Thursday, February 01, 2007

Thursday, February 1st Morning Comments

10:03 AM - OK, no more calls, no more emails. I'm starting to feel like that guy in the Timekiller video. Anyway, what we're looking for in short term trading are shifts from demand to supply, from buyers to sellers, and vice versa. When ISM came out, I noticed very large traders hitting bids, which I interpreted as getting out of their positions, given that large traders earlier had been lifting offers aggressively. I then waited for the first bounce in buying (NYSE TICK, attempts to lift offers) to show me that the buyers couldn't get price back above the highs and I aggressively shorted the market. At that point, one of the things that keeps me in the trade is if I see a continued dominance of volume at the bid vs. offer, especially among the large traders. That is easy to track in Market Delta (which I have to credit for this AM's trade), because as long as the bars stay red, you stay short. When you get hitting of bids and negative TICK that can't push the market to new lows, that becomes a short-term opportunity to take some profits. In that sense, in a short time frame, you become a trend follower, where large traders create the trend.

I continue to think we're putting in a range, esp. given relative weakness in NQ and ER2 recently. Short-term the bounces in TICK have given us some selling opportunities, but we've yet to see extreme selling in TICK. Have a great morning! Update tonite on the Weblog.

9:49 AM - As I noted in the Weblog, this is a common pattern, in which we get a momentum peak, then sell off, and begin the process of finding a trading range. I believe that's what's going on now. More in a bit to explain my trade. I've been handling phone calls and emails galore this AM, trading, and doing the blog. Talk about multitasking!

9:33 AM - Took some profits here. I'll explain a few things in a min.

9:20 AM - I continue to watch to see if we start getting lower price highs on TICK bounces and lower price lows on TICK declines, as well as a downward shift in the TICK distribution. Selling in ER2 and volume at bid in ES keep me short.

9:08 am - The selling in ES on the release showed some heavy volume; some large participants were taking profits. I'm watching to see if that dynamic continues and if we start to roll over to a more negative TICK distribution. I continue to lean short as long as we see more volume at bid than offer in ES.

9:05 am - Another drop in the dollar on ISM release, but stocks fell, rebounded, now looking somewhat tired. I'll lean short in ES if we cannot stay above prev. day's highs.

8:53 AM - Notice DAX continues to new highs.

8:50 AM - We continue to see solid buying in the TICK and solid volume at the offer vs. bid in ES, with ER2 especially strong. It's in these kind of situations that you don't want to buck the trend. Let's see how we respond to ISM shortly.

8:40 AM - Nice follow through strength in ER2 has taken us above the Wed. highs, and we see advancing stocks well ahead of decliners with very positive TICK. Upside target is R1; NQ a bit heavy here; watching carefully to see if we stay above overnite high in ES.

8:05 AM CT - Good morning. I'll be fielding some calls from traders this AM and working on some research, so my comments (and my trading) may be lighter than usual. We had economic numbers come pretty much in line this AM, with initial unemployment claims a little below consensus. Bottom line is that bonds continue to rally, and the interest rate on the 10-year note is now down to under 4.8%. (Early yesterday we were briefly above 4.9%). See my most recent post re: short-term moves in rates and stocks. The dollar, so far however, is not falling meaningfully further relative to the Euro. Note that we have the important ISM number at 9:00 AM CT, with expectations for continued firmness. We've already taken out Wednesday's highs in pre-opening trade in ES and NQ. Note how we are at very long-term resistance in ER2, but also at highs in ES that go back to mid-December. I would expect that taking out these highs, at least in the short run, would produce a spate of buying from breakout traders. So while my research suggests modest returns in the near term following a rate drop, I am watching those levels closely. Price levels for the day are on the Weblog; I'd expect a failure to hold the Wednesday highs to lead to a test of the Wednesday pivot. Back after the open.