Friday, September 08, 2006

Market Psychology AM Update for 9/8/06

9:54 AM CT - OK, hopefully you were able to see that selling dry up after a big program (sell) hit the market and drove the TICK down sharply. None of the 3 main markets (ES, NQ, ER2) were able to make new lows for the AM on the downmove and subsequent selling was well absorbed. That provided a nice short-term trade back to the top of the AM range, where we'll see if any demand comes into the market. I'm outta here for some research. Once again, thanks for the feedback; have a great weekend. Wrapup tonite on the Weblog.

9:31 AM CT - Notice the drying up of selling at 1306.5, the lifting of the big offer at 1307.5, and then the aggressive buying on the heels, once that level was taken out. And now it's back in the preopening range. Very much a locals' market. I do think that, if we hold above yesterday's lows, we'll eventually take out the pre-open highs, FWIW. Watch for a positive skew to the TICK to validate. Back in a while.

9:29 AM CT - Whoa, someone lifted a big offer at 1307.5.

9:20 AM CT - The same pattern below occurred at 1306.25, with a big bid absorbing selling. If we can hold above yesterday's lows, I'd expect to see some volume come in as we test the overnight highs. Just an idea for the back of the mind.

9:15 AM CT - Interesting patterns at 1307.75. Several times we had a large bidder just sitting on that bid, absorbing selling, willing to get hit. Very shortly after, the selling abated and the market bounced a few ticks higher. This last time, however, a big seller took out that bid and selling volume rushed in taking us down several ticks quickly to 1306.50. That 1307.75 now becomes resistance; it's the level that sellers were willing to lean on before and--if the demand/supply equation does not change--that level should hold as an upside ceiling. If we move above that level, back into the early AM trading range, you know we have a rangebound market and tepid follow through among sellers. So far, however, volume has picked up on selling.

9:07 AM CT - What happens in markets like these is that you have large locals working big orders above and below the market. So they'll buy 'em up and push the market into their offers and whip 'em down and push the market into their bids. Until paper comes into the market and runs them over. If they don't see signs of institutional participation, they just get bolder with the whipping of the index in a range. That creates the unusual pattern you sometimes see of the market sitting, sitting, sitting, and then running up a few ticks at a time (usually in my face!). I just took half a point profit on a short position and just got out until the market decides to show its hand (if it does at all). Unless you have rapid-fire order execution and a keen sense for where to work orders, playing very narrow, slow, range bound markets is a great way to get chopped up.

8:58 AM CT - So far, the locals are playing ping pong with the market in a tight range, but the distribution of the TICK is pretty positive, and the proportion of volume at bid vs offer in ES is relatively even. It continues to look like a range bound market. I am not impressed with the bulls ability to push the market above preopen levels so far, but we're not seeing much from sellers in terms of TICK either.

8:42 AM CT - Moderate volume; we opened with a bit of a bounce--advancing stocks are slightly ahead of decliners--but locals have leaned on the market since the open. So far looks like a local dominated market, which suggests a possible rangebound market. The new Market Delta shows actual bid and offer in the book, and if you're familiar with reading depth of market displays, you can see the games that the locals play. It's a very advanced topic, however, so if you're just getting used to reading volume patterns, I wouldn't put too much energy into reading the actual order book. Better to focus on what actually trades, where it trades, and the flow of volume from bid to offer.

8:25 AM CT - Two trading events from the Chicago Mercantile Exchange that you might want to note if you're around:

November 2nd - I'll be part of a three-person panel in Chicago at the CME presenting on the topic of peak trading performance. I'll post specific times on my personal site.

November 15/16 - This is the Futures Trading Summit in Las Vegas, with quite a roster of presenters. I'll be presenting the first day and hanging out at nite with whomever is interested in the psychology of the markets and the psychology of traders.

8:14 AM CT - Good morning! Some volatility has come into the market, and that's made for good trading. We've had two consecutive days in which a large proportion of stocks have shown strong downside momentum, as measured by the Weblog's Demand/Supply numbers. That has occurred 26 times since 2004. The normal pattern is to get some follow through weakness the next day, before a bounce on day two. Interestingly, though, during 2006, we've seen that bounce the next day on 4 of 6 occasions. We twice have bounced off the 1304-1305 level (Dec. contract ES), so that is our support. Yesterday's afternoon highs (see the previous post and my Trading Markets article) provide upside resistance (1312.50-1313.75). The overnight range has been more muted than in the past two days, and that might provide us with more of a rangebound trade today. The key will be tracking volume patterns as we approach the edges of the support-resistance range. Back after the open; check out that Trading Markets article if you need a jolt of music to keep you awake.