Morning With the Doc - 10/31/06

11:24 AM CT - That TICK distribution has taken a negative turn, and we're testing yesterday lows in ES. Note that we are not making lows in the other major indices. It would take a drying up of selling to have me testing the upside here, however. The weak dollar and falling rates are not signs of economic robustness and macro traders obviously did not step up to the plate and buy this AM after the numbers came out. While I keep the longer-term research in mind, it will take a pronounced upward shift in TICK and participation lifting offers by large traders to have me buying again today. It's not an exciting way to trade, but over the years it's preserved capital for me. Thanks for the interest; I'll do another morning session later in November.

10:53 AM CT - Well, that's where stops come in handy. It's disappointing to scratch a couple of promising trades, but I don't know of any way to pursue the large gains without risking some of those profits in hand. But when we saw fresh selling drive the Russells and TICK down, that was the cue that we could not sustain the uptrend. Tonight I'll review my decision making and probably kick myself for not more proactively recognizing that we were in a rangebound market oscillating around that average price. That would have allowed for taking of profits as we traded above 1383 and stalled out. I've been trading since the late 1970s and continue to learn, continue to make mistakes, continue to search and re-search patterns. My longer term picture remains intact, but we'll need more participation to the upside to make that happen. Volume really tailed off as the morning wore on, and we could see some rangebound and slow trade ahead of economic numbers later in the week. Have a great one.

10:36 AM CT - Trade has slowed down and we're seeing those runs up and down initiated by the locals. I will not add to positions in that environment, but so far I'll need more concerted selling to take me out of the positions. The TICK distribution for today continues to look favorable relative to the last two days and note that, so far, we've held above yesterday's lows. Still, the 1383.25 average price is acting as a magnet on prices and we'll need volume to vault us to new value areas. I hope today's session has shown you a bit about money management, framing trade ideas, framing when to stay in trades vs. pull out, and how to coordinate a longer-term perspective with a shorter one. Arguably, I've gotten too caught up in the big picture today and missed some short-term trades. My hope is that you can learn from my mistakes as well as my wins. Have a great rest of the day.

10:25 AM CT - I have not added to positions on this pullback, as stocks in the basket have been weak and NQ is looking heavy. I could get stopped out at breakeven here, and that would just put me back in the mode of assessing the market, developing new ideas, etc. Back in a few.

10:05 AM CT - Stocks in the basket still look OK; a few making 5 min lows here. As long as those TICK pullbacks are shallow and occur at higher price levels, they are candidates to add to positions. But if we get aggressive selling (hitting of bids with size) and very negative TICK, that's a different matter altogether. I'll update at least once more before calling it a morning.

9:58 AM CT - Stops raised to breakeven. No sense letting good trades turn into losers. All part of the money mgt. I added the Russells because of the positive shift in the TICK distribution. Russells correlate about .78 with TICK. I keep all sorts of stats like that in my head to aid decision making. I might be a piggy here, but I think we have a shot to break the day's morning highs and get a flurry of buying as a result. So I'm holding on here and not taking profits. If I do take profits, I'll take off one unit at a time when TICK gets extended and if stocks in the basket aren't doing a good job making new highs.

9:50 AM CT - Added Russells to the position. Tight stop 772.2.

9:45 AM CT - Note the strength in energy issues. Why? Weak dollar: oil is dominated in dollars. Ditto gold. Not good, not good for the longer run, even though the big traders are lifting offers and the TICK has shifted dramatically upward. I've raised my stop to the day's lows (note that I'm giving this trade plenty of room to breathe, as it's designed to be held overnite) and will add to positions when selling bouts fail to take us to new lows. In a nice trending market (which this isn't so far!!), retracements of the TICK back toward zero (or modestly negative) make good candidates for entries. I'll see how we hold up in price on the next such retracement before adding to the position, quite possibly with Russells.

9:40 AM CT - I'm not gonna lie. Having my initial position go under didn't bother me particularly. Seeing the dollar tanking and bond yields plummeting makes me really uneasy. That's traders anticipating recession, folks. We've gotten some nice buying, expansion of TICK, and stocks in the basket making fresh 5 min highs on a broad basis, returning the core position to breakeven. Now let's have sellers take their turn and see if we can hold at higher lows in TICK and price. That would get me adding to the position, but I still don't like that falling dollar.

9:28 AM CT - This is where money management is crucial. I took a small position with one unit of capital. I divide my trading capital into 4 units. If I'm wrong by buying (and my position *is* under water at this time), my losses won't be extreme. If the market is proving me right, I have plenty of opportunity to scale in. At present, it's not that we're seeing heavy selling so much as the absence of buying in the face of the weak economic numbers, rising bonds, etc. Declining issues only lead advancers by about 250 issues. But there's no way I'll add to the long position until the TICK distribution turns positive with readings over +800.

9:17 AM CT - I have a small core position long at this point and it's mainly playing for that edge over the next 5 days, as mentioned on the Weblog. As long as the TICK distribution stays more positive today than yesterday (and yesterday was stronger than Friday) and as long as we stay above yesterday's lows, I'll look for the Friday-Tuesday sequence as a transitional structure creating a market bottom. If we get fresh selling and extended negative TICK, I'll be stopped out. A few issues in the basket are perking up and showing new highs, but we need to see large traders lifting offers to confirm the long idea.

9:05 AM CT - Ok, we see signs of a bit of weakness, rates coming down, Euro strong against the dollar, some selling of stocks, but TICK holding up well. Basket of stocks making more 5 min lows than highs, large traders not hitting bids in force. I've been nibbling long as TICK went negative, but we need to stay above yesterday's lows to make this a longer term buy.

8:54 AM CT - Selling so far is modest in the TICK and volume continues strong. More than just locals in this market, and that usually leads to good movement. We're seeing some hitting of bids in Market Delta among large traders; that's kept me out of the long side. New 5 min lows in my basket have dominated new highs recently. The basket's weakness has kept me out of the long side as well. Patience, so far. Let's see how those numbers look and develop an idea from there.

8:41 AM CT - Remember that strong volume generally correlates with high volatility, so if our 5 minute volume readings stay high, I'd expect decent market movement this AM and today in general. I'm also tracking the net NYSE TICK, which has been positive so far; the volume at offer vs. bid in Market Delta (also positive so far); and the net new 5 min highs vs. lows in Trade Ideas (pretty even at this point). Note how the new highs/lows kept me from chasing the opening upmove. Staying out of bad trades is as important as making good ones. I'm flat and may well stay that way until the numbers come out; sellers taking their turn.

8:35 AM CT - Solid volume to open, particularly considering we're awaiting some numbers. We're seeing solid net lifting of offers among large traders, and that's showing up in a positive NYSE TICK and advancing stocks solidly leading decliners by over 600 issues. We've taken out yesterday's highs in NQ and Russell; so far the bullish bias is playing out. My basket of stocks is showing some issues making 5 min lows even as ES made its opening run, so I'm waiting for sellers to take their turn.

8:30 AM CT - Here's what I'm looking at on my screens: e-Signal tracks the NYSE TICK, TIKI, DAX, Russell, NASDAQ, and ES futures, along with sector ETFs. Trade-Ideas is tracking fresh five-minute highs and lows in my basket of stocks (see the Trader Performance page for details). Market Delta is tracking volume at the bid and offer and is alerting me to what large traders are doing. I also maintain a cumulative volume at price histogram on Market Delta that gives a rough reading of where our value area is at, a la Market Profile. That's it. The value area is approximately between 1381.75 and 1384.75. The big question for the open is whether we can get quick buying pressure to sustain us above that range, or whether we'll return toward the average price around 1383.25.

8:10 AM CT - Couple of quick announcements before the open. My new book, Enhancing Trader Performance, will be shipped in the next week. Initial comments from reviewers have been very positive; it's the first book I know of that tackles the issue of how traders can develop systematic programs of training for success. Also check out the Chicago Mercantile Exchange's free panel presentation on Peak Performance Electronic Trading this Thursday (11/2) at 2:30 PM CT, which I'll be part of. Registration is required; the session will be live at the Merc auditorium, but also Webcast for those unable to attend in person. I also want to offer a note of thanks to Brian Shannon, another trader devoted to the training of traders, for giving his blog readers a heads up on this morning's session. Brian's innovative use of video as a teaching tool, on his blog and in his online classes, is worth checking out. For other unique training tools, check out what Charles Kirk is quietly doing with the portion of his site devoted to members, in which he makes his trades, results, and trading journal available for readers. Also take note of what Howard Lindzon, Trader Mike, and others have put together in the video world with Wallstrip. Back after the open.

7:45 AM CT - The ECI report came in pretty much in line, and we're not seeing any radical moves in bonds, stocks, or the dollar as a result. Monday's average trading price was 1383 in the Dec. S&P emini futures, and we're trading above that level. Note that the Russell futures are closer to yesterday's highs than either the ES or NQ. With ES, we're looking at Monday highs of 1387 and lows of 1378.75. Given the bull bias of my research, my initial trading plan is to buy bouts of selling that hold above the Monday lows in anticipation of taking out Monday highs. A great setup would be to see early selling scare off bulls but hold above yesterday's lows, completing one of those transitional market structures spanning Friday through today. If that occurred, I would probably leave a piece on for a potential several-day move that would test the recent bull highs. My plan B kicks in if we get fresh selling pressure, perhaps as a result of those 9 AM CT economic reports. Fresh selling that breaks yesterday's lows with broad participation would target the cluster of daily lows we've seen in the 1369-1369.75 region and would flip me to the sell side. The important point here is that you rely on research for a leaning, but you don't get so wedded to that opinion that you ignore how the market is *actually* trading. I will start the morning flat. Back before the open.

7:00 AM CT - In my haste, I forgot to mention the Employment Cost Index report at 7:30 AM CT, which tracks the cost of labor. A very strong figure would be taken as inflationary and would likely lead to a jump in interest rates and pressure on the Fed to tighten monetary conditions. With economic reports before the open, I like to note the high-low range of the overnight market prior to the report and then the high-low range after the report until the open. That is a quick gauge of whether the report has fundamentally altered market participants' estimates of value. If the news is truly news, we should see a considerable adjustment in the bonds and currencies.

6:50 AM CT - Good morning and welcome to the Halloween AM session, in which we'll track markets and take a look at decision support for traders. Here are three reading assignments prior to the market open: 1) Take a look at my latest Trader Performance page entry in which I explain how I track intraday new highs and new lows with my basket of 17 stocks. I'll be referring to this during our AM session; 2) Note the research reported on the Trading Psychology Weblog. This is one reason I have moderately bullish expectations over the next several trading sessions; and 3) Check out the excellent Briefing website and click on their economic calendar, and then click on the economic reports due out today. At 9 AM CT, we'll have consumer confidence and Chicago PMI. The markets will be looking for signs of economic strength to see if we might get future rate hikes and interest rate firmness. Keep an eye on bond yields and the dollar when those numbers come out. If we get major moves in those markets, the odds are greatly enhanced that we'll see a trending move in equities, as markets price in fundamental, new information. All things being equal, we've been seeing sustained strength across a broad range of sectors and that normally leads to upside follow through in the near-to-intermediate term. But this is Halloween, and we could get some tricks along with promised treats. Back before the open.