Evening Briefing for June 30th

* MARKET THEMES FROM TUESDAY: Concerns over economic weakness following weak consumer confidence number; weak oil, gold; falling rates; strengthening dollar; some reversal of these themes late in day, with stocks finding support below ES 910; good site for daily market wrap.

* OVERSEAS/OVERNIGHT NUMBERS: 12 Midnight CT - Japan, domestic auto sales, steel imports/exports.

* WORTH READING:

-- Possibility of currency crisis in UK. More like Iceland than U.S.?

-- Review of rates and looking ahead to more economic numbers

-- China leading the economic recovery; Europe bringing up the rear?

-- Home loan delinquencies on the rise. More foreclosures to come?

-- Concerns over lack of transparency at NYSE over program trading.

-- Low NASDAQ volume on a rise; what to expect.

-- Evidence for trendiness in Russia's stock market.
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Details on the Chicago Trading Seminar

This is a follow-up to the notice for the Chicago trading seminar for those who have registered to attend. The event is booked solid with a waiting list; although it will not be recorded, we will be posting PowerPoint slides from the session and will conduct a webinar on related topics in the near future. Here are the details:

Session Title: "Understanding Markets, Understanding Yourself"

Date/Time: Friday, July 17th; 1:00 PM CT - 5:00 PM CT

Location: Third Floor Conference Room; Club Quarters Hotel; 111 West Adams St. between Clark and LaSalle Streets.

Check In: Will be held outside the conference room starting at 12 Noon. Please bring your emailed confirmation and some form of photo identification. We can't admit gate crashers due to the filled attendance; that's why we're verifying registration at the door. For the same reason, attendees will not be able to bring guests who have not separately registered.

Agenda: From 1 PM - 3 PM we will review concepts pertaining to the psychology of markets themselves, with a focus on identifying shifts and trends in buying and selling sentiment. Trevor and Brett will follow the S&P 500 e-mini futures market in real time with the Market Delta platform to illustrate trading ideas in real time. After a break at 3 PM, Brett will present trading psychology best practices from his recent work with traders at various firms; he will also discuss (and disclose) his methodology for identifying and utilizing pivot-point trading targets. The last portion of the day will be a group coaching session in which attendees can bring up any question regarding trading or trading psychology.

We'll be encouraging lots of questions, discussion, and mutual learning. It should be fun! Please make sure you're at the seminar early to check in so that we can get as much live time in the market as possible. Thanks!

Brett

Looking for a Market Transition

Looking at a possible transition pattern in the ES market: high volume selling becomes low volume selling becomes net buying. We need to see new highs in TICK to confirm influx of buying; less selling alone won't move a market higher.
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Anatomy of a Stock Market Breakout

After trading in a narrow range overnight and early in the morning, consumer confidence data came in much weaker than expected. If you click on the Market Delta chart above, you'll see within the bars how large size began hitting bids as the ES market moved below 923. At the same time, we saw a strengthening dollar and weakening gold and oil, both recent bearish themes for stocks, as 10-year yields pulled back from the day's highs. The appearance of volume brought volatility and the simultaneous move among asset classes reflected the fact that the morning numbers were, indeed, a game changer. It's the breakouts accompanied by significant directional volume and correlated movements among related asset classes that are the most trustworthy.
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Morning Briefing for June 30th

After a very narrow range trade on Monday afternoon, we're now seeing very narrow trade in the overnight session, perhaps in anticipation of a slew of economic numbers later this morning (bottom chart). We remain above the 6/25 and 6/26 highs (purple line); a move back below those levels would target the range midpoint around 912.50. Strength sustained above the line would target the late May/early June trading range, as part of the longer ongoing range trade. Note the timing of economic reports coming out in the U.S. (see Twitter post) and overseas this morning. If those cannot take us out of range trade, I'd expect quite a quiet afternoon.

8:51 AM CT - The Market Delta chart nicely shows how we've moved back into the narrow range when buying after Chicago purchasing manager data could not sustain a move above the overnight range. With strength in the U.S. dollar vs. euro and weakness in oil and gold this morning, themes will be weighing against upside for stocks. Let's see how those themes respond to consumer confidence data at 9 AM CT.
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Volume, Volatility, and Opportunity: Why Many Traders Struggle

I recently stressed the relationship between volume and volatility as a gauge of trading opportunity within the day. Here we see the principle illustrated at a longer time frame. As volume has steadily come out of the S&P 500 ETF (SPY), we have seen an extended range trade from early May to the present. Note also new lows in the VIX, which is now around 25, considerably down from levels earlier in the year. With reduced institutional participation in the stock market, daily trading ranges have collapsed; the 20-day median daily range in SPY is 1.59%, down from 3.58% at the end of March; 2.13% at the end of April; and 2.00% at the end of May. That is affecting both swing and intraday traders, as moves that once extended now reverse more readily. That is a major reason many active traders are having more P/L problems this year than last.
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Evening Briefing for June 29th

* MARKET THEMES FROM MONDAY: Low volume; large caps outperform small caps, creating weak participation on the rise; U.S. dollar weak vs. euro; oil strong. Wrap-up of the market day.

* OVERSEAS/OVERNIGHT NUMBERS: 4 AM CT - Japan, Housing Starts, Construction Orders; 5:45 AM CT/5:50 AM CT - France, Housing Starts, PPI; 7:00 AM CT - Germany, Labor Statistics; 7:00 AM CT - Italy, PPI; 7:30 AM CT - UK GDP; 8:00 AM CT - Italy, Provisional CPI; 8:00 AM CT - EU Inflation; 9:00 AM CT - France, CPI; 11:30 AM CT - Canada, GDP.

* WORTH READING:

-- Nice summary of what central banks have been up to;

-- Excellent overview of economic data;

-- Companies to avoid due to poor earnings quality;

-- Recap of the major stock market averages;

-- Pictures of the financial crisis and more excellent links;

-- Questioning the China growth story;

-- Great catch: Problems with Treasury plan to buy bank shares.
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Weaker on an Up Day: What Next?

Kudos to Rennie at Market Tells for pointing out that today's stock market was weaker than Friday despite the rise in the level of the large cap indexes. According to the data that I keep, which tracks all NYSE, NASDAQ, and ASE stocks, we made fewer 20-day highs today than on Friday.

So what happens after a weak up day in the market? I went back to late 2002 (when I first began collecting the 20-day high/low data) and looked at all cases in which SPY closed up on the day, but fewer stocks than the day previous made fresh 20-day highs.

Three days after the weak up day, SPY averaged a loss of -.25% (124 occurrences up, 133 down). For the remainder of the sample, SPY averaged a three-day gain of .07% (808 up, 638 down).

Interestingly, the weakness following a weak up day was more pronounced when the weak up day registered less than 500 new lows (as was the case today). That seems to suggest that a weak up day in a relatively strong market is particularly vulnerable to reversal, as a longer-term move may be waning. The average three day loss in SPY when new lows were low was -.41% (55 up, 63 down). When new lows were high, the average three-day loss was -.11% (69 up, 70 down).

It's a nice example of how looking at price change alone can mislead traders.
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Is There Opportunity in the Market?

So often, as I work with traders, I'll see them struggle to formulate an opinion: are we going higher, or are we going lower?

As the morning market today has shown us, the answer to that question is sometimes "None of the above."

Note the sharply declining volume, identified by the blue arrow. As volume has come out of the market, volatility has narrowed to the point where there has been little short-term opportunity.

Understanding that volume-volatility connection is key for active traders. When volume decreases, it means that the large, directional players in the market are relatively absent. What remains are market makers and scalpers who play for ticks within narrow ranges, making money between bids and offers.

When volume comes into a market, we don't just get more of the same trade; we get a qualitatively different trade, because that added volume typically reflects a certain kind of market participant. Knowing how much trade is occurring is a good clue as to who is trading--and that is an excellent tell for how much movement we can expect.
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Pre-Opening Briefing: The Context of the Market

We're trading higher in the S&P 500 e-mini (ES) contract this morning before the open, thanks to strength in Europe, but a broader look at the context of the market move gives us a little pause. Of course, the tipoff to the context came from an investigation of the trend status of the S&P 500 sectors and the status of the market indicators posted weekly. Both show that we are in an intermediate-term trading range, in a market that has been losing momentum and strength.

As you can see above (middle chart), this morning's strength places us near the top of a several day range. Even further out (bottom chart) we are trading at the upper end of a multiweek range defined by the highs of 6/19 and the lows of 6/23. How we trade relative to the resistance at the tops of these ranges will be of crucial importance today and this week. A failure to sustain strength above those highs would have me looking for retracement back into that range, toward the 900-area midpoint. A successful upside breakout would target the June highs. Either way, standing near the top of an extended range should set up a worthwhile trade. I'll track my thinking on this with intraday Twitter posts (follow here).

9:37 AM CT - I added the top Market Delta chart to show how we traded down toward the overnight lows in ES before rallying furiously and taking out the overnight highs. Note, however, that both the NASDAQ and Russell Indexes are below their opening price levels. The large cap stocks are leading this morning; to sustain an uptrend, they'll need to bring the others along. I'm watching TICK for signs of broader market strength. With volume at the market offer handily exceeding volume at the bid in ES, it is difficult to sell this market despite current non-confirmations.
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Indicator Update for June 29th

Last week's indicator review concluded that we had lost upside momentum and were likely trading in a range defined by May's lows and June's highs. After dipping toward May lows early in the week, we bounced higher later in the week and ended on Friday pretty close to the middle of that broad range. Accordingly, we didn't see dramatic trending behavior among the S&P 500 sectors that I follow; prices remain relatively close to levels recorded in early May.

Recall that the Demand/Supply Index (DSI) is a proprietary index of the number of stocks closing above and below the volatility envelopes surrounding their short-term moving averages. The Cumulative DSI (top chart) is a running total of daily DSI levels, adjusted to create a zero mean. During rallies, the Cumulative DSI will stay above zero for prolonged periods, as more stocks close with strong momentum than weak momentum. This past week we dipped below zero before bouncing back into positive territory; this often occurs during the early phase of market corrections. It continues the pattern of weakening momentum noted last week.

Similar weakness was seen in the new high/low data (middle chart), as we saw new 65-day highs move slightly below new lows early in the weak before bouncing higher. The new highs peaked in early June and have been moving lower since; indeed, much of this past week we saw 20-day lows outnumber 20 day highs by handy margins. We need to keep 20-day highs above lows to sustain the late week bounce; a reversal back to a surplus of new lows would suggest further correction.

Finally, we can see from the Decision Point chart that the advance-decline line specific to S&P 500 stocks (bottom chart) has shown only a weak bounce and is well off its highs after dipping last week below May lows. A drop in the A/D line below last week's lows would suggest a more serious correction to the bull move that started in March.

In all, we appear to continue in a broad trading range between May's lows and June's highs. The continued weakness among the indicators suggests that we may see further correction ahead; should we move to further weakness in the DSI and hold last week's lows (and level of stocks making 20-day lows), I would be an aggressive buyer. A break of last week's lows accompanied by further indicator weakening would be indicative of a more substantial market correction that I would be reluctant to fade.

Indicators, as usual, will be updated each day before the market open via Twitter; you can follow tweets here or read the latest five posts on the blog page under "Twitter Trader."
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Sector Update for June 28th

Last week's sector review suggested that we were in a broad corrective mode defined by May's lows and June's price highs. We did indeed touch the lows in SPY from the middle and later part of May before bouncing higher toward the end of the week. On Friday, new 20-day highs across the NYSE, NASDAQ, and ASE finally exceeded new lows for the first time during the week, once again highlighting that we are in a trading range rather than an outright bear market. A move below this past week's lows, particularly on an expanded number of stocks registering fresh new lows, would suggest a deeper and more significant retracement of the rally since early March.

Here are how the sectors are lining up as of Friday's close with respect to Technical Strength (a quantification of short-term trending):

MATERIALS: -180
INDUSTRIAL: -120
CONSUMER DISCRETIONARY: -40
CONSUMER STAPLES: -60
ENERGY: -140
HEALTH CARE: +440
FINANCIAL: -80
TECHNOLOGY: +160

Recall that sector Technical Strength varies from +500 (strong uptrend) to -500 (strong downtrend), with scores between -100 and +100 signifying no meaningful trending. Note that, with the exception of the strong defensive health care sector, none of the sectors are displaying robust trending. We can also see from the chart above that the technical picture is not meaningfully different from the week previous, with the exception of that bounce in the health care sector.

Going into a holiday week, I am not expecting a break from the broad trading range. Per usual, I will be tracking the trending of the sectors by following the 40 stocks in my basket and reporting trend status prior to each market open via Twitter (free subscription via RSS). I will also be tracking the new highs and lows, which should help us gauge whether or not we're building enough strength/weakness to break the range.
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Daily Trading Coach E-Book Now Available

I promised to post when The Daily Trading Coach book came out as an e-book in PDF version; I'm pleased to report that it's finally available from Wiley. Please note that the book is also available at a discounted price in Amazon's Kindle format and, of course, it is available in hardbound edition from Amazon at a nice discount.

Unlike other trading psychology texts that I've encountered, The Daily Trading Coach is written as short "lessons" that describe practical, hands-on techniques for improving trading performance. Chapters in the book cover making life changes; handling stress constructively; maximizing emotional well-being; self-coaching techniques; behavioral, dynamic, and cognitive techniques to change problem patterns that affect trading; sound business practice for traders; advice from experienced trader/bloggers; and finding edges in historical trading patterns.

What I like about the e-book version is that it allows traders to read relevant lessons from their desktops before, during, or after trading hours. That makes the text a kind of daily coaching companion...hence the title of the book!
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Gaining a Feel for Markets by Immersion in Historical Trading Patterns

A central part of my preparation for the trading day consists of running historical investigations of current market patterns. For example, if I notice that an index has been down for two consecutive sessions, culminating in a 10-day closing price low, I'll consult market history to see what has typically occurred thereafter. Sometimes, the investigations will reveal a potential edge: a directional bias following the current pattern.

I don't trade that bias mechanically; rather, I treat it as a hypothesis for the coming days' action. If real time market behavior supports the hypothesis, the historical background provides me with a little greater conviction in the trade idea. In that sense, the historical studies might be viewed more as hypothesis generating (qualitative) research than hypothesis testing (quantitative) research.

All of my studies are conducted with a database of historical data that I've assembled, with analyses and charts in Excel. A chapter in the Daily Trading Coach book explains in detail how I created the database and conduct the analyses.

Much of the art behind the investigations, however, consists of knowing what to investigate. Anyone can conduct 20 studies and find the one result that is significant at a .05 chance level! The most promising studies are those that make solid conceptual sense; that capture how traders actually think and behave.

For example, how traders view the shares of emerging markets speaks volumes regarding their attitudes toward risk assets in general. If traders are bullish on emerging markets, they are probably also bullish toward a host of assets, from commodities to emerging market debt. Such sentiment factors are likely to lead to trade-worthy directional tendencies.

As a simple example, I went back to 2006 and examined what happens when the five-day change in emerging market shares (EEM) is up by 2% or more and when it is down by 2% or more. Interestingly, when EEM has been strong on a five-day basis, the next five days in SPY have been weak, averaging a loss of -.44% (130 up, 162 down). When EEM has been weak on a five-day basis, the next five days in SPY have averaged a gain of .08% (128 up, 97 down).

But when we look 20 days out following five-day strength and weakness in EEM, we see a different pattern. Twenty days after a strong five-day EEM, SPY has averaged a loss of -.51% (162 up, 130 down), not significantly different from its five-day prospective return. Twenty days after a weak five-day EEM, SPY has shown further weakness, with an average decline of -1.21% (119 up, 106 down).

In other words, on a short time frame, we have seen countertrend behavior in SPY following strength/weakness in EEM, but over an intermediate time frame that has dissipated. Of course, this is but a starting point for further investigation to see if other factors (larger market trends; behavior of other assets) might affect the relationship between EEM strength/weakness and prospective price change in SPY. Many good trading ideas come from looking deeper into apparent patterns and asking why they might occur.

It's surprising how conducting these studies day after day gives traders a feel for how market move and how different markets are connected. There is no contradiction between being immersed in data and being discretionary in trading: over time, the data are a powerful source of pattern recognition.
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Learning How to Trade: Picking Up the Market's Lessons

One of the things I'm trying to accomplish with the real time Twitter posts (follow here) and the intraday blog posts is help traders with the reasoning processes that can lead to successful trade ideas. Too often traders become self-focused (and focused on P/L) rather than market focused. I've archived these posts to help with the market focus: figuring out how we're trading, so that you can then infer likely movement to come:

* RECENT TRADING LESSONS

* TRADING PATTERNS THAT SET UP DURING THE DAY

Every day in the market should teach you something about how markets move, how trades set up. I've been trading since the late 1970's; the market is still teaching me lessons--sometimes the hard way! I'll be posting those lessons along the way.
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Practical Resources for Active Traders

The Become Your Own Trading Coach blog site has become my repository for archived posts regarding trading psychology and the psychology of markets. Here are two recent archives that might provide worthwhile weekend reading:

PRACTICAL SELF-COACHING IDEAS FOR TRADERS

RECENT READINGS IN MARKET AND TRADER PSYCHOLOGY

Over time, look for more TraderFeed posts focusing on the how-to's of trading based on an understanding of market psychology. These will be posted as morning, midday, and evening "briefings", as well as posts focusing on execution and position/money management. I'll also be linking more sites that provide practical trading guidance. Toward that end, check out the recent posts and archives for Trader X; the Elliott Wave work of Corey Rosenbloom; and the technical analysis work of Brian Shannon.
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Pre-Opening Briefing: Reversing Strength

After a bounce on the release of Personal Income data, the U.S. dollar has weakened, 10-year Treasury rates have fallen, and stock index futures saw concerted selling, taking us below the day's VWAP (bottom chart; red line). As the Market Delta chart indicates, we've seen significant volume transacted at the bid vs. offer; I'll be looking to see if that continues into the morning trade, testing yesterday afternoon's lows. We have Consumer Sentiment at 8:55 AM CT, and it's a nice warm Friday in the summer; things could slow down and turn rangebound as the day moves on. I'll be tracking relative volume and passing along observations via tweets.

10:09 AM CT - I've added the top chart to show how we've been trading more volume at the market bid vs offer most of the morning in the ES contract despite relative strength in the NASDAQ and Russell indexes and the NYSE TICK. That has kept selling pressure on the S&P 500, with a declining VWAP and trade below VWAP. I note that we're trading right at yesterday's pivot level, with much of today's trade in the fat part of Thursday's value area.
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Six Questions Worth Asking at the End of the Trading Day

* What opportunities did I miss and what could have alerted me to those opportunities?

* When I took heat on trades, what could I have done to enter at better prices?

* Was the level of risk that I took in trades commensurate with my conviction in the trade ideas?

* What were the themes and markets driving prices today that I should be alert for tomorrow?

* What are the themes, economic reports, and markets that might drive prices overnight that I should be alert for in the morning?

* What kind of trades are making me money? Where am I losing my money? What can I do about that?
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Evening Market Briefing for June 25th

* ECONOMIC REPORTS: Germany Foreign Trade 1 AM CT; France GDP 1:45 AM CT; France Consumer Confidence 1:50 AM CT; EU Economic Activity 2:30 AM CT; Italy Labor Indicators 3 AM CT ; UK House Prices 5 AM CT; NZ looking weak.

* U.S. ECONOMIC INDICATORS: Helpful chart view.

* THURSDAY THEMES: Strong U.S. stocks; strong Treasuries (falling rates); weak U.S. dollar; strong oil and gold. Consumer Discretionary, small cap stocks strong. See excellent rundown.

* GREENSPAN ON THE CURRENT FED: He's warning of inflation.

* DISTRESSED REAL ESTATE: What some properties are fetching in California.

* DEBATE ABOUT REFORMS: Volker advocates radical change.

* RECESSION LOSING STEAM: Durable goods looked good.

* UPDATED LINKS: Warnings about 3x ETFs, interviews with top traders, and more.

* TOP STOCK PICKS: And lessons learned from them.

* GETTING RID OF TAX-EXEMPT BONDS: They're in the Obama administration's crosshairs.
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Five Things to Look for in a Stock Market Breakout

It's easy to become lulled by range-bound trade and then miss a significant price breakout. There are several things I look for in identifying a promising breakout move:

1) The presence of an extended trading range - On average, the longer the range, the more extended the subsequent breakout/trend move, as a greater number of traders are forced to cover positions (thereby extending the breakout).

2) An increase of volume on the attempted breakout - The fresh higher or lower prices attract the participation of large, institutional traders, as we begin to accept value at higher or lower prices.

3) One-sided sentiment on the attempted breakout - A valid breakout will show persistently elevated or weak NYSE TICK and extremes of volume transacted at the offer or bid.

4) Limited retracements - Pullbacks following the breakout thrust are limited both in terms of TICK values and amount of points retraced.

5) Broad participation - The attempted breakout will have broad participation, with the major indexes and sectors moving to new highs or lows.

Many good breakout moves occur following short-term oversold or overbought markets. That is because many traders who are holding positions short or long are trapped by the breakout and need to exit, adding to the buying/selling of momentum traders.

The above five features of a valid breakout make a nice checklist to keep in mind when we trade within an extended range.
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Pre-Opening Briefing: Back Into the Range

Here's a look at my Market Delta chart (bottom) prior to this morning's GDP and jobless claims numbers. We peeked above yesterday's highs in the ES and NQ contracts, only to pull back as the overnight session progressed. That sets yesterday's high and the overnight high as important resistance areas, near term. Note how we've transacted more volume at the market bid than offer thus far (bottom histogram) and are currently trading below the day's volume-weighted average price (VWAP; red line). Meanwhile, we're accepting value in the 897-900 range in the ES contract, which--importantly--is not far from yesterday's pivot (average price) level.

What does that mean? We're well within yesterday's trading range and need to see if the morning numbers move us (and keep us) away from that 897-900 consensus area, with yesterday's highs and lows as key near-term resistance and support. If the numbers can't move us significantly, watch today's opening price and VWAP as early fulcrums for range trade.

7:50 AM CT - Note how the weak numbers led to significant selling (middle chart) and rejection of the 897-900 level referenced above. We've broken yesterday's low in ES, with the 6/23 lows as a target if we cannot sustain a bounce back into yesterday's range. Meanwhile, we're building volume at lower prices and trading well below a declining daily VWAP. I'll be updating market action via Twitter after the open.

9:50 AM CT - With a strengthening dollar and weakening bank stocks, we are having trouble vaulting above the multi-day highs (top chart), leaving us range bound and suggesting a possible retracement back to the range mid-point, as volume at bid recently in ES has exceeded volume transacted at the offer price.
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The Most Common Mistake I'm Seeing Traders Make

I performed an interesting little exercise with data for the S&P 500 e-mini (ES) futures this morning. I looked at 3-minute bars and calculated a ratio: the absolute value of the movement from open to close to the total movement from the bar high to the bar close.

Think about this for a minute: What we're looking at is the ratio of directional movement per three-minute period to total movement.

The median ratio yesterday was .50. The ratio did not change after the Fed announcement. Total movement increased as volume increased, but directional movement stayed as about half of total movement.

If you're more visual, think of a candlestick bar on a chart. On average, half of that bar will be filled in; the other half will be "tails" above and below.

When traders buy into strength and sell into weakness, they tend to enter positions in those tail regions. Much of their trade is occurring during the half of price movement that is not directional. How much P/L does that cost them over time, chasing strength and then chasing weakness? So often, traders who are afraid of missing moves end up seeing those moves reverse.

It's the most common trading problem I'm seeing active traders make.
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Five Pitfalls of Developing Traders

I've been working with some new traders at firms; here are five observations about their most common mistakes and developmental pitfalls:

1) Lacking a Development Plan - Traders typically start by trading small size and keeping losses small. Then, as they build their skills and achieve consistent success, they trade more capital and move their loss limits accordingly. Very often they (and their firms) don't have structured plans in place for when they would raise their size, what would have to happen to increase size, how loss limits would be set and monitored, how drawdowns would be dealt with, etc. Without clear benchmarks and guidelines, it's not unusual for new traders to founder.

2) Lacking a Structure for Skill Development - Many traders do not keep records/journals and, if they do, are not consistent in maintaining the journals or the depth/quality of entries. Most commonly, the journals consist of broad observations ("I need to trade more patiently.") without concrete observations of *why* problems are occurring and what, specifically, might be done to address those problems. Without metrics on their trading, it's difficult for traders to truly know what is working and what is not. Is a trader taking more heat on trades than usual? Is a trader setting stops too close, getting stopped out of trades that would have been winners shortly thereafter? Is a trader making more money in trending markets than narrow, range ones? Without some mechanisms for review and assessment, these kinds of questions go unanswered.

3) Lacking Perspective on Trading Days - Many traders are looking for "setups" to get them into trades before they truly understand what is happening in the marketplace. Are we setting up within a range or continuing a trend? Are we accepting value higher or lower? Are we doing more or less business at key price levels? What are the themes operating in the current market? A surprising number of traders can't answer these questions. Instead, they react to higher or lower prices without situating those moves in a broader context.

4) Lacking Explicit Stops and Targets - A corollary of being too "setup" focused is that many traders don't have firm ideas of when and how to get out of trades. Without explicit stops and targets, they tend to exit trades at points of maximum pain or at points of comfortable profit. The problem with such seat-of-the-pants exits is that they frequently leave traders hanging on to losers too long and getting out of winners too quickly. Having more winning trades than losers doesn't help if your winners are significantly smaller than the losers.

5) Lacking Persistence - Many new traders simply aren't emotionally resilient. They lose money on an idea and will quickly abandon the idea, rather than try again with refined timing. They will quit trading and leave the screen after several losing trades or after markets turn a bit slow. Instead of observing markets and maybe paper trading some fresh ideas, they exit the learning process altogether. To be sure, there are risks in being stubborn and revenge trading out of frustration. But many developing traders haven't learned to embrace losses and move on: learn from them, then put them behind.

The goal of the developing trader should be to become a lean, mean learning machine. How well are you mentoring yourself?
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Midday Briefing: Awaiting the Fed Announcement

We see from the Market Delta chart (middle) how selling has begun entering the ES market after a strong morning, with the dollar moving higher versus the euro. A longer-term look (bottom chart) shows that the support from 6/17 and 6/18 is now serving as near-term resistance. I'll be watching that level closely going into the Fed announcement. Failure to sustain prices above that level would set up range bound trade between today's highs and the last two days' lows.

2:05 PM CT - I added the top chart of ES to show how strength in rates and the dollar led to steady volume at bid to exceed volume transacted at the offer price (bottom histogram) and a break of the day's VWAP (red line). Selling rallies that fail to take us above VWAP has been a worthwhile strategy so far, as we're accepting value lower relative to the morning trade.
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Pre-Opening Briefing: Thoughts and Themes on a FOMC Day

* Weak Consumer? - One feature I love in the Decision Point service (one of the few stock market services I've subscribed to year after year after year) is the advance-decline lines that are specific to individual stock sectors. One of the weaker A/D lines belongs to the consumer discretionary shares that are part of the XLY universe. Since early May, that sector has seen significant net selling--not something you'd expect if economic "green shoots" were going to blossom.

* FOMC Tendency - Another shout out to a service I really like: Market Tells. Their post on stock market historical tendencies *prior* to Fed announcements was an eye-opener; I hadn't realized that the tendency during the day leading up to the announcement was so bullish. Great stuff; helps you know when markets are playing out their scripts--and when they aren't.

* Weak Market - We had more 65- day lows than highs on Tuesday. That's intermediate-term correction material; significant weakness relative to the action of the past two months. Less than half of all S&P 500 issues are now trading above their 50-day moving averages.

* Learning From Others - One nice aspect of interviews with traders is that they provide us with windows on how others view and approach markets. I recently interviewed system developer Henry Carstens and will be posting other interviews in the future. Meanwhile, check out these informative interviews of bloggers from Wall St Cheat Sheet on the topic of the top mistakes that traders make.
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Interview With Henry Carstens of Vertical Solutions

Long-time readers are familiar with Henry Carstens, a developer and trader of trading systems who has made his living from his work for many years running. Henry's Vertical Solutions site is a treasure trove of inspirations, including papers on system development (and an e-book on testing your trading ideas), as well as forecasts from his models and several tools for looking more deeply into one's trading systems.

Recently, Henry has made the transition from trading for a living to managing money for investors. His trading systems are available through a broker or by monthly subscription to his trading signals. I recently talked with Henry about his transition, as well as the broader challenges of trading for a living:

Brett: What led you to offer your trading system through a broker, rather than set up a fund on your own?

Henry: The marketing is hard. In the end, I decided to do what I *enjoyed* the most (building automated systems), had the most experience at (selling software) and concluded I had the greatest chances of both enjoyment and success by licensing my software to funds instead of becoming and running a fund, which would require me to either hire or wear too many hats...Raising money for a fund is harder than raising money for managed accounts...at least in the beginning.

Brett: When will the funds that you license to be making your systems available?

Henry: It's taken longer than expected. The first fund was scheduled to launch in October of 2008 and launched in May of 2009. A second fund should be out in the next 60 days; a third fund will probably use a subset of the strategies to gain an execution edge for its bigger trades. The funds handle managed accounts...Regulations and regulators just chew up time (and money).

Brett: What have been some challenges you've faced in making this transition?

Henry: Adding accounts adds complexity and complexity naturally increases the strain on technology. For instance, in March, TradeStation's data were very unstable, which meant creating a process for making sure that the data were clean each morning...When it came to managing multiple accounts, Interactive Brokers and Ninja Trader became my best friends: IB because their professional level service is so good and Ninja Trader because it allowed me to replicate orders across accounts without increasing the strain on TradeStation. I still like TradeStation because it removes all the hassle of managing multiple streams of data--something I have neither time for nor interest in.

Brett: What's been the hardest part of going public with your systems?

Henry: A losing month. There is nothing so painful as telling your hard won, newfound customers that you just lost money for them. It will be 30 days before you can redeem yourself in their eyes, so it will have been 60 days or almost 20% of the year that you've been a minus instead of a plus in the back of their minds.

Brett: What has been the best part of going public?

Henry: Turning nothing into something and something into something more. Having more and more people interested in your work. Ultimately, though, interest will only grow by making money for clients. (When you're a trader, your family *is* a client).

Brett: What kind of results do you shoot for?

Henry: The bar is lower than one might thing: 10-12% year in, year out without huge drawdowns is plenty ambitious. No one expects a double without a lot of leverage and a lot of risk.

Brett: Do you share your ideas with others? Do you partner with others for your research?

Henry: Research partners are the true leverage on the research side: add 1x returns per partner and compound! Partner with the best people you can find. Find one, share, and grow. Our "trade secrets" are never as unique as we tend to think.

Brett: Do you keep records of your research?

Henry: Paper doesn't work. Get a tablet PC and put all your research notes there. Have it automatically backed up. Use an online collaboration tool for partnered projects.

Brett: What are your thoughts about trading mentors?

Henry: They are invaluable. It's quite inefficient to learn it all yourself. It's not nearly as fun and the stories aren't as good! My trading muse is chess. I find that learning something in parallel with learning trading provides insight and momentum into the learning process. The leverage gained from a muse is similar to the leverage that research partners add, only different.

There are several takeaways from Henry's responses to my questions:

1) Stick to what you love and what you do best: that is the highest probability path to success. Stay firmly within your niche and outsource everything that falls outside your spheres of talent, skill, and passion;

2) Patience is the better part of success: There is a learning curve and a developmental phase to all undertakings, including trading. Things always take longer to get off the ground than you'd like. It's the love of one's work that overcomes technical challenges and inevitable delays;

3) Success is a team endeavor: Finding like-minded partners and mentors leverages your own skills and talents, just as you leverage theirs. In sharing ideas with the right people, everyone gains perspective. Surround yourself with talent and you will live up to the best within you.

Thanks to Henry for the excellent website and the willingness to share his entrepreneurial experiences.
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Chicago Trading Seminar: Details and Registration

I want to thank Trevor Harnett from Market Delta for his huge help in making a free summer trading seminar in Chicago a possibility. I'm particularly happy to hold the event with Trevor, as a number of traders that I work with have been utilizing Market Delta successfully to trade with the short-term sentiment of the stock market. Trevor has shown an unusual willingness to educate and support traders--not just hawk a product; I respect that greatly.

For this seminar, Trevor is underwriting all meeting room expenses and I am donating my time. There will be no registration fee, but attendees must register in advance (details below). Please note that seating is limited, so if you can definitely attend and are interested, please register as soon as possible. Please do not register unless you know you'll be attending; I'd hate to see some people miss out on the event because we were saving seats for no-shows.

Now the details:

The seminar will be held on Friday, July 17th from 1-5 PM at the Club Quarters Hotel in the Chicago Loop. Please make sure you arrive a bit early and are seated by 2 PM as we will follow the S&P 500 e-mini market live for the final hour of trade, illustrating principles of market psychology with Market Delta and related indicators. Trevor will be highlighting applications of Market Delta that I have not covered in the blog; I'll be supplementing the discussion with information that I share in real time with the traders I coach.

In the second half of the seminar, I will share the proprietary model that I use to calculate pivot points and targets for the S&P 500 Index and explain the uses of this information in setting up solid risk/reward trades. The remainder of the time will be devoted to questions and answers, as we hold an open group coaching/mentoring session.

Interested participants will find the registration details on the Market Delta blog site; please make sure you use the dedicated email address to send in your registration. (Note: You cannot register by emailing me). If you're coming from out of town, Trevor's registration blog post notes that the hotel has generously made a block of rooms available at a very reasonable price; details for making hotel reservations are also on Trevor's post.

Because we decided to make this a larger event than initially planned, I will do the potluck idea (each trader sharing a best practice trading idea with each other trader) another time in a smaller, sharing environment. Trevor and I will also conduct a webinar in the not so distant future for traders unable to attend July's seminar. As part of our keeping overhead down and making the seminar free of charge, the July session will be live only, not webcast/videorecorded.

I believe this will be a unique opportunity to learn from real time market application and group interaction; it will also be a great occasion to meet traders with similar interests. Hope to see you there!

(PS - If you have questions about the seminar, please write them as comments to this post, so that I can answer for all readers. Thanks as always for your interest.)
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8:26 AM CT - Just talked with Trevor and we're adding an hour to the program, so it will start at 1 PM and go until 5 PM on Friday, July 17th. The extra hour will give us more live market time, so that we can add a feature in which Trevor will be the trader, I will be the coach, and we will role play working together in trading the market. That will be a great way to illustrate both market and trader psychology: real time trading/coaching!
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Pre-Opening Briefing: After a Weak Day

As noted in the recent tweet, we had a strong downside momentum day on Monday, with Demand closing at 15 and Supply at 214. The general pattern following such downside momentum days is a bounce one day later followed by subsequent weakness, although this pattern is affected by larger-term market regimes.

Given the significant expansion in the number of stocks registering fresh 20-day lows, I went back to October, 2002 (when I first began archiving the 20-day high/low data) and examined what happens in the S&P 500 Index (SPY) after 20-day new lows make a 20-day new high. The next day, SPY averages a gain of .18% (91 occasions up, 59 down), versus no change for the rest of the sample (818 up, 712 down). Five days after a surge in 20-day lows, SPY averages a gain of .47% (88 up, 62 down), versus .02% for the remainder of the sample (836 up, 694 down).

It's thus not unusual to get a bounce following significant market weakness. I will be watching to see how we trade relative to yesterday's pivot level, as well as the usual sentiment gauges of NYSE TICK and volume transacted at bid/offer, to gauge the likelihood of sustaining a bounce on the day today. Alternatively, inability to sustain buying sentiment below the pivot would sustain the downtrend.

10:17 AM CT - I added the above chart of the NYSE TICK with a green 20-minute moving average to show how sentiment has weakened during the trading day, with more stocks transacting on downticks than upticks. Noticing that shift was key to anticipating the move below the overnight low. Should we continue with bearish sentiment, the next target would be S1. The fact that it's taken us a while to even approach S1 suggests to me, however, that we could see more of a range environment, trading back into the overnight range, in advance of the Fed announcement and Wednesday's numbers. I'm watching TICK closely to handicap that scenario (but not become wedded to it!)
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A Look at Growing Market Weakness

As you can see from the chart above, after today's sharp drop, new 20-day lows across the NYSE, NASDAQ, and ASE are now outpacing new highs rather handily. On Monday, the new lows hit a level they haven't seen since the March bottoming period. I notice that new 65-day highs and lows are now about even. This fits with the pattern of market weakness--and the trend shift--noted in the recent indicator review and update of the sectors. Seeing the market weakness setting up early in the morning, as noted in the intraday Twitter comments, and placing that weakness in the context of a trend shift was helpful in anticipating our break of last week's lows. It's a nice example of how placing short-term strength/weakness in the context of longer-term market activity is useful in anticipating moves to and through key price levels.
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Update on Summer Trading Seminar

Just a quick note to help interested traders with planning: The earlier mentioned summer trading seminar will be held on Friday, July 17th from 2 PM to 5 PM in downtown Chicago. There will be no fee for attendance; I'll post registration and program details tomorrow, so keep an eye out!

This will be an excellent opportunity to meet other traders and learn about both the psychology of markets and trading psychology.

Thanks as always for your interest--

Brett
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Focusing on the Structure of the Day's Trade

Here's an updated Market Delta chart for the day's trade. Note how volume at bid has consistently exceeded volume at the offer for the ES contract (bottom histogram); how we've remained below the volume-weighted average price (VWAP) all morning (red line); and how we have accepted value lower by trading increasing volume at lower prices (side histogram). The reason I have my chart set up this way is that it provides me with a quick, visual sense for the structure of the day's trade.

Where I see traders making mistakes in trading this market is by focusing on what has been happening in the last few ticks of movement, rather than the emerging day structure. That has kept many traders out of the market--or on the wrong side of it--even as we've taken out the S3 level. A thorough market perspective also needs to look beyond the day timeframe; that shows how we have moved below last week's lows and, so far, have accepted value beneath that level. Given that dynamic, bounces that stay below last week's range become candidates for selling.
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Pre-Opening Briefing: Weakness to Start the Week

With the S&P 500 Index e-mini futures market (ES) unable to hold above the 915 level stressed last week, we're now seeing selling toward last week's lows, continuing the market's trend shift. We also continue to see intermarket themes dominate: the strong U.S. dollar versus the euro and weak commodities accompanying stock selling. Meanwhile, the Market Delta chart (bottom) shows that we're building volume overnight in the 908-909 level, with the volume-weighted average price higher at 911.50. Inability to rally above those levels will target last week's lows below 900.

7:56 AM CT - Just a few added notes to the briefing. We have a Fed meeting tomorrow and the announcement on Wednesday, so things could get a bit range bound in anticipation. Not much expectation of a rate change, but some language skewed toward economic growth and possible inflation could impact interest rates and the dollar. Meanwhile, we see considerable weakness in gold and oil, amid U.S. dollar strength and lower 10-year Treasury rates. I'll be tweeting from a prop firm today and will update market ideas that crop up through the morning.

9:28 AM CT - I added the top chart for longer-term perspective; we've broken last week's lows and now we're looking to see if we can accept value lower vs. move back into last week's range. To this point, NYSE TICK is quite weak; we would need to see more significant buying to sustain a move back into last week's range.
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Indicator Update for June 22nd

Last week's indicator review found that "As long as new lows exceed new highs, we have to look at this as a potential trend shift that could take us well into May's trading range." We did, indeed, see those new 20-day lows continue to outpace new highs, taking us briefly below 900 in the S&P 500 Index before bouncing higher late in the week.

The bullish momentum that we saw sustained from the March lows (top chart) has been lost, a situation that commonly occurs during topping processes. New 65-day highs, which peaked early in June, have steadily declined since then and now stand barely higher than new lows (middle chart). Meanwhile, the advance-decline line specific to S&P 500 stocks--a great feature from the Decision Point service--actually broke May lows last week before bouncing.

With a majority of S&P 500 sectors retreating from their bullish trending status, we now stand in a broad trading range between May's lows and June's highs. At this juncture, given the relative strength of NYSE Cumulative TICK and intermediate-term new highs/lows, I see this more as a correction within a bull market move than as the start of a fresh bear market. A move below May lows, particularly accompanied by new 65-day lows exceeding new highs, would lead me to re-evaluate that stance.

Daily updates of the indicators will continue to be posted prior to the market open via Twitter. Readers can subscribe to the tweets free of charge via RSS or can view the latest five tweets on the blog page under "Twitter Trader".
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Sector Update for June 21st

Last week's sector review concluded that, despite a closing high in the S&P 500 Index, many sectors were not participating in the strength, making it difficult to justify chasing strength. That view turned out to be helpful, as we pulled back sharply last week and moved back into May's trading range. As we can see above, most of the sectors lost Technical Strength (a short-term measure of trending) last week; only the relatively defensive Consumer Staples and Health Care sectors showed signs of buying week over week. With the pullback in commodities, the Materials and Energy sectors turned bearish; we also saw fresh bearish readings among economically sensitive Industrial and Consumer Discretionary shares.

Here is how the sectors lined up as of Friday's close:

MATERIALS: -200
INDUSTRIAL: -160
CONSUMER DISCRETIONARY: -180
CONSUMER STAPLES: +20
ENERGY: -200
HEALTH CARE: +260
FINANCIAL: -40
TECHNOLOGY: +80

Recall that Technical Strength by sector varies from +500 (strong uptrend) to -500 (strong downtrend), with values between -100 and +100 signifying no meaningful directional tendency. Several of the sectors are in neutral trending mode; the others are not showing strong downtrends at this time. For now I'm viewing us in a corrective mode within a broad trading range defined by the May lows and the June highs. Given June's extended topping, I would not be surprised to see us test those May lows going forward. I will be tracking relative sector performance--defensive vs. growth sectors--to gauge sentiment and the likelihood of retracing the late May/early June strength.

Per usual, I will be updating the indicators, including trending behavior across my basket of 40 stocks taken from the above sectors, via Twitter (follow here).
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Quick Book Looks: Resources for Traders

* TRAINING THE BRAIN - For a while now I've enjoyed the Sharp Brains blog, which focuses on the science and practice of brain fitness. Their book "The Sharp Brains Guide to Brain Fitness" consists of 18 interviews with practitioners and researchers in the field. It debunks a number of myths about optimizing brain function, with practical chapters on nutrition, stress management, exercise, and mental exercise/stimulation. My own chapter focuses on "Achieving Peak Performance in High-Pressure Professions"; other interesting topics include training the brain for attention span and lifelong learning.

* FINDING AN EDGE - High Probability ETF Trading by Larry Connors and Cesar Alvarez is a nice follow up to the earlier volume How Markets Really Work. Subtitled "7 Professional Strategies to Improve Your ETF Trading," this manual covers a number of tested historical patterns and trading rules. A worthy feature is that a range of ETFs are covered in the tests, including SPY, QQQQ, IWM, GLD, FXI, EEM, and quite a few sector ETFs. Many of the patterns involve buying weakness in a rising market and selling strength in a falling market. I suspect that at least some of the patterns might make useful starting points for the development of trading systems. A nice feature is that the strategies can be automated via TradeStation.

* MAKING FRIENDS OF TRENDS - Michael Covel's new edition of his popular book "Trend Following" takes an updated look at trend following strategies and the firms that trade them. It includes a chapter on market crashes and quite a bit of performance data relevant to trend following strategies. A new chapter on trend following in the stock market is also a worthwhile addition. It's interesting to see Covel's book juxtaposed with Connors' strategies (above); the takeaway surely has to be that there are many ways of making money in markets. The key is to find what best fits your own views and style.
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