Thursday, December 21, 2006

Setting Up Trading On An Economic Report Day

Here's what my Market Delta screen looks like this morning prior to the 7:30 AM CT release of GDP and Initial Claims numbers. Then, at 9:00 AM CT, we have Leading Economic Indicators and at 10:00 AM CT, we have the Philly Fed report on manufacturing, which could turn out to be the most important of all if it shows dramatic weakness.

You can see that Wednesday's market established value (the area where most volume is traded) above Tuesday value region. We bounced higher overnight and have pulled back, so I'm now seeing if we can hold the Wednesday lows for a test of the Tuesday/Wednesday highs.

I like to look at the market's trading range(s) prior to economic releases and then after to see if the data have truly brought fresh buying or selling to the market and especially if the market is repricing its assessment of value. I also look at interest rates and the dollar to see if those markets are undergoing significant repricings in the face of the economic data. We are most likely to see trending moves in stocks (i.e., repricings of value) if the global/macro traders are also repricing rates and currencies.

It sounds simplistic, but it's easy to lose sight of: In a rising market, you'll see bouts of selling terminate at successively higher levels. In a falling market, you'll see buying spurts terminate at successively lower levels. When we have buying or selling bursts that end near the termination points of prior bouts of buying/selling, we have a relatively rangebound market. In a market that shows short-term mean reversion, buying when selling peters out at a higher level or selling when buying dries up at a lower level is often a good trading strategy.

On an economic report day, I like the market to show me its response to news and actually *see* where the buying and selling are terminating. That speaks volumes about the market's pricing and repricing of value over time.