bulls to make their charge. Note how the TICK has shifted positively, with buying in NQ and ER2. It's those transitions you want to train your eye to see. Have a great day.

10:09 AM CT - Again, we seem to be struggling to put in lows in that 1325 region, but waiting for those pullbacks in the TICK and for averages to hold above their lows makes lots of sense if you're leaning to the upside. Note that we tested yesterday's lows in ER2; I'd want to see those hold if I'm going the bull way. NQ so far is strongest of the three. Volume at bid continues to outweigh volume at offer in ES and decliners lead advancers by around 900 issues. I continue to believe we'll take out AM highs if we hold above these lows on selling squalls; we're testing that as I write. A break to new lows target yesterday AM lows. I'll post later if major developments occur; otherwise, have a great day. Update tonite on the Weblog.

9:40 AM CT - Volume at bid continues to outweigh volume at offer in ES. The key to the next move, IMO, is whether we break down to new TICK lows and begin a more negative TICK distribution or whether we see selling dry up in this 1325 region and the market eventually break to new TICK highs and begin a process of higher highs, higher lows, etc. I'd like to see strength in the weakest of the three indexes (Russell) before committing major resources to the bulls.

9:24 AM CT - Just off the phone with a trader; hard to trade, talk with traders, and do the blog all at the same time! Talk about multitasking...but it's fun...Anyway, what I said to the trader is don't chase markets to the upside. If you think we've bottomed out around 1325, wait for the sellers to take their turn. You'll recognize that by the drop in the TICK. If the TICK drops and stabilizes and we hold above the lows, you have a nice entry to test the AM and overnight highs. Your stop can be below the AM lows. It's amazing how much of profitability is simply waiting for good prices. Let's see if the current drop in the TICK holds above prior TICK lows and at higher price lows.

9:13 AM CT - Volume remains solid for this time of day, suggesting we'll have decent volatility through the day trading session. The market is bravely trying to hold its own in this 1325 region, but volume at bid continues to outweigh that at offer in ES. We need to see that distribution shift toward the bulls before committing a great deal to the long side. Ditto the TICK distribution. Note how the buyers and sellers take their turns in the market, with the rises and falls of the TICK. We want to see those TICK declines occurring at less negative levels and at higher price levels to be aggressive on the buy side. The reverse would target yesterday's AM lows.

8:59 AM CT - Some buying interest has entered the market as we got near the 1325 area where we have done a fair amount of volume over the past three days. The X axis histogram on Market Delta shows that well. That buying has lifted the NQ and ER2, which had been leading the downside. Let's see if that 1325 area can hold on any fresh selling bouts; if so, we have an entry possibility to the long side to at least test AM highs.

8:45 AM CT - Volume is heavier than its recent average for this time of day, which means that we have more than just locals in there juking the market around. There has been meaningful selling from yesterday's highs as we approach bull market highs in the large cap indices. The usual pattern is for rising markets to sell off, bottom out, and then return for tests of highs as part of range-bound trading. In other words, bull runs normally transition into range bound markets, not bear runs. The key to trading a range bound market is finding its "fulcrum": the average trading point of the range as it emerges. Then you can frame meaningful trade ideas as you test highs and lows above and below that fulcrum. At this point, I'm still waiting for selling to dry up; then I'll worry about average prices and moves toward those.

8:36 AM CT - The broad market is weaker than the ES in very early trade. Declines lead advances by nearly 600 issues and the TICK is skewed negatively. ER2 and NQ are at AM lows, unlike ES. I'm going to wait for the broad market to show some drying up of selling before making any long side moves.

8:10 AM CT - On the heels of the retail sales report, we traded below the pre-opening range to that point and have gone slightly below yesterday's average trading price of 1327. We have upside resistance from the overnight session at 1331; we're below yesterday's midday support at 1326.75; 1322.75 was the AM low. My first priority will be to see if the selling dries up this AM or continues, so a reading of the Market Delta volume at bid/offer will be important. As mentioned on the Weblog, following a day of strength and low VIX, it's common to get near-term weakness before moving higher. That's the pattern I'll be looking for today and tomorrow. My update on the Odds Maker research will appear in tonight's Weblog and will tie into my last blog post. Back in a few after the open.