Monday, December 28, 2009

Evaluating the Market's Trading Context

The previous post took a look at how I assess market context as an initial step in framing, executing, and managing trades. Let's take a look at how the context ideas apply to this morning's stock market:

* First, we go to the longer-term market indicators, which are highlighted in this post. Notice that we're seeing more S&P 500 sectors in uptrends than downtrends; that new 65-day highs are expanding and outnumbering new 65-day lows; that Demand is expanding and exceeding Supply; and that we have broken to bull market highs in the advance/decline line specific to the common stocks listed on the NYSE. All those indicators place us in a short-term uptrend.

* Second, we take a look at the indicator tweet this morning from my Twitter stream and compare that to the prior indicator tweet. We see that 20-day highs are handily outnumbering new lows; that Demand exceeds Supply; that above 50% (and an expanding) number of stocks are trading above their 20-day moving averages; and that a majority (and expanding number) of stocks in my basket are trading in short-term uptrends. All those indicators place us in a short-term uptrend.

* Third, we notice in overnight Globex futures trade that we opened the post-holiday session weak, touching the 1117 area that had been support from 12/24. From that point forward, selling pressure diminished and we've traded higher. That tells us that, above the 1117 area, we're in a short-term uptrend.

* Fourth, we take a look at overseas stock markets and commodities (gold, oil) and see firm prices, suggesting that traders are buying risk assets. We're also seeing further yield curve steepening from Treasuries. Those are supportive of a short-term uptrend.

As I emphasized in the earlier post, none of these things constitute trade ideas; they are only market background. As a trader, I take it to the next step by thinking ahead about the price and indicator action that would tell me that we're ending the short-term uptrend, and the price and indicator action that would tell me the uptrend is intact.

But that gets us into an analysis of price levels, volume at price levels, historical trading patterns, and intraday sentiment: all topics for future posts in this series.