Friday, July 31, 2009

Readings for Week's End

* Thanks to a perceptive reader for this article on overconfidence and its relationship to reading skill; very pertinent to trading;

* Excellent article on reflation and its implications;

* The need for a level playing field for traders is getting attention in Washington;

* Great way of catching up with trading and finance blogs;

* Revisions show recession worse than initially thought;

* A look at imports and exports suggests GDP not as good as it seems;

* Worthwhile articles on trading trend days;

* Does fiscal policy aid banking crises? What the research shows;

* Are we in a primary bull market for stocks?

* Why healthcare companies might not want a public plan.

Teamwork and Trading Success

When producer Danger Mouse (right above) and rapper/vocalist Cee-Lo Green (left) created the Gnarls Barkley collaboration, the result was music that was qualitatively different than either artist had achieved previously. That music, nominated for four Grammy awards, is most familiar to the public via the song "Crazy". Perhaps even more creative is Chris Milk's video for their song "Who's Gonna Save My Soul?" The combination of the collaborative music and the collaboration with the video producer created quite a novel piece of work.

I've seen this with traders as well. Individually the traders achieve modest results, but teamed together, the whole becomes more than the sum of the parts. This is common at investment banks and hedge funds: getting the right people "on the desk" is a huge part of success. The right team inspires each other, informs each other, and brings the best out in each other.

When you're part of a team, you become accountable to your teammates. Suddenly that makes discipline a greater imperative. Many times we won't let others down, where we might cut corners on our own.

As in a marriage, we become greater when we find the right partners.


Three Ways You Know Economic Numbers Are Game Changers

This morning we found out that GDP contracted less than expected and consumer spending contracted more than expected. Stocks veered higher and lower upon the release before moving steadily lower.

How can we tell when economic numbers are game changers and when they're not? Here are several things I look for:

1) How do markets in general respond to the news? If we see correlated moves across currencies, interest rates, stocks, and commodities, that's a good indication that the numbers are causing a reassessment of value among global/macro investors and traders;

2) Do we break key price levels? Do we trade--and stay--above or below the overnight range to that point? Do we break price levels from the prior trading day? If so, across indexes, that's a strong sign that we're repricing value;

3) How does volume behave on the news? A surge in volume comes from institutional investors. If we see a very significant jump in volume on the news, it's a good sign that large market participants are acting upon the new data.

When we see all three criteria in concert, that's a strong indication that the news really is news to the financial community. All three criteria were met this morning, which is why my reversion scenario strengthened significantly upon the market response to the release.

Morning Briefing for July 31st: Sustaining the Breakout

Above, we see the S&P 500 e-mini (ES) futures over the past several days, highlighting yesterday's break to the upside, as well as the late pullback. Overnight we've consolidated above the late afternoon lows; now I'm watching to see if we can stay above the prior multi-day range (red horizontal line) vs. revert into that range. With momentum (Demand/Supply) and strength (new highs/lows) tilted to the bulls on Thursday, my first hypothesis is generally to look for a test of the previous day's highs. Failure to make that expected test would strengthen expectations for a retreat into the multi-day range. I would see any such reversion into the range as part of an extended topping process, with eventual intermediate-term implications. (See indicator comments from evening briefing).

Countries and People: Reflections on Getting Old

When does a person become "old"?

If you ask my teenage kids, 40 seems ancient.

Ask a 40-year old and middle age doesn't hit until the mid 50s.

Maybe getting old is more a matter of mindset than chronological age: People become old when they decide that the best years of life are behind them.

In that case, I know old people in their 30s and I know young retirees.

These thoughts were prompted by the latest Rasmussen Report showing that 49% of Americans believe that America's best days are in the past.

How does this attitude affect investments in U.S. debt? Shares? Currency?

The national discussions focus on rationing health care, cutting carbon emissions, and avoiding financial meltdowns due to housing, unemployment, and banking failures.

When people are old, they spend more energy addressing their ills than maximizing their well-being. Maybe countries aren't so different.

Thursday, July 30, 2009

Evening Briefing for July 30th

* MARKET THEMES FROM THURSDAY - On the heels of Wednesday's range bound performance, in which stocks stayed above their overnight lows despite overall selling of risk assets, Thursday started strong out of the gate, reaching the R2 level before the open. We moved to new bull highs on good volume before buying moderated and late selling retraced a good portion of the early gains. The NASDAQ futures were particularly weak in the afternoon; oil was strong on the session; gold closed off its highs; the dollar closed off its lows vs. euro (but has since fallen back thus far in overnight trade); and a favorable auction took 10-year yields off their highs by the close. With 2723 new 20-day highs and only 182 new lows among NYSE, NASDAQ, and ASE issues, the market was clearly strong; note, however, that this is actually fewer new highs than we saw on 7/23. I will be watching closely for signs of deterioration in the new highs; more problematic for the bulls would be a meaningful expansion of 20-day lows. That hasn't happened to this point.

* OVERSEAS/OVERNIGHT NUMBERS: 3:00 AM CT - Italy, PPI; 4:00 AM CT - Italy, CPI; EU, consumer prices; EU, unemployment; 7:30 AM CT - Canada, GDP.



-- The value of cutting losses on low opportunity trading days;

-- Thanks to Gustavo for key TraderFeed posts in Portuguese;

-- The TradeOrderFlow blog makes nice use of video to illustrate day trades;

-- Economy tanking, but stocks rising and other good market reads;

-- Volume can be deceptive and more excellent updates;

-- Ray Barros is offering webinar sessions on the habits of success with free previews.

How Do We Know a Trend is Ending?

A savvy developing trader posed this question to me, and it deserves a thoughtful answer.

My reply: Think in terms of structure.

From before the open, I raised the possibility that today could be a trend day to the upside. Even when we were selling off prior to the Noon CT Treasury auction, I did not abandon this view.

By the afternoon, however, I posted to Twitter:

1:11 PM CT - Note rel weakness in NQ, XLV, XLP. Watching how we trade around vwap, which is approx 988 in ES

I was seeing weakness across several sectors--something not consistent with an upside trend day--but I was also setting a structural criterion for the market.

On an upside trend day, we should consistently trade above the day's volume-weighted average price (VWAP) and that VWAP should be rising. During moves toward VWAP, we should see selling volume dry up. That was what happened through much of the day. Market dips largely stayed above the 988 VWAP in ES and, with each dip, volume dropped and volume hitting bids declined.

A little after 2:30 PM CT, however, we saw selling volume rise as we approached (and ultimately breached) VWAP. Instead of offering support, VWAP served as a breakout level.

Trend days don't oscillate around VWAP; that's what range days do. If a trend day fails, it typically does so by reversing and becoming a range day.

By thinking structurally, we can stay in trends and ride our winners, but also exit when our upside expectations are not met. Kudos to readers who commented on the blog and caught the emerging weakness in the early afternoon, including relative weakness in NQ. Catching the failed attempts to set new highs in the afternoon led some bright trading lights to profit from the move back through VWAP.



New TraderFeed E-Mail Policy

A couple of months ago, I posted to the blog that I would not be able to respond to the growing stream of emails from traders. (My current inbox is shown above). Basically the problem is one of numbers: if only 1/2 of 1% of readers emails me with requests for coaching, advice, or placement into prop firms, it would take me three hours per day to meet the demand.

Readers are in no way to blame for my predicament. TraderFeed has just logged its fifth consecutive month of record blog traffic, with the number of site readers and page views running double year-previous levels. Twice as much traffic, twice as much email!

Back in May, I thought that highlighting this issue, illustrating the size of my inbox, and posting the new policy in the "About Me" section of the blog would change the situation. It did! Now, instead of simply asking for advice/coaching, readers preface their requests with, "I know you're busy, but..." :-)

So here's the deal: I'm spending today clearing the deck and responding to all outstanding email, including some that is ridiculously overdue for response. From here on in, I will only respond to requests for advice etc. if they're sent to the dedicated mailing address in the Trading Coach book.

I estimate that three-quarters of all questions that come my way are directly addressed in my books and/or in the blog. I'm happy to answer questions about the material in the books, but spending several hours a day responding to questions in lieu of people doing their own reading and Googling just doesn't work.

I deeply appreciate the interest and will be scheduling more live events to provide further guidance, perspective, and training. Thanks for your understanding--


Midday Briefing for July 30th: Consolidating the Upside Breakout

Here we see the S&P 500 e-mini (ES) futures on the day via Market Delta. Overall, we've seen more volume transacted at the offer than bid (bottom histogram), though selling ahead of the Treasury auction cut into that. We also see a rising volume-weighted average price (VWAP; red line) and price staying largely above that line. Most important, we're building volume at the 989-993 area, which means that we're accepting value higher. All in all this is consistent with an upside breakout from the recent multiday range and with the scenario laid out in the morning briefing.

NYSE TICK: A Look at Buying Sentiment in an Uptrending Market

One characteristic of trend days to the upside is that the NYSE TICK--the number of NYSE issues trading on upticks minus those trading on downticks--will persistently stay above zero, with many readings greater than +800. That shows that institutions--those that trade the baskets of stocks that will tick up or down in unison--are leaning strongly to the buy side. We see that so far in today's market, as we've yet to get a single TICK reading < -500.

In an uptrend day, the pullbacks in TICK to negative territory tend to be short lived and can be excellent short-term buying opportunities. Also in uptrend days, the moving average of TICK (green line) will tend to stay above zero (blue horizontal line) throughout the day.

Here is more on the topic of identifying trend days to the upside.

Comforting the Afflicted, Afflicting the Comfortable

Readers of the case studies from my Psychology of Trading book know that I see the role of psychologist as comforting the afflicted and afflicting the comfortable. When people are down, the goal is to help them find their strengths and the energy and optimism to move forward. When they are too comfortable repeating old, unproductive patterns, the goal is to prod and serve as a catalyst for change.

Comforting and afflicting are a large part of this blog, as well. The goal is to help traders find the best within themselves. Sometimes that means nurturing traders along a learning curve; sometimes it means reminding them that they must never stop learning.

It's not a bad life philosophy: comfort ourselves by drawing upon our talents and skills when things are darkest; push ourselves a little outside our comfort zone when life is easy. As Neil Young realized, it's just as dangerous to rust away as to burn out. A good question to always be asking, in trading and in life: Where am I in my comfort zone?

Morning Briefing for July 30th: Testing the Highs

One of the themes I touched upon several times yesterday was the resilience of the stock market in the face of themes that would normally be bearish for equities: falling commodities and the drop in share prices in China. When markets fail to do what they normally do, that is often an excellent sentiment tell. Underlying demand for stocks has been sufficiently high that even normally bearish developments could not push us below the overnight lows yesterday.

That has emboldened the bulls and this morning before the open we're looking at a healthy rally. Those intermarket themes are once again in gear, with stocks higher overseas, U.S. dollar weakness vs. euro, and rises in commodities and Treasury rates. As we can see from the chart above, we're now testing the bull highs, having traversed the multiday range overnight.

Whenever we see an early strong rise following several days of consolidation, we have to be alert to the possibility of a breakout and an upside trend day. I will be tracking the market via blog and Twitter updates (follow here) to see if such a scenario materializes. Should we prove unable to sustain such a breakout move, we could develop an interesting move back into the multiday range. Either way, there should be some trading opportunity here.

Wednesday, July 29, 2009

Evening Briefing for July 29th

* THEMES FROM WEDNESDAY'S TRADE - On the heels of a steep drop in China's share market, we saw an unwinding of many of the risk trades. The U.S. dollar rallied vs. the euro and commodity prices tumbled. Despite these dynamics, the U.S. stock market held above its overnight lows and turned in a range bound performance. This also kept us above the 7/24 lows and within the multiday trading range. I thought that this was a particularly resilient performance for stocks; as long as we hold above the Wednesday overnight lows, I expect to see us testing bull highs and the 1000 level in SPX before long. Failure to hold those lows would represent fresh selling pressure and a break in the multiday range, suggesting a potentially more significant correction to the recent rise.

* OVERSEAS/OVERNIGHT NUMBERS: 2:50 AM CT - Germany, unemployment; 4:00 AM CT - EU, economic sentiment; 7:30 AM CT - Canada, industrial and raw material price indexes; 6:30 PM CT - Japan, CPI, unemployment, household spending.



-- Mean reversion trading strategies aren't working so well;

-- A good look at weak consumer confidence;

-- Consumer confidence better, but not consumer spending;

-- 30% of China's GDP is held in agency and treasury debt;

-- FDIC to split troubled banks to find buyers;

-- Nice review of ETFs.

A Few Favorite Posts From TraderFeed

It was a great live chat with Charles Kirk; my thanks to him for setting that up. Thanks also to the 400+ participants who contributed excellent questions.

One question asked by Kirk that caught me by surprise asked my favorite TraderFeed post from the past year. Upon reflection, here are a few candidates:


Nice View of a Range Day in the Stock Market

I wanted to post this Market Delta view of today's ES market, because it very nicely captures the central identifying features of a range market: a relatively flat volume-weighted average price (VWAP; red line); a narrow trading range and value area (histogram at right); mixed transactions at offer vs. bid (bottom histogram); and price oscillating around VWAP.

So much of pattern recognition simply boils down to seeing many variations on particular patterns. With enough exposure, you can learn to identify patterns relatively quickly in the market day, giving you the framework to either trade market moves or fade them.

Midday Briefing: A Look at the Smaller Caps

One of my favorite indexes to follow is the Russell 2000 (IWM, above). Small and midcap stocks act as a kind of sentiment gauge among portfolio managers who are trading equities. If they expect growth in the economy, they will invest in companies and shares that are best poised to participate in that scenario. The smaller, more entrepreneurial and growth oriented stocks will particularly benefit relative to the established large cap names. Conversely, if portfolio managers wish to express defensive views relative to the economy, they'll be more likely to hold the blue chip, stable names and flee the more volatile growth ones.

What we see from the recent performance of IWM is that, even with the consolidation of the past few days, those smaller company shares have held up well. Today's steep drop in China might have been expected to tank the stocks that benefit from the risk trade. As I write, however, IWM has stayed well within its multiday trading range. That suggests to me that money managers may be more afraid of missing the next leg up in stocks than chasing relative price highs; for several days now we've seen early weakness met by solid buying. Staying above today's overnight lows would be bullish for stocks; a move below would represent fresh selling pressure and a continuation of the recent correction.

Morning Market Briefing: After a Drop

Here you see how we're setting up for today's open in the S&P 500 e-mini (ES) futures. The multiday range that has been the subject of several recent posts stands out here. We tested the lower end of that range (the 7/24 lows) on the heels of a large drop in share prices in China. We're currently on target for an opening drop of over half a percent in the emerging markets ETF (EEM). Many of the bullish intermarket themes are retreating in overnight trade, with gold and oil down, a stronger U.S. dollar, and lower 10-year Treasury rates.

All of this is a corrective movement from the significant momentum highs of 7/23 and Monday price highs. Recall that we made a breakout from the long term range that went back to May-June; it would not be surprising to see that former resistance now serve as support. Failure to take out the 7/24 lows would be quite bullish for stocks, as it would signal significant buying interest on modest dips and a resilient ability to weather the China weakness. A break below those lows should find support in the 950 region. I'll be updating market action via Twitter; my live online chat will begin at 10 AM CT.

Sector Update for July 29th

Last week's sector review noted that the bullish intermarket themes were in unison, with impressive breadth to the market rally. That strength has carried over to the most recent trading week, as most of the sectors have retained positive Technical Strength readings. Recall that Technical Strength is a quantification of short-term trending, with +500 representing a very strong uptrend; -500 a very strong downtrend; and scores between -100 and +100 suggesting no significant trending. As we see above, all of the sectors are in uptrends with the exception of financial shares. The health care sector is leading the pack in relative strength:


With new 20- and 65-day highs continuing to outpace new lows and advance-decline lines for the major averages in new high territory, the health of the uptrend remains strong. It would not be surprising for traders and investors to use pullbacks in Technical Strength as buying opportunities, given the increasingly common belief that the S&P 500 Index will vault above 1000 before there is any correction of significance. I will be tracking the indicators daily via Twitter to assess the strength and momentum of the market (follow here).

Tuesday, July 28, 2009

Evening Briefing for July 28th

* MARKET THEMES FROM TUESDAY'S TRADE: Once again we saw stocks close within their multi-day trading range after breaking Monday's low and then rebounding in the afternoon. Oil and gold prices turned lower on the day, and the U.S. dollar closed stronger vs. the euro. Ten year Treasury yields fell, but closed off their lowest levels. Small cap shares showed relative strength; energy stocks were weak on the day. We saw 1698 stocks make fresh 20-day highs against 176 lows, a drop in new highs from recent peaks. Both upside (Demand) and downside (Supply) momentum were weak, as is typical in a range environment. I'll update indicators tomorrow before the open via Twitter.

* OVERSEAS/OVERNIGHT NUMBERS: 1:45 AM CT - France, PPI; Germany, CPI; 6:50 PM CT - Japan, industrial production.



-- Live chat session I'll be offering tomorrow;

-- Jim Rogers on a collapse in China's share prices;

-- Perspectives from Jeremy Grantham and other good reading;

-- Very interesting view of professional investor sentiment;

-- A look at the Fed balance sheet and inflation and much more;

-- Defending high frequency trading;

-- Views on technical trading methods.

The Importance of Gut Hunches in Trading

As background for this post, I recommend you take a look at this post on the role of somatic markers in trading decisions and this post on the role of intuition in trading.

What cognitive neuroscientists are finding is that emotion--those gut hunches--plays a critically important role in decision making. That is especially true of rapid decision making in the face of risk and uncertainty. A fantastic recent New York Times article captures how gut hunches are crucial in military battle. The article makes clear that the body often senses danger before the mind makes the identification.

One fundamental fact keeps psychologists busy in the world of finance: the emotions associated with performance pressures--that legendary fear and greed that traders and investors know well--are stronger than the emotional cues from our gut hunches. When we are frustrated or overconfident, we unwittingly override the more subtle signals from our body's pattern recognition of danger or opportunity.

An important implication is that experienced traders--like experienced soldiers--generally know more than they know they know. Their implicit knowledge can only be accessed, however, if they are in a receptive state. This is why techniques for enhancing a calm state of focus can be so helpful for trading performance.

All too often, our self-talk submerges our gut hunches. In other words, we talk to ourselves when we should be listening.

Midday Briefing: A Shift Away From Risk

After failing to take out yesterday's high (and the overnight high), note that the S&P 500 e-mini (ES) futures have taken out yesterday's low and are trading in the lower portion of the multi-day trading range referenced earlier. The move lower in stocks is supported by a general unwinding of the recent risk trade, so we're seeing lower yields in the 10-year Treasury note, lower gold and oil prices, and a stronger U.S. dollar vs. the euro. I expect to see us challenge the 7/24 lows before this correction is over; failure to breach or stay below that level would have strong bullish implications.

Morning Briefing: Home on the Multi-Day Range

For this morning's briefing, I'm posting the NASDAQ 100 (NQ) futures, because they so nicely illustrate the multi-day trading range and weakening of upside momentum that we've been seeing. They also illustrate a pattern of higher price lows day over day, as even modest selling has been seized by bulls as a reason to participate in the recent strength. It wouldn't surprise me to see us take out those rising bottoms and shake out the weak bulls. It also wouldn't surprise me to see us fail to move significantly lower than that. After having poor years in 2008, money managers are not in a position to miss a rebound in 2009. That gives them plenty of incentive to chase highs as the year progresses. As long as we don't see rising 20-day lows among stocks (and 20-day highs handily outweighing lows), it's tough to be selling this market for anything more than a short-term trade. (Note: I track those new highs/lows daily via Twitter).

The Perils of Trading as a Victim

I've seen bears make money, and I've seen bulls make money. I've worked with longer-term traders who have been profitable, and I've worked with successful daytraders. But there's one group of traders I've never seen win. Those are traders who view themselves as victims.

Victims don't win, because--in a fundamental way--they do not see themselves as in control of their own destinies. They attribute their losses to bad luck, the market manipulations of others, or random, situational factors. It's difficult to change problem patterns if you don't own them. It's difficult to sustain confidence if you don't perceive yourself to be the driver of your own destiny.

Trading victims mostly come in two flavors:

1) Permabears who complain that markets are manipulated/distorted when their own views and theories are getting hammered;

2) Active traders who whine that markets are not giving them enough opportunity.

I can't help the former group. They really aren't interested in trading or investing. They are interested in promulgating their theories and conspiracies. See this post for details.

The second group seriously needs to get a grip. The excuse that the markets are slow, don't move much, don't offer opportunity, etc. only goes so far. Your job is either to adapt to those market conditions or to find other, more suitable markets to trade.

Plus, the idea that these markets are unusual in their lack of opportunity is simply NOT TRUE!!

Let's take VIX as a proxy for volatility. The VIX at present is around 24. Going back to 1990, what is the median VIX? It's 18.58. There is nothing unusual about this market at all.

Not satisfied with VIX as a measure of market movement? Let's take the median daily trading range for the S&P 500 Index (SPY) going back to 1990. It is 1.14% What is the recent median daily trading range (last 20 trading days)? A little north of 1.4%. Again, nothing unusual in this market.

The problem with the market isn't that it is trading abnormally. The problem is that it's trading like the stock market usually trades. What was abnormal was the crazy volatility of late 2008 and early 2009. If you can't find opportunity in the current trading conditions, perhaps stocks aren't what you should be trading.

At the very least you shouldn't be blaming the market for behaving typically, reinforcing a sense of victimhood. When you find the opportunity that *is* there and focus your efforts at exploiting that, you are in the driver's seat. That's what self-efficacy is all about. And you might just make some nice coin.

Live Chat With Dr. Brett Tomorrow

One of my favorite blog sites over the years has been The Kirk Report. Charles Kirk does a yeoman's job of finding informative material on the Web. He also tracks market action and offers members to his site considerable insight into his own stock screening and trading. One particularly valuable feature that he offers members are Q&A sessions with well-known traders and investors. When you see people with a mere fraction of Charlie's insight and experience offering "education" and "training" at hundreds and even thousands of dollars, you can't help but feel that, at $50.00 per year, membership in his site is one of the screamingest bargains around.

So one way I can recognize and pay a little back for all that good work is to offer members of The Kirk Report a free live chat tomorrow (Wednesday) at 11:00 AM ET. Members not only participate in the chat, but suggest questions for me to address. The markets will be trading then, of course, so I may make some comments about those in real time. Here is the URL for the session; you can also sign up for a reminder.

Should be fun; hope to see you there--


Monday, July 27, 2009

Evening Briefing for July 27th

* THEMES FROM MONDAY'S TRADING: Once again we saw a "beach ball" day in which stocks moved lower early only to bounce back up in the afternoon. This is part of a consolidation of the recent significant strength, and it shows that bulls remain on the sidelines using even modest weakness to buy stocks. We saw firmness in oil and gold prices, but the U.S. dollar came off its lows and 10-year rates closed higher (though off early highs). With 1388 stocks making fresh 65-day highs and only 95 registering lows, market strength remains healthy. Upside momentum, however, remains sluggish, reflecting a multi-day trading range that is most apparent in the NASDAQ futures. This range trade is the dominant picture going into Tuesday's market.

* OVERSEAS/OVERNIGHT NUMBERS: No major numbers overnight; 6:50 PM CT - Japan, retail sales.



-- End of the recession? and other excellent reads;

-- China to keep expanding credit;

-- Recapping a tough market for the bears;

-- What might be depressing the VIX;

-- Interesting article on China and imperialism;

-- What it means when the number of stocks making new highs lags as price rises.

Midday Briefing: Range Markets and the Importance of the Day's Opening Price

As emphasized in the past, one of the most important calls a short-term trader can make pertains to day structure. Note how, once we were unable to sustain early weakness and could not take out the S1 level, we moved into a range trade for the day. Having noted prior strength but waning upside momentum, this was not a surprise outcome.

One simple way to identify a range day is to look at how we're trading relative to the day's opening price. Trend days, by definition, will move away from the day's open; i.e., the day's open will be close to the day's high (in a downtrending market) or low price (in an uptrending market). When we see a market move away from the open and then snap back to the open, you have a good indication of range trade.

Once we make the identification of range trade, we know to be wary of buying strength near the day's high and selling weakness near the day's low--particularly if volume dries up on those efforts to set value higher or lower. For other ways of identifying a range market, check out this post.

Evaluating Yourself as a Trader

Here I've shortened and republished ten items for self-evaluation:

1) What is the quality of your self-talk while trading?

2) What work do you do on yourself and your trading while the market is closed?

3) How would your trading profit/loss profile change if you eliminated a few days where you lacked proper risk control?

4) Does the size of your positions reflect the opportunity you see in the market?

5) Are trading losses often followed by further trading losses due to frustration?

6) Do you cut winning trades short because, deep inside, you don't think you'll be able to achieve large profits?

7) Is trading making you happy, proud, fulfilled, and content, or does it more often leave you feeling unhappy, guilty, frustrated, and dissatisfied?

8) Are you making trades because the market is giving you opportunity, or are you placing trades to fulfill needs--for excitement, self-esteem, recognition--that aren't being met in the rest of your life?

9) Are you seeking returns that are realistic given your level of experience and development?

10) Can you identify the specific edges you possess over the many other motivated, interested traders that fail to achieve success in the markets?

Many answers to trading problems begin by asking the right questions.

Integrating Information Across Time Frames in Generating Trading Ideas

In my earlier post, I noted how the information from the tweets helps me gauge market themes and sentiment prior to the open. I then showed in the morning briefing how a multi-day view of the market places the recent overnight trade into a broader context that can be integrated with the information from the tweets.

Above we see a different view from the Market Delta platform. This shows us the day's trade only (from the start of the overnight session to the present), so that we can see how the day's structure is evolving. Here are a few things I watch for:

1) Sentiment: We see from the bottom histogram that selling sentiment is dominating, as more volume is being transacted at the market bid than offer.

2) Levels: We see that we are predominantly trading below the day's volume-weighted average price (VWAP; red line) and that VWAP is trending lower.

3) Value: We see from the side histogram that we are building volume (and accepting value) around the 974-976 level, well below the overnight high, below VWAP, and inside of Friday's range.

I will be watching to see how we trade relative to the key 974-976 level; inability to move and stay above it would target first Friday's pivot level, then Friday's lows.

Integrating this shorter-term perspective with the context from the market data from tweets and longer-term charts provides a multifaceted view of market action that tells you not only how we're trading now, but where we're likely to go under a variety of scenarios.

Morning Briefing for July 27th: Consolidating at the Highs

Here we see how the S&P 500 e-mini (ES) futures moved to new bull highs in overnight trade before pulling back into the range from the last two trading sessions. (See the prior post to place this action into full context). A key to the morning trade will be to see if we can stay above that range and continue to build value higher vs. retreat into the range back toward Friday's pivot. Given the overnight strength overseas and the bullish market themes from the overnight trade, the follow-through in early U.S. share trading is quite modest, suggesting to me that the upmove may be tiring. I'll be watching sector performance from the open as well as those intermarket themes to gauge whether this morning offers trend continuation vs. consolidation.

Making the Most of Twitter and the Morning TraderFeed Tweets

A good amount of the information from this blog is provided through Twitter. Following the stream of tweets is free; you can subscribe via RSS or simply track tweets on the site's Twitter page or follow the latest five tweets on this blog's home page under Twitter Trader. Let's take a look at this morning's tweets and make sense of them:

6:50 AM CT - Dollar dn; oil, metals up; rates higher; stks up in Europe, Asia:

Here we see that bullish (risk-seeking) themes have been dominating overnight market action. The link to the Bloomberg article provides detail. All things being equal, these themes should provide a bullish tone to U.S. stocks in early trade. Think of the overnight trade as providing a kind of sentiment gauge for traders in the short run. Overnight markets, like day ones, can be slow or busy; range bound or trending. Because large money managers operate globally, sentiment toward asset classes overseas invariably affects how U.S. stocks and bonds trade.

6:54 AM CT - Fri: 2103 20-day highs, 199 lows; Demand 24, Supply 27; Basket: 32 stks uptrend, 2 neutral, 6 dn; 90% SPX stks > 20 dma.

This tweet tells us that new highs continue to swamp new lows among NYSE, NASDAQ, and ASE shares. If we go back to the corresponding tweet for Thursday's market (posted Friday AM), we can see that there were fewer new highs on Friday than Thursday, suggesting a slowing market. We're not seeing any meaningful expansion of stocks making new lows, however, suggesting that the short-term trend is not rolling over.

We also see that both Demand and Supply are quite low, which tells us that upside momentum is waning, but we're also not seeing significant downside momentum. That is typical of range markets. Right away that alerts me to the possibility of continued range trade on Monday--and to the possibility that the market's upmove could be running out of steam.

Finally, we see that, among my basket of stocks, there continues to be a huge plurality trading in uptrends. That indicator caught the recent market advance beautifully; it generally doesn't pay to fade the market for more than a scalp when the great majority of shares are showing solid uptrends. Indeed, as we see, fully 90% of shares are trading above their 20-day moving averages. That is a very strong intermediate-term uptrend.

6:57 AM CT - 75% SPX stks > 200 dma; 68% small caps; 87% NDX stks; 54% XLF stks; 84% XLY stks; 83% XLK stks; 82% XLB stks.

Now we're taking a bigger picture look at index and sector strength. We can see that all indexes (large cap, small cap, NASDAQ) are in bull markets, with more than half of shares trading above their 200-day moving averages. Sectors reflecting economic growth (XLY, XLK) are among the strongest sectors, as is the materials group (which reflects commodity strength). Financial shares are the relative laggard of the major sectors. As long as themes of economic growth and commodity strength dominate, that is supportive of higher stock prices.

7:04 AM CT - $SPY targets: Pivot=97.74; R1=98.61; R2=98.91; R3=99.20; S1=96.86; S2=96.57; S3=96.28. Trading above pivot.

So here are profit targets for SPY for the day's trade. These are levels adjusted for recent market volatility, such that 70% of days (going back to the year 2000) will hit R1 or S1; 50% will hit R2 or S2; and 33% will hit R3 or S3. The pivot is an approximation of Friday's average price. Note that we're trading above the pivot in overnight trade, indicating firmness to the stock market as noted from the first tweet. If I think we're going to fall into range trade, I would look for a retreat back to the pivot level. If I see overnight firmness carrying over into the early morning market, I'll look for a move to R1. These profit targets, together with an understanding of market themes and indicators, are very helpful in framing trade ideas for the day.

Hopefully you can see that a wealth of information can be condensed into the tweets. My goal is to provide a measure of decision support to aid your thinking about the day's trade--not pass along hot tips or subjective impressions. (See this post for details). In many ways, this is every bit as valuable as actual blog posts, as the tweets help traders think about their market thinking, check their assumptions, and plan their ideas for the day.

Sunday, July 26, 2009

Evening Briefing for July 26th

* THEMES FROM FRIDAY'S SESSION - Friday saw a consolidation of Thursday's breakout gains, with afternoon strength kicking in after early weakness. As of this writing, we are trading at fresh bull highs in the S&P 500 Index. Thursday's strength displayed unusually bullish momentum, so it would not be surprising to see follow-through price strength before a sizable correction manifests. Strength in oil prices has accompanied the stock market strength, though gold lagged on Friday and we did not see sustained weakness in the U.S. dollar on Friday. The rise in shares has been led by the growth-oriented sectors--small caps, NASDAQ--suggesting continued risk appetite among traders and investors. Excellent review of the market week.




-- Best selling mutual funds, the role of emerging markets, and more good reading to start the market week;

-- Reflections on the stock market's underlying trend;

-- Market recap and a look at the market's trend;

-- Weekend market review;

-- Updates from a variety of blogs.

Building Trading Strengths, Correcting Trading Weaknesses

In my recent post, I highlighted several features that distinguish great traders from the rest. A 19-year old reader from Brazil asks the perceptive question of how to deal with trading weaknesses when you are solution-focused? Is it really enough to build strengths when weaknesses may be holding your performance back?

First off, let me say that I love it when young traders have the gumption to jump in on a blog post, comment, and ask questions. A winning quality in life is to be fearless about networking. Whenever you see someone doing good work, never hesitate to make a personal contact. Talent is attracted to talent, and it's amazing who you can meet and what you can learn by having the courage to put yourself out there.

Even now on my California road trip, I find talent wherever I hang out. I make sure to reach out to people like Scott, who was roasting his regional Hawaiian coffees at the Farmer's Market in Walnut Creek, or jazz/alternative singer Susan, who was charming listeners on a street corner in the Haight. (Macrae's comment: "That girl's got pipes!".) Talent is everywhere; the world is a brighter place when you find it and share in its fruits.

The question about working on weaknesses is important, because many times the difference between profitability and lack of success amounts to avoiding just a few bad trades per week or month. It would seem that doing less of the bad should go straight to the bottom line--and in a sense that's true.

For background on a solution-focused approach to self-coaching, please take a look at this post as well as this solution-focused linkfest. What you'll see is that, when you're focused on solutions, you *do* address your weaknesses, but you do it by focusing on what you're doing when you're *not* getting caught in your problem patterns.

Let's say that overtrading in slow markets is a weakness. We could take the traditional psychological approach and try to analyze all the reasons why you might be "self-sabotaging", etc. In a sense, however, that just reinforces a problem-centered mindset. Instead, we can take the solution-focused approach and spotlight those occasions when you do *not* overtrade a slow market. We would look at what you're doing and what you're thinking at those "exception" times and crystallize those as "solutions".

In other words, we can stay focused on strengths by observing what we're doing when we're not enacting our weaknesses. The exceptions to our problem patterns hold the keys to solution in marriages, trading, and personal development. When you focus on your problems, you reinforce the greater notion that you are dominated by your problems. In identifying and building solutions, you build self-efficacy.

Like I said, talent is everywhere. Most of all, within yourself. Life is richer if you are relentless in its pursuit

Great Traders: Five Distinguishing Features

* Everyone is wrong in the markets at times. The difference between the great traders and the unsuccessful ones is in how long they stay wrong.

* Addictive traders get high from action; great traders get high from mastering markets--and mastering themselves.

* Great traders do their best work when they are not trading; unsuccessful traders do not work when they are not trading.

* Every loss of discipline is a self-betrayal; great traders are true to themselves and stay disciplined as a result.

* Great traders focus on the two things they can always control: when they play and how much they bet.

You will never achieve greatness by minimizing your weaknesses. At best that will bring you to average. The path to greatness lies in maximizing strengths: becoming more of who you are when you are at your best. Here are five things I look for in successful new traders.

Saturday, July 25, 2009

Site Seeing Tour: Investment Postcards From Cape Town

I'm looking forward to getting back to Cape Town in August; it's been a few years and lots has happened since then. Note (chart above; EZA) how stocks were cut by about two-thirds in the bear decline and have come close to doubling since that time.

One particular treat will be getting together with Prieur du Plessis, author of the Investment Postcards blog. It's an excellent site that covers markets and economic developments, with an international perspective.

Here are a few recent posts worth a look:

* A sobering view of stock earnings in the U.S.;

* World economic updates show a tentative recovery;

* Video perspectives on the recent stock market strength.

Weekend Reading for July 25th

* Perspectives on high-frequency trading and whether Wall St. is picking the pockets of traders and investors;

* Turning trading problems around. Literally.

* Could sovereign wealth funds be destabilizing influences for markets?

* Vulnerabilities in the unemployment system are showing up as states face budget shortfalls;

* How will the economic crisis affect average people in the long run?

* China's reserves are rising and so are its holdings of U.S. Treasuries;

* Interesting article on China's economy and prospects for sustained economic recovery in U.S.;

* Looming problems with commercial real estate and regional banks;

* What caused our economic crisis? What to do about it?

* Questioning existing home sales data;

* Calls for further help for homeowners as mortgage relief efforts fall short;

* More on FIFO and effect on forex trading.

Becoming the Best You Can Be as a Trader

Suppose you're a baseball coach and your team has bases loaded in the last inning with one out. Your team is losing by one run, and it's the playoff game that will determine who will go the World Series. Who would you want to send to the plate?

You'd want someone who can put a bat to the ball, who is least likely to strike out in this situation. But how would you know who that would be? You could rely upon subjective impressions, or you could keep detailed statistics regarding the performance of your hitters in a variety of situations. If you know that one of your hitters is most likely to hit the ball out of the infield against a right handed pitcher and least likely to strike out with men on base, that might be your choice. You would want any possible statistical edge on your side.

As Diego points out in his market student site, and as Victor Niederhoffer and Laurel Kenner stressed in their site and Practical Speculation book, a large part of successful trading and investing is avoiding the behavioral biases embedded within subjective impressions by grounding oneself in probabilities.

How is your trading performance in range markets? Trending ones?

How does your performance vary as a function of time of day? Day of week?

How does your performance vary as a function of the size you trade?

Do you trade certain stocks, sectors, indexes, or asset classes more successfully than others?

Do you trade better from the long or short side?

What holding periods are associated with your most successful trades?

If you are your own trading coach, you make the decision of who to send up to bat each day. If you don't know what you don't know, you'll likely send the wrong hitter and strike out with the bases loaded.

It is difficult to play to your strengths if you're not aware of them in the first place.

It is difficult to improve your performance if you don't first have a baseline.

It's the look inside your P/L performance that will ultimately make you a more successful trader. That's where you can work around your weaknesses and take fullest advantage of your strengths.

Spare me the "passion for trading"; too many of those people are trading junkies. Successful people sustain a passion for self-improvement. This post will help traders who choose that path; this post will get you started in the right direction; and the trading coach book is designed to help you sustain your self-development.

Whatever you choose in life, be the best you can be. Life's too short--and you're too important--to compromise.

Friday, July 24, 2009

Market Context: The Importance of Non-Confirmations

One of the great values of Twitter is the ability to comment on the market in real time (follow comments here). Here is the comment from earlier this morning:

9:55 AM CT - Note that recent ES lows not confirmed by NQ and Russell; 13 stks up from open, 27 dn. Bk l8r today.

In a solid trending move, sectors and indexes will generally move in unison. When we see multiple non-confirmations, you have to wonder if the move to new highs or lows truly reflects broad market sentiment.

Note what has happened since those lows in ES that were not confirmed by the other major indexes. We've seen a retracement of much of the morning's weakness.

This is why it is crucial to not only see what is happening in the market you're trading, but what is happening more broadly in the stock market--and even among other asset classes. Much of the value of market "setups" depends upon the context in which they occur.

The Importance of Tracking Where Volume Trades

Notice how we are beginning to build volume and accept value below the volume-weighted average price (red line) early this morning in ES trade. I like to see how many contracts are executed at various prices during the day (histogram at right) to show how the market is placing value in real time. We are trading within the overnight range, but often a breakout from that range is preceded by a building of volume above or below the range midpoint (VWAP). Remember: a trend day will create increasing distance between price and VWAP; a range day will oscillate around VWAP. We saw yesterday how important it is to make the right early call on day structure. Many of the most challenging days are ones that start as range days and morph into breakouts and trending ones. Tracking volume at price is one way of gauging the likelihood of such morphing.

Thoughts on High Frequency Trading and Stock Market Manipulation

This article from the New York Times does a nice job of giving an example of how high-speed trading algorithms can front run markets. It helps to explain why traders who only buy or sell after strength or weakness has been manifested are often the ones buying the high tick or selling the low one.

It seems to me that some of the traders who are most vulnerable to these machinations are very active traders (including prop houses) who frequently bid and offer for stocks. The algorithms are reading the order book ahead of others, which tips the hand of these traders.

Because the high-speed algos are buying and selling quickly as a rule, their effects on the markets longer-term are unclear. A stock may still travel from point A to point B, but the computers will affect the path from A to B. This may help explain why traders I work with who are more selective in their intraday trades and who tend to hold for longer intraday swings on average have been doing better than very active daytraders.

When up to half of all stock market volume consists of these algorithmic trades, one has to wonder about the edge of very active traders. Interestingly, those that are successful may be trading new patterns that have emerged since the onslaught of the high-frequency computers. My hunch is that these new patterns would involve a keen reading of order flow, catching the shift in the bidding/offering and the location (bid/offer) of transactions in real time.

When Market Strength Follows Market Strength: Shout Out to Market Tells

On Thursday, we saw a very strong market performance that was preceded by significant market strength. I was going to take a historical look at what to expect when strength has been followed by strength, but I see that the excellent Market Tells service has beaten me to the punch. They, in fact, looked at the strength-after-strength pattern in multiple ways, generating very interesting conclusions. I cannot recommend Rennie Yang's work highly enough.

One permutation of strength-on-strength that he examined was three days of higher highs and higher lows followed by a day in which stocks (S&P 500 Index) rose by more than 2%. Going all the way back to 1965, Rennie could only find ten previous examples of such strength. Here is what he has to say. (As noted above, I recommend you read the rest of his report, as his conclusions are drawn from multiple historical views).

A 2%+ up day for the S&P after multiple days of higher highs and higher lows doesn’t sound like a great time to buy. Prices are high, so it’s natural to wait for a pullback. The problem is that the pullback is often quicker and shallower than expected before the market takes off again. Here’s a look at all cases since 1965 in which the S&P gained 2%+ after three days of higher highs and higher lows. While there have only been ten cases, it’s noteworthy that the market moved higher over the next two weeks in all but one instance…

S&P500 2% Up Day After Three Days of Higher Highs & Lows

07/23/09… S&P500 ??? two weeks later
03/17/09… S&P500 +2.5% two weeks later
12/30/91… S&P500 +1.3% two weeks later
05/11/90… S&P500 +0.7% two weeks later
12/18/87… S&P500 +3.8% two weeks later
03/11/86… S&P500 +1.3% two weeks later
10/11/82… S&P500 -0.9% two weeks later
08/02/78… S&P500 +1.7% two weeks later
08/16/71… S&P500 +0.8% two weeks later
08/24/70… S&P500 +2.5% two weeks later
04/01/68… S&P500 +4.7% two weeks later

It is difficult to draw conclusions from a sample size of ten. What I find significant, however, is precisely how rare this pattern is. We are seeing market strength that is historically unusual. Moreover, if we examine the dates of the prior occurrences--such as 8/70, 10/82, 12/87, 12/91, and 3/09--we see that quite a few were early in bull markets.

It is indeed normal to look for pullbacks after market strength. When those don't materialize, it suggests that the buying is unusually persistent. In that context, historical patterns that *don't* materialize can yield important clues to the present market.

Thursday, July 23, 2009

Evening Briefing for July 23rd

* MARKET THEMES FROM THURSDAY - Upside breakout lifts stocks to bull market highs. Those highs were well confirmed by such indicators as advance-decline and new highs/lows, with over 3000 new 20-day highs. Bullish themes dominated across asset classes with oil strong and weak 10-year Treasury prices (rising yields), but strengthening in the U.S. dollar and weakening of gold in the afternoon led a late stock market retreat from the day's highs. Given the strong upside momentum and the tendency of momentum peaks to lead ultimate price highs, it would not be surprising for pullbacks to be limited on the way to new bull highs.

* OVERSEAS/OVERNIGHT NUMBERS: 11:30 PM CT - Japan, Industry activity index; 1:45 AM CT - France, consumer confidence; 2:00 AM CT - France, PMI; 2:30 PM CT - Germany, PMI; 3:00 AM CT - EU, PMI; 3:30 AM CT - UK, GDP.



-- Longest winning streak in Asia since 2004;

-- Interesting look at the bond/stock relationship;

-- Continued problems at regional banks;

-- Overview of Fed policy and where it might be headed;

-- Recap of the strong market day;

-- High frequency trading getting more scrutiny.