Friday, January 26, 2007

Friday, January 26th Morning Comments

9:38 AM - If we're putting in a bottom here, we should start seeing TICK lows (pullbacks to negative TICK) at higher price lows. Ideally, we should also see TICK lows at successively less negative levels. Similarly, we should get higher prices on rallies in TICK. The lesson I want to stress for today's session is position sizing. We had huge odds of taking out yesterday's lows, creating a very favorable edge. Once selling started appearing in the market, you have to participate with all the size you can muster. You can lose money on 2 or 3 small trades, make money on one high odds trade with size, and wind up the day/week a solid winner. Your position size should reflect your confidence in the trade. Yesterday I mentioned putting small size on when you're feeling out a market. Today it was time to press the advantage. Those odds don't come along every day. Have a great weekend; update on the Weblog tonite.

9:30 AM - Notice how, on the downside breakout, we had over 76,000 ES contracts traded in a five minute period. Such panic selling often leads to short covering, and that's why it makes sense to not chase lows after that's occurred. We're seeing some relative strength in ER2, also leading me to believe we're putting in a short term bottom. Back in a few before I sign off.

9:24 AM - Looking to see if we continue to get an upward shift in the TICK distribution, which would help us put in a short-term bottom. Again, need to sustain the buying.

9:08 AM - We broke the recent support mentioned in the Weblog and, sure enough, hit the S1 pivot level. My tendency is to take profits on big TICK moves down, simply because, with enhanced volatility, you can get some nasty short-covering bounces. As mentioned earlier, however, until we see *sustained* buying, it pays to short these bounces.

9:02 AM - Rates have jumped and stocks selling in response. Keep an eye.

8:53 AM - Note that we've still not seen the very negative TICK that we saw yesterday, but rates continue to creep up and the ER2 and NQ have already broken their recent lows. The market will have to show me sustained buying to make me a bull; otherwise, I'm leaning toward selling into rallies.

8:49 AM - Hope you were able to take some advantage of this move toward the targets of the overnight and Thursday lows. When you have odds like that, you really have to put your max size on and just hang in there to hit the targets. One trade like that can make your week.

8:38 AM - DAX coming off its highs, some selling in US indices. But advancers lead declines by over 400 issues and no substantial selling in the TICK as of yet. I was short pretty much out of the gate because of the analysis I posted and expect a test of the overnight and Thursday lows.

8:10 AM CT - Good morning! We had a continued move higher in interest rates on the Durable Goods news at 7:30 AM CT, with a spike higher in the dollar. Both of those moves have since retraced quite a bit, with the 10-year yield falling back under 4.9%. At 9:00 AM CT, we have the report on new home sales. Prices opened lower in Europe on the heels of the big decline in the U.S., but the DAX has been steadily rising since then, and that has lent support to the U.S. indices in pre-opening trade. I took a look at what we might expect following a weak day such as Thursday, and the norm was for the next day's trade to take out the lows of the weak day. So let's see how buying and selling shape up early in the AM session and see if we can profit from this idea--or from the market's inability to live up to that historical norm. Over the weekend, I'll be posting a detailed analysis of the traders' questionnaire posted a little while back, which assessed--among other things--the trader's well-being. Let's keep an eye on interest rates; I'm seeing some tendency for stocks to catch a bid when bonds also rally (lowering rates) and for stocks to sell off when bonds fall (rates rise). Back after the open.