Monday, January 08, 2007

Monday, January 8th: Morning Comments

10:38 AM - The main thing to take away from the AM trading session is the importance of flexible thinking. We started off with some research that suggested we were likely to take out the Friday lows. As the selling progressed early in the morning, however, it was apparent that many sectors were not participating. That suggested that it would be a mistake to chase those lows and, indeed, made sense to watch for reversals. Perhaps the most important mental shift was from "downtrend" thinking to "rangebound" thinking, with the AM lows and the 1420 resistance area forming the range. Having that range in mind enabled me to get on board to the long side when heavy selling could not bring us to new daily lows, but the range also alerted me to be aggressive in taking profits when the buying ran into a wall of sellers. Unless we see fresh buying enter this market, I anticipate the range to continue, which might set up some selling opportunities to test the lower end of the range. Have a great day!

10:29 AM - It was one of those "take what the market gives you" situations: we got nice buying up to the 1419 area and then sellers entered in force. I waited for the first bounce in the TICK and took profits. Now we'll see if we can regroup for another assault at 1420--or if sellers hold the lid and eventually have us retracing the trading range. One last comment shortly...

10:16 AM - The rangebound trade has continued, as volume is slowing down. We're not seeing the selling so far able to push stocks below the AM lows, but neither is buying expanding as we approach that 1420 resistance. That remains the tug of war. We need to see more than selling in the TICK terminating at higher lows: we need evidence of expanded buying as we move toward that 1420 area. I'm long some ES here when the heavy TICK selling couldn't push us to price lows, but will bail out if good buying is not sustained.

9:45 AM - In a good downtrend (or uptrend), you'll see the sectors moving in relative unison. That hasn't happened today. We had early weakness in the Russell, but note that commodities were not falling (as they have been) and we never saw a break of Friday lows in the emerging markets (EEM), as well as the NQ, semis, etc. That's helping us form a trading range between the 1420 resistance area and the AM lows, and now the job of the trader is to see areas where buying or selling dry up without getting through that range. That would heighten the odds of reversal. The positive shift in the TICK distribution and the very recent relative strength in ER2 raise the scenario that we've put in a low for the day. That will have me looking for spots where selling enters and dries up above those lows for a test (and possible break) of the resistance highs.

9:22 AM - Here you can see where the scenarios and flexible thinking are helpful. I was looking for evidence of selling drying up, but instead we've seen a continued negative TICK distribution and new lows first in the ER2 and then in the ES. Think of a downtrend as a situation in which successive rallies in the TICK occur at progressively lower price highs; an uptrend is the reverse. Once we get a bounce in the TICK at a lower high and then see the positive TICK eroding, the next short-term trade idea would be a test of the prior lows. It's when we see TICK selling hold up at higher or equal lows that we think about a downtrend reversing. So far that hasn't occurred. By staying grounded in the bid and offer volume and how the market is *actually* trading, we can entertain hypotheses about the market without becoming wedded to those.

9:05 AM - That 1420 resistance area held the first rally attempt, as buying dried up without us taking out that level and, sure enough, we were back to testing Friday lows. But only about 500 more stocks were declining than advancing, and the TICK distribution has not been as negative as on Friday. All that has me looking for signs of selling drying up so that I can buy this market, take advantage of a possible short squeeze, and a push through that 1420 resistance. Once again, it's a scenario I'm keeping topmost of my mind--not a fixed opinion. I need to see higher lows in the TICK and the weakest of the indices, the ER2, stop making new price lows.

8:42 AM - Hopefully you were able to see the weak TICK distribution and volume hitting bids in ES from the very start of the session, propelling us toward Friday lows. As noted, however, we're vulnerable to non-confirmations and snap back rallies: some sectors are showing some residual strength here, including semiconductors.

8:21 AM - We're seeing some rebound buying in the commodities (oil, gold) and some rebound buying overnight in the major U.S. equities futures markets. I'm watching the resistance area in the ES of 1420-1421; inability to break and sustain a rise above that level will have me selling the market this AM in anticipation of a test of Friday's lows. The equivalent levels in the Russell futures (ER2) and NASDAQ futures (NQ) are 782-783 and 1803-1804, respectively, and 6628 in the cash DAX. I will be watching the NYSE TICK and the distribution of volume at the bid and offer in the ES futures very carefully in early trade to handicap the odds of breaking and staying above those levels vs. testing Friday's lows. Should we test the lows, I will be looking at participation in the move very closely. If we see non-confirmations among sectors and relative strength in the TICK compared to Friday, the odds of a snap-back, short-covering rally would be increased. What I'm doing this AM, as every morning, is creating what-if scenarios to prepare for a variety of possible market outcomes, even though my primary scenario calls for a test of Friday's lows. The what-if scenarios keep you flexible; not locked into a single expectation. I'll post further if and when I see something of note. As mentioned earlier, I won't be posting every few minutes--only if there's something in the larger picture worth mentioning.