Tuesday, February 06, 2007

Tuesday, February 6th Morning Market Comments

10:33 AM - One more quick observation. Note on this most recent low in ES that we did not make new lows in the semiconductors and NQ (as well as ER2), which had been leading the downside. That has me looking to see if the market laggards are running out of sellers. If so, I'd be looking for a short-covering rally at the least.

10:06 AM - OK, hope the research and tracking the market's inability to make highs helped you take advantage of the move back into the Monday range. Three takeaway lessons here: 1) On average, markets will not give you inside days. If you can't make new highs, consider the possibility that you'll be testing new lows; 2) Rangebound markets tend to revert to their average trading prices. At the edge of a range, you generally have a good trade either for a breakout or for a mean reversion; 3) Keep an eye on the most volatile market sectors, such as semiconductors, NQ, and ER2. Very often they will lead the way on short-term trending moves. Have a great rest of your day. Update tonite on the Weblog.

9:58 AM - Note that we broke Monday lows in NQ and are approaching them in ER2. The failure of those two averages to take out their prior day's high was an important early AM tell as well that figured into my being short. Again, if markets are going to be really strong or really weak, all the sectors will travel together. Continued weakness in semiconductors has led to broadening selling, with much more volume at bid than offer in ES. Back for a wrap shortly.

9:49 AM - My strategy is to sell TICK bounces, not chase declines that have already occurred. Note we have a downside breakout of the 1st hour's range. Odds Maker tells us that selling that downside move has been a losing strategy over the last 3 weeks. I prefer to be quick and take profits or, at the very least, not chase lows.

9:47 AM - The semiconductors have been a great tell for this market; they've led the weakness. You can see, however, that the bears are gaining ground only grudgingly, only now hitting the VWAP target.

9:37 AM - Next downside targets would be 1451.25 (VWAP), 1449.75 (S1), and 1448 (Monday low).

9:35 AM - Note weakness in semiconductors and energy issues. I don't have enough reasons to be long, given those dynamics and the research.

9:28 AM - I'm flat and may stay that way unless I see we're at the edge of an important range where I can handicap the odds of either a breakout or another reversion to a mean trading price. This really is not my best trading environment; many times I'll get a point out of a trade, and then it will reverse. So I've learned to take what the market gives me. The other reason I took profits a little while back is the Odds Maker finding that downside breakouts of opening ranges were tending to reverse. So when we broke to a new AM low, I was not thinking of adding to shorts; I was concerned about reversal. Which, as it turned out, is what happened in the short run. Once again, a nice piece of decision support from research. Back in a few.

9:21 AM - Well, the idea was for a trade back into the value area toward the Monday pivot/VWAP. There was solid buying sentiment early in the AM with solid TICK numbers, but I noticed that wave after wave of buying could not push the market to new highs relative to Monday. That led me to take an initial short position in anticipation of sellers taking over (which fit with this AM's research idea). The sellers did come in and then bounces in the TICK provided an opportunity to add to shorts and catch the move back to the mean price from Monday. It wasn't a huge move by any stretch, but it was a nice illustration of how research and a reading of the market can go together and produce a solid trade. In a higher volatility environment, that same trade would have paid me out much more. Back in a short while.

9:16 AM - Took profits on the shorts.

9:06 AM - Got the move back into the value area; now watching to see if we get lower price highs on TICK bounces. That would set up further selling opportunities, although I'm not aggressive in this rangebound environment with modest volume.

8:56 AM - Lots of choppy cross currents, but with net buying in TICK and in ES, with volume at offer exceeding that at bid. Because of those dynamics, I am not aggressively short, but I'm willing to hold a small short position to see if the inability of buyers to make new highs relative to Monday will bring in sellers.

8:45 AM - Carrying an initial short in ES. But need to see selling in TICK and no break of AM highs or I'll be out quickly.

8:36 AM - Got some solid buying off the AM pivot. Now watching to see if we can hold above the AM lows on pullbacks in TICK. Advancers well ahead of decliners thus far and no negative TICK. Note that ER2 and NQ did not surpass their Monday highs in overnite trade.

8:26 AM - Here's my Market Delta chart this AM. Note we're trading above value and handicapping the odds of reverting to the value area vs. breaking out to the upside in a new bull leg.

8:17 AM CT
- Good morning. It's another cold one in Chicago. Let's just see if I can keep my screen from freezing today! Note my post earlier this AM on what happens after narrow market periods. Pretty modest expectations, so even though we're seeing some pre-opening strength in the ES on the heels of gains in Europe--and we're trading above the Monday highs--I'll need to see evidence of buying volume in ES and across the broad range of stocks to target the R1 and R2 levels outlined in the Weblog. A return back to the Monday range would target that day's pivot and VWAP levels as initial targets. No major economic news today; just testimony from Sec Treas and others through the day. My other post this AM takes a look at combining information from trading research with information we glean from real-time following of the markets. I think it's a topic very important to developing and sustaining a market edge. While on that topic, BTW, here's an interesting pattern from Odds Maker: When we've had a breakout above the opening 15 minute range in SPY over the past three weeks, 7 out of 10 occasions you would have made money by fading the upside breakout. By selling strength and holding the trade for 30 minutes, you would have averaged 2.2 ES points per trade, with a net gain of slightly over 10 ES points. Knowing patterns and odds like this--and then tracking in real time whether the patterns are setting up *now*--can make for an effective trading methodology. Back after the open!