Tuesday, September 05, 2006

Market Psychology Update for 9/5/06

2:20 PM CT - Normally my updates will be during the morning (Central US time), which is when I'm trading, rebalancing the portfolio, etc., but once in a while I might get a few words in during the afternoon. What I wanted to emphasize here was how important it is relatively early in the day to identify: a) level of volume and nature of the market participation; and b) whether the market is moving in a range bound or trending manner. As noted below, we had early indications of moderate volume and range bound trade. Even when we got two good attempts at an upside breakout around 11 AM and 1:50 PM CT, upside volume dried up, just as downside volume had waned in the earlier AM. Knowing that the market has been trading in a range bound fashion and seeing volume dry up after a move to new highs provided an opportunity for short-term traders to either take long side profits or--at the very least--not chase the upside needlessly once the move had occurred. So far, the range for the day has been a little under 7 ES points! Despite the positive bias of much of the day's action, thanks to the positive adjusted TICK, this is a relatively slow market--and those tend to lack the institutional participation needed for sustained trending action. Update on the Weblog tonite.

10:20 AM CT - Can't say much has changed here: continued modest volume and rangebound trade, with some leaning toward volume at bid in ES and positive skew in TICK. I'm watching for a shift in those dynamics: as long as it's status quo, action is likely to be rangebound. I'm finding that patterns we normally think of as bullish test out as making money the *opposite* way in Odds Maker. This fits with the notion of the market as mean reverting. Selling an indicator of strength or buying an indication of weakness seems to work well intraday. For example, I bought downside breakouts of ranges and the pattern tested out profitably. More tonight; have a great day.

9:55 AM CT - Pretty much the same as before; I'm watching for a downward shift in the NYSE TICK, which--if it materializes--should break us below AM lows. Otherwise, volume has slowed, and we continue with runs and retracements of runs--very much a market typical of local domination. I'll be playing more with the Odds Maker; will report anything of major import. Otherwise, have a great rest of the trading day.

9:33 AM CT - We're establishing a range between the overnight highs and the AM low, which is around the day's average price from Friday. Volume at bid continues to modestly outweigh volume at offer in ES, but the TICK remains positively skewed. The result thus far is a rangebound market, albeit one with somewhat better volume than late last week (though that has been waning recently).

I find the Odds Maker quite interesting, fast, and easy to use once you get the hang of it. You take a pre-programmed market pattern (or one that you define), apply it to the entire market or your own defined subset, and then look back over 15 days to see how many signals were profitable, unprofitable; the size of average wins and losses; and overall profitability. You can tweak entries and exits and see how this affects profitability.

I took a simple pattern of a market dipping below its 30 minute linear regression channel and then trading back above it. I applied it to the ETFs and held on to the close. We had 7 winners out of 9 trades, with average win size handily outweighing the average loss. You can then scan for this pattern in real time (no signals so far today). More on this tonight in the Weblog.

9:08 AM CT - Some slow down of volume, with whippy action typical of local-dominated trade. The TICK remains skewed positively, even as we've seen hitting of bids in ES. As mentioned a bit ago, it is very hard to sustain a downside move under those conditions. It's been very interesting watching 5 minute new highs/lows picked up by Trade Ideas vs. a one-minute footprint chart off of Market Delta. When buying at offer slows down at a five-minute ES high and you start seeing individual stocks making five-minute *lows*, a short selloff in ES has materialized in ES this AM. The key is seeing which stocks are bucking the ES and leading the next move. Some possible patterns to watch for very short-term traders. Great example of selling (volume at bid) petering out with a positively biased TICK from 8:40 - 9:00 CT.

8:45 AM CT - Well, volume has indeed picked up and, in the ES, it's been skewed toward hitting bids, despite the modestly positive NYSE TICK. We hit the first lower targets and, if volume at the bid continues to dominate, next will target Friday's lows. We'll need to see a more negative distribution of the NYSE TICK, however, if we're to see meaningful downside action. I'm going to play with a little research; back with an update in a while.

8:22 AM CT - Here's a dark speculation worth keeping in the back of the mind re: the MidEast situation.

Thanks to 24/7 Wall St. for the kind mention of TraderFeed as a top twenty blog site. I'll have more to say about the list tonight on the Weblog.

Opening trade idea: If we can't muster buying pressure and move above the pre-opening highs in early trade, I'll look for a test of the pre-opening lows and then the average price from Friday (1310.5). Strong volume at offer and strong TICK will have us testing the preopening highs.

8:00 AM CT - Welcome back to the U.S. markets after a long holiday weekend. The expectation is that volatility will pick up now that the holiday is behind us. Let's keep an eye on early volume to see if this, indeed, will be the case. We've had six consecutive days of buying in the broad market, as described in the Trading Psychology Weblog, although the buying--as measured by the adjusted NYSE TICK--has not been at historically high levels. Interestingly, when we've had five straight days of buying in the TICK since late 2003 (N = 47), returns 1-3 days later have been subnormal. That is especially the case when the total cumulative TICK over those five days has been below +2000 (as it has been recently). So that keeps me alert for a pullback early this week. As always, however, before I act on that leaning, I'll need to see weakness materialize in the form of stocks making very short-term lows (I continuously track the number of stocks in my basket making five minute highs vs. lows) and in terms of large traders hitting bids rather than lifting offers. One project for this week is to take a close look at the Odds Maker feature from the Trade Ideas program. I'll be looking to see if we can generate some interesting short-term trading ideas from the Odds Maker. If so, I'll be happy to share those here. Next update planned for after the open.