Market Psychology AM Update for 9/6/06

11.10 AM CT - Per my initial update note, we are indeed testing the lows from late last week, where there's some good support. The continued volume at the bid and negative TICK have made the "sell the bounce" mode the way to go all AM--especially once we saw large volume beat down that rally attempt and cap the market in the 1308 region.

I've been working furiously with the Odds Maker program and am finally coming up with some signals that are working across multiple symbol lists and time periods. That suggests that the signals are robust and not just curve-fit artifacts. My experience, FWIW, is that you have to think like a market maker to come up with the good patterns. If you think like a trend follower or retail trader, you get randomness. The patterns I'm finding involve countertrend trading: buying dips under overall conditions of strength and selling bounces under conditions of weakness. Holding period is 30 min. I'll tweak and hopefully have something to share later this week. Have a great day.

9:58 AM CT - Sorry about the Blogger problems; my previous post below never got through. I'm retaining it nonetheless. The TICK continues its negative skew and volume picks up on the declines. The key, however, was seeing the large selling come in around that resistance point. That really put a lid on any possible early AM strength.

I'll be working with the Odds Maker program from Trade Ideas today, conducting some research. One nice feature of the program is that you can see it calculate the % winning trades as it scans the market. During the scan, sometimes the % will decline or rise quite a bit. That's telling you that the odds are changing as you test the pattern on the most recent data. That is very good information. I see Blogger is down again; I'll try to get this through. Have a great day; I'll post later if any major developments.

9:37 AM CT - Having Blogger problems; will update later. We're seeing persistent selling as we get into that 1308 region, and it's large selling--much of it executed by automated programs. This is keeping a lid on the market and, as long as we see a negative distribution to the TICK and more volume hitting bids than offers, we should stay below that resistance and look at bounces as selling opportunities. A move above the resistance would bring in quite a bit of buying/short covering.

9:23 AM CT - Yowza. Someone unloaded over 3000 contracts (sold at bid) around 1307.75-1308 at 9:20:35 - 9:20:47. That's not a small retail trader, folks. Someone is defending that resistance area with real size. The market absorbed it well, and that tells you something.

9:05 AM CT - One other thing: There's juicy resistance at 1308.75-1309. I want to see if the locals push that level to set off stops. If they can't pull that off, that would be a key sign that the bears have the upper hand.

9:00 AM CT - Volume picked up to the downside, and notice how different the distribution of the NYSE TICK is from recent sessions. What that tells us is that traders are tending to sell bounces, not buy dips. It doesn't mean we can't have short-covering rallies from here, but it does mean that market bounces in which buying dries up will make for candidates for selling. Volume remains moderate, but--reflecting the weak TICK--we're seeing more selling in the broad market than in the large caps. Notice, too, that the NAZ did not follow the other indices to lows on this most recent bout of selling. I'm cautious about selling into new lows when not all sectors are in gear.

8:45 AM CT - No question we have market weakness, with declining stocks outnumbering advances on the NYSE by over 1600 issues. I'm surprised volume has been stronger in the early going and will want to track that as the day goes on. We're less likely to get sustained (down) trending action if we see volume dry up in the AM. The NYSE TICK is clearly skewed to the sell side, and we're seeing more ES volume at the bid than offer, though not by a huge margin thus far. A few early attempts could not get the market below that 1307.50 area; I'm alert to the possibility that selling volume could dry up here and lead us to a bounce.

8:15 AM CT - Good morning. Looks like that loss of upside momentum tracked last night in the Weblog and mentioned in my last post is finally catching up to stocks. The immediate cause of the weakness is bonds. For the second straight day, we're seeing a selloff in U.S. fixed income, creating rising interest rates. This is taking a toll on the pre-opening S&P 500 Index, which is already below Tuesday's lows. Let's see how volume looks (magnitude and proportion at bid vs. offer) early in trade to see if we're likely to trade back into yesterday's range vs. test Friday's lows. My early hypothesis is that we put in a short-term high yesterday and should work off the recent overbought condition, eventually taking out Friday's lows. One last note: there is a decent correlation between the trading range of the overnight session and the trading range for that next day. If that holds, we should see a pickup of volume and volatility today. I'll post early after the open to see if that is indeed the case.