Hi! I've sent out an email today to the traders and programmers who expressed an interest in collaboration. This is for experienced traders who have ideas they'd like to test out and experienced programmers who are interested in testing and honing ideas.
What I'm proposing is that interested individuals email me with a brief description of their background and experience that I could share with the entire group of participants in a group email. (The group email would only go out to the screened list of interested participants). That would enable traders and programmers to freely network on their own, rather than have me play matchmaker.
If you haven't gotten an email from me today and you'd like to participate, by all means get in touch. Once again, my email address is at the bottom of the "About Me" section to the right on the TraderFeed home page.
Thanks for your interest. I hope this bit of networking is helpful to all parties involved.
Brett
Tuesday, February 20, 2007
Tuesday, February 20th Morning Market Comments
9:58 AM - Well, the takeaway for the day is to know recent history and how the buying and selling you're seeing *now* compare to that history. It's when we see shifts from recent trading that markets make meaningful intraday tops and bottoms. We saw a nice example of that today. Hope this has been helpful; have a great rest of your day. Wrap up tonite on the Weblog.
9:50 AM - We returned to the thick of the recent trading range and volume picked up nicely on the buying. Those pullbacks in TICK will continue as buying opportunities as long as we sustain the positive TICK distribution and stay above the recent lows at 1454 in ES.
9:46 AM - Sure enough, we got a pullback toward -400 TICK, but now we couldn't make new price lows and buyers came right back in. You can see how the market transitioned from sellers to buyers with the shift in the TICK. Great tell. Back to wrap up shortly.
9:40 AM - Notice how the distribution of the NYSE TICK up to 9:09 AM CT was quite different from how it has been since then. Once we broke to new lows, we found buyers and not an avalanche of sellers (the TICK never hit extreme negative levels). Recognizing those shifts is key to short-term trading. We had shifted down relative to Friday to start the day, and that's what led me to be short. I still leaned short after the shift upward in TICK, but I've had to pull in my horns with respect to selling bounces, because those bounces have been sustained. If we can put in a bottom here, I'd expect buyers to return us to the midpoint of the Friday range as a target.
9:29 AM - Note that we, indeed, have sustained buying in TICK and it is showing up in ER2 strength. Note also that ER2 did not take out Friday's low--an interesting divergence. Watching to see if TICK pullbacks now start coming on higher price lows, which would signal us for buying and a return to the prior price range.
9:21 AM - Nice bounce in the TICK; the question, however, is whether we can sustain that buying. I continue to have doubts, but need to see bounces on weaker TICK strength to confirm.
9:11 AM - Seeing a touch of relative strength in the semis; held above their prior low on the recent selling. Also seeing a little more strength in the TICK and ER2. I'm still leaning toward selling bounces until we see a recent high from a previous TICK bounce taken out.
9:07 AM - Note also how volume has really picked up on the declines. Need to see volume pick up on a bounce to show us that large traders are finding value at these lower prices. Otherwise, you just keep shorting those bounces in TICK.
9:04 AM - Clear breakouts from Friday lows in ES and NQ. TICK distribution very weak if you follow the reasoning from my recent article. It took an average TICK reading of about +400 to sustain the neutral trending mode (trading range) over the past 3 days. When we couldn't sustain readings above that level, it was clear that there was not enough buying in this market. That, with the semi and ER2 weakness, kept me leaning short early on.
9:01 AM - Took some more profits, but again ready to reenter
8:51 AM - I'm using these TICK bounces to short ER2 and ES until we see signs of sustained high TICK that can make relative price highs.
8:46 AM - Took some profits, but very ready to reenter on short side if selling accelerates.
8:40 AM - These are actually weak TICK readings; more on that in a bit. Nice tell from ER2 and semis. Need to see if volume picks up on weakness, or if we'll dry up and return to the thick of the recent trading range.
8:35 AM - Volume modest in ES; no substantial institutional involvement to this point relative to usual. Consistent so far with range bound market; I'm short a bit of ES here and looking to add on TICK bounces that fail to take price higher.
8:33 AM - Keeping an eye on early weakness in ER2 and SMH. Will be short this market if that persists.
8:28 AM - This Market Delta chart goes back to Friday, with 10 price ticks per bar. You can see the narrow value area (left Y axis) and the narrow trading range. We're handicapping the odds of a break out of this range today by tracking NYSE TICK, volume, and volume distribution.
8:20 AM CT - And a good morning following a long weekend. The three averages have all established very clear resistance levels over the past three trading sessions and most recently failed to breach those levels in Globex trading on the holiday morning. As a result, we're pulling back well into the trading range over those several days. It would not at all surprise me to test the lows of those ranges, and I will most likely be selling bounces that fail to take us above the recent pre-opening high of 1460.50 in the ES contract. Some good reading over the weekend, with several best practices posts. Pivots are posted on the Weblog, along with a link to a PDF of collected "classic" articles. The Weblog also notes some deterioration of internals during the market's recent consolidation that also has me looking to the downside. No major economic releases scheduled for today; tomorrow we have CPI. Oil lower so far today; 10 year rates back above 4.7%. Back after the open.
Identifying the Trend of Market Sentiment With the NYSE TICK: A Best Practice in Trading
Here is a best practice that will help you identify the trend of the market's sentiment in a single glance. It is a simple way of calculating the Adjusted NYSE TICK, as reported daily in the Trading Psychology Weblog.
In past posts, I have described the use of the NYSE TICK as a real-time measure of market sentiment. Because it captures the number of stocks trading at their offer price minus those trading at their bid at each point in time, it illustrates whether buyers are more aggressive in the broad market (they are accepting the offer price to get into stocks) or whether sellers are more urgent (accepting the bid price to get out of stocks). The NYSE TICK, when cumulated over time, is helpful in anticipating momentum effects in the market and in determining whether or not we're likely to hit pivot-based price targets. For this reason, a number of very nice setups can be identified using TICK, price, and volume.
The chart above, taken from e-Signal, is of the NYSE TICK on a 1-minute basis. Notice that the TICK values, displayed in candlestick bars, are accompanied by three horizontal lines. The first line, in red at the center, is the regression line over the past day of trading (i.e., the past 405 bars). This line is the best fit connecting the high-low-closes for each bar over that period. The blue lines above and below the TICK bars represent values that are two standard deviations above and below the regression line. When the TICK exceeds these levels, we know that an unusually large amount of buying or selling is occurring simultaneously among the NYSE stocks. Very often this is because program trading is hitting the market.
Note that, by looking a 3-minute or 5-minute bars, we can adjust the lookback period for the regression line and the standard deviation calculations, since the lines will always be based on the past 405 bars. I generally use a lookback period that corresponds to a relatively flat market condition (e.g., if the market has been flat over the past three trading sessions I'll look at a 3-minute bar of TICK), because that tells me the net buying vs. selling sentiment needed to sustain zero price change. If new TICK values consistently exceed the value represented by the regression line, that signals a shift toward bullish sentiment, and I would be leaning toward buying pullbacks in the TICK (i.e., pullbacks toward the lower blue line). If TICK values consistently fall short of the regression line value, that would indicate a shift toward bearish sentiment, and I would lean toward selling bounces in the TICK (i.e., upthrusts toward the upper blue line). When TICK oscillates evenly around the regression line, we often will have range bound conditions.
The key visual identification is the slope of the regression line for the NYSE TICK. If the slope is positive (the line is rising), we have increasing buying sentiment over time and vice versa. The slope of the regression line--and particularly a change in the slope--informs us of the trend of market sentiment. This is very useful in identifying shifts in the market's trend. In the above example, the slope is steadily rising and that--all other things being equal--would lead me to buy dips in the TICK that do not make fresh price lows. That would be one way to buy pullbacks in an upward trend.
Viewing the NYSE TICK-based sentiment in this fashion, you can filter your own entry signals. For instance, you might identify a bullish configuration in a chart pattern or in a CCI pattern, but only take that trade if the slope of the TICK (the sentiment trend) is positive. Many, many times the TICK distribution--the direction of the line--has kept me out of a bad trade by forcing me to go with the dominant market sentiment (which is set by the large traders). This is why identifying the trend of sentiment is, for me, a best practice.
Monday, February 19, 2007
Do the FX Futures Help Us Track Large Traders in the Currency Markets?
You're probably aware that the Chicago Mercantile Exchange trades Euro FX contracts that trackscurrency trading involving the Euro and the dollar. (The CME also has contracts covering many other currency pairs). The price of the contract reflects the value of a Euro in dollar terms, so that when the contract rises in price, it reflects Euro strength and dollar weakness. The symbol for the Euro FX contract is 6E, and the current contract is 6EH7.
What you may not be aware of is that the Euro FX contract has gained respectable volume over time. It is not at all unusual to see 20-40 thousand contracts trade per hour during the busier hours. While this is not as much volume as we're accustomed to seeing in the emini S&P 500 Index (ES), it is sufficient liquidity for most independent traders. During those busier hours, a one-pip spread is the norm (a pip is the equivalent of a tick in the equity index futures and is equal to .0001 dollar.) Further background on the FX markets and the Euro product is available through the CME.
The question, however, is whether volume in the Euro product reflects true underlying demand and supply in the much larger cash market for currencies. After all, the cash market for FX, according to the CME, amounts to 1.9 trillion dollars daily. The FX futures, with their tens of thousands of contracts traded, are but a tiny fraction of this much larger market.
Readers are aware that I use futures volume in the S&P 500 Index to help me understand how large traders are trading. This is valuable in identifying breakout trading opportunities, and it also helps me identify when markets are likely to be range bound. To gauge how much movement we're likely to get during the day, I track how much volume in the ES futures we're getting relative to how much we normally have for that time of day. This is a helpful measure of market opportunity, because it tracks the presence of large traders in the futures, which is well-correlated with the presence of institutional traders.
But can we obtain similar benefits by tracking FX futures volume? One problem in the FX markets that we don't have in equities is that there is no central marketplace for the cash trade. For U.S. stocks, for instance, we can compare the cash trading volume in the NYSE Stock Exchange with the day's futures trading volume in the CME emini S&P contract and observe a positive correlation. Cash currencies, however, trade on multiple platforms and lack a single, central marketplace that reports volume. There is no equivalent of a New York Stock Exchange for cash currency trading.
If, however, we can establish that futures volume in the FX market is connected to price movement, then we can infer participation of large traders in the currency market when futures volume is high relative to its norm. We know that small futures traders don't move the world currency markets. When those markets are moving significantly, large institutional traders--from banks to hedge funds to monetary authorities--are responsible. A high, positive correlation between FX futures volume and movement in the Euro/Dollar relationship would suggest that we might be able to use FX futures volume data similarly to the ways in which I use futures volume in the ES product.
I went back to 1/3/2007 in the 6EH7 contract and examined hourly futures volume from 8:00 AM ET to 15:00 ET. What we see is a great deal of variability in hourly volume within the day--even more than is typical in the equity index futures markets. Volume is highest in the morning hours and noticeably tails off from noon forward. The correlation between hourly volume in the Euro FX emini contract and the high-low price range for that hour is a very high .89. Equally interesting, volume for the hour correlates with the price range for the next hour by about .30. What this means is that, for FX futures as for equity index futures, volume is telling us something about volatility. When there is more volume, there's more movement--and thus more potential opportunity for the trader. Since only large, institutional participants can move the currency markets, this suggests that Euro FX volume is telling us something about the involvement of the "big boys" in that market.
When I limited my look to the period between 8:00 AM ET and noon, a similar, high correlation between volume and price range was evident: .86. Interestingly, however, there was a smaller correlation between volume in the current hour and price range for the next hour: .11. That tells me that volume may be variable within the hour for the FX futures, limiting serial correlations.
I decided to drill down and examine Euro FX futures volume on a 15-minute basis between 8:00 AM ET and noon. Once again, the correlation between volume and price range was very strong: .85. Moreover, we see a substantial correlation between volume in the prior 15-minute period and price movement (range) in the next 15-minute segment: .31. Even on this short time frame, volume informs us not only about current volatility, but also contains information about upcoming opportunity.
My very strong suspicion is that it is not absolute volume that is important, but current volume relative to the average volume for that particular time of day. If we're trading 20,000 contracts at 9:00 AM, that might be average volume or even a bit below. That same volume at noon would be quite high. Knowing typical volume at each time period and how much volume we're currently getting helps us infer likely movement, which is really a function of institutional participation.
Can a currency trader infer the likelihood of a range bound or trending day based on unfolding volume? Can we use futures volume in the Euro FX eminis to validate genuine vs. false breakout moves? Can we combine an analysis of volume with movements toward and away from value areas for an enlightened application of Market Profile (tm) to FX trading? Many fine avenues of analysis are opened by the relationship between volume and price movement.
One conclusion, however, strikes me as inescapable. If I'm an active trader in the Euro currency and need to ascertain likely opportunity in my market, I would be wise to track the Euro futures contract. The volume information from the futures--data not available in the cash market--offers an informational edge that, at least in my equity index trading, has proven invaluable.
What you may not be aware of is that the Euro FX contract has gained respectable volume over time. It is not at all unusual to see 20-40 thousand contracts trade per hour during the busier hours. While this is not as much volume as we're accustomed to seeing in the emini S&P 500 Index (ES), it is sufficient liquidity for most independent traders. During those busier hours, a one-pip spread is the norm (a pip is the equivalent of a tick in the equity index futures and is equal to .0001 dollar.) Further background on the FX markets and the Euro product is available through the CME.
The question, however, is whether volume in the Euro product reflects true underlying demand and supply in the much larger cash market for currencies. After all, the cash market for FX, according to the CME, amounts to 1.9 trillion dollars daily. The FX futures, with their tens of thousands of contracts traded, are but a tiny fraction of this much larger market.
Readers are aware that I use futures volume in the S&P 500 Index to help me understand how large traders are trading. This is valuable in identifying breakout trading opportunities, and it also helps me identify when markets are likely to be range bound. To gauge how much movement we're likely to get during the day, I track how much volume in the ES futures we're getting relative to how much we normally have for that time of day. This is a helpful measure of market opportunity, because it tracks the presence of large traders in the futures, which is well-correlated with the presence of institutional traders.
But can we obtain similar benefits by tracking FX futures volume? One problem in the FX markets that we don't have in equities is that there is no central marketplace for the cash trade. For U.S. stocks, for instance, we can compare the cash trading volume in the NYSE Stock Exchange with the day's futures trading volume in the CME emini S&P contract and observe a positive correlation. Cash currencies, however, trade on multiple platforms and lack a single, central marketplace that reports volume. There is no equivalent of a New York Stock Exchange for cash currency trading.
If, however, we can establish that futures volume in the FX market is connected to price movement, then we can infer participation of large traders in the currency market when futures volume is high relative to its norm. We know that small futures traders don't move the world currency markets. When those markets are moving significantly, large institutional traders--from banks to hedge funds to monetary authorities--are responsible. A high, positive correlation between FX futures volume and movement in the Euro/Dollar relationship would suggest that we might be able to use FX futures volume data similarly to the ways in which I use futures volume in the ES product.
I went back to 1/3/2007 in the 6EH7 contract and examined hourly futures volume from 8:00 AM ET to 15:00 ET. What we see is a great deal of variability in hourly volume within the day--even more than is typical in the equity index futures markets. Volume is highest in the morning hours and noticeably tails off from noon forward. The correlation between hourly volume in the Euro FX emini contract and the high-low price range for that hour is a very high .89. Equally interesting, volume for the hour correlates with the price range for the next hour by about .30. What this means is that, for FX futures as for equity index futures, volume is telling us something about volatility. When there is more volume, there's more movement--and thus more potential opportunity for the trader. Since only large, institutional participants can move the currency markets, this suggests that Euro FX volume is telling us something about the involvement of the "big boys" in that market.
When I limited my look to the period between 8:00 AM ET and noon, a similar, high correlation between volume and price range was evident: .86. Interestingly, however, there was a smaller correlation between volume in the current hour and price range for the next hour: .11. That tells me that volume may be variable within the hour for the FX futures, limiting serial correlations.
I decided to drill down and examine Euro FX futures volume on a 15-minute basis between 8:00 AM ET and noon. Once again, the correlation between volume and price range was very strong: .85. Moreover, we see a substantial correlation between volume in the prior 15-minute period and price movement (range) in the next 15-minute segment: .31. Even on this short time frame, volume informs us not only about current volatility, but also contains information about upcoming opportunity.
My very strong suspicion is that it is not absolute volume that is important, but current volume relative to the average volume for that particular time of day. If we're trading 20,000 contracts at 9:00 AM, that might be average volume or even a bit below. That same volume at noon would be quite high. Knowing typical volume at each time period and how much volume we're currently getting helps us infer likely movement, which is really a function of institutional participation.
Can a currency trader infer the likelihood of a range bound or trending day based on unfolding volume? Can we use futures volume in the Euro FX eminis to validate genuine vs. false breakout moves? Can we combine an analysis of volume with movements toward and away from value areas for an enlightened application of Market Profile (tm) to FX trading? Many fine avenues of analysis are opened by the relationship between volume and price movement.
One conclusion, however, strikes me as inescapable. If I'm an active trader in the Euro currency and need to ascertain likely opportunity in my market, I would be wise to track the Euro futures contract. The volume information from the futures--data not available in the cash market--offers an informational edge that, at least in my equity index trading, has proven invaluable.
Sunday, February 18, 2007
Entering Markets on Pullbacks From a Trend: A Best Practice in Trading
Note From Brett: This best practice post comes from professional trader, fund manager, author, and educator Ray Barros. Since he started trading 20 years ago, his track record reflects a whopping 39 percent per annum return on a compounded basis. He is also the author of two books--The Nature of Trends and The Ray Wave. Ray has been regularly featured in regional newspapers and publications, including the Sydney Morning Herald, Your Trading Edge Magazine, Business Times, and Smart Investor. I've been in touch with Ray for a while now and can vouch for his experience, insight, and dedication to teaching. In this post, he generously shares one of his favorite trading setups. His basic method is to enter trends on pullbacks, relying on the structure of the setup to provide both entry and stop. This creates a nice risk:reward ratio and, in my book, merits acknowledgment as a best practice.
From Ray:
I am writing to introduce an idea that has been around since at least the days of Richard Wyckoff (1920). I have seen it in many different guises from Bruce Babcock’s ‘Slinky System’ (http://www.rb-trading.com/bbbio.html) to Bradford Radsche’s ‘Turtle Soup’
(http://www.lbrgroup.com/index.asp) to Joseph Hart's ‘Repo’ (http://www.trend-dynamics.com/). Nowadays, I use the word ‘RePo’ to identify the pattern.
I’ll describe the buy pattern; reverse the rules for a sell. The conditions for a buy are:
q Identify an uptrend in the timeframe you are trading.
q Identify a correction to that trend.
q Within that correction, identify a swing low (A). Following ‘A’, there will be a rally to a swing high (B). That rally is followed by a new low (C).
My research shows that it is best if ‘C’ is within 20% of the ‘AB’ range. For example if the AB range is 20 points, and ‘A’ is 1404, then it is best if ‘C’ is no lower than 1400.
The calculations are: 1404 (which is A’s low) – 4 ( which is 20% of the AB range of 20) = 1400. [corrected- BNS]
While it is best that ‘C’ be within 20% of AB, it need not be. But, it is essential there be no close below the 20%.
q After ‘C’, the market reverses the down move and closes above ‘A”. This bar (D) must show buying conviction. In my own trading, a bar that shows buying conviction takes one of two forms:
· a bar that opens no higher than in the bottom third of its daily range and closes no lower than the top third of its daily range. I call this a bull bar will stop
· a bar that opens no higher than in the bottom 25% of its daily range and closes no lower than in the top 25% of its daily range. I call this a directional bar up.
The keys to this setup are
- the identification of the trader's Timeframe trend and
- the ability to define a corrective move.
The best tools I know to do this are Swing Charts. I like swing charts because they give a clear visual picture of the trend and they give earlier warnings of a change in the trend.
There are at least two types of swing charts:
- Arthur Merrill’s ‘Filtered Waves’. These are the most popular. (If you are an E -signal user, Jan Arps offers a free utility, Universal Swing Analysis Tool (UST), at:
(select free download).
The utility probably draws percentage charts. I say seem because the logic is not disclosed.
- The other type of charts by timing price based: Hart Swing Charts and Barros Swing Charts (http://www.tradingsuccess.com/ . These differ from percentage swing charts because they use both time and price inputs to draw the charts.
The question I am usually asked is: does it matter what type of swing construction you use? Not really, provided about the same magnitude swings are compared.
Dealing With Price Spikes: A Best Practice in Trading
Note: This best practice post comes from AnaTrader, a relatively new trader with a background in the arts. Over the time I've corresponded with her, I've found her to be not only a Renaissance woman, but a dedicated student of the markets. AnaTrader relates an incident regarding market spikes due to either faulty ticks or manipulated trades. When you're working orders in the book, such spikes can create unwanted fills. AnaTrader passes along a message from her mentor, Ray Barros, who reassures Forex traders about spikes they might see in their charts.
Over the weekend, some market makers' trading platforms Down Under showed a big spike in GBP/USD, a one time high of 300 pips from normal spread of bid and ask prices as per chart which I extracted this Monday morning.
Over the weekend, some market makers' trading platforms Down Under showed a big spike in GBP/USD, a one time high of 300 pips from normal spread of bid and ask prices as per chart which I extracted this Monday morning.
Many have shorted this instrument, including me, with stops in place for the weekend pending the G7 weekend meeting announcements.
I have to say that when I checked my trading platform, I was not hit or stopped out.
I was perplexed and this is what I learned from my mentor:
Quote
A spike can be a false price that did not actually
take place in trading, It usually occurs on weekends
when M-East traders play with the prices. Most
good brokers don't carry the data.
Even if they did, it would not be considered
a trade - in trading parlance the prices would be 'outed' .
take place in trading, It usually occurs on weekends
when M-East traders play with the prices. Most
good brokers don't carry the data.
Even if they did, it would not be considered
a trade - in trading parlance the prices would be 'outed' .
Am I relieved that there is a trading practice that such a big spike would be outed or disregarded and not carried on trading platforms of renowned brokers.
We could be slaughtered like pigs, all right.
From Brett: The best practice takeaway from AnaTrader's post is that, in the Forex market, it is important to not overreact to false price spikes that may appear. It sounds as though this is just what the traders are trying to cause in the first place.
A different kind of spike is caused by "fat finger" episodes in which a trader might mistakenly buy 10,000 contracts at the market rather than 1000. The resulting purchase takes out quite a few price levels and can lead to further short covering before anyone figures out that this was simply a mistake. A trader who might be working an order to sell above the market would find themselves short and immediately down a couple of points or so on their position. This is not common, but it is an occupational hazard of working orders in the book. Another occupational hazard is working orders in the book prior to the release of an economic report. If the report does not fall within expectations, a spike of price movement created by automated trades can fill you at very bad prices. Unlike the situations mentioned by AnaTrader, these trades will not be "outed". Rather, you'll be out some capital! My own practice is not to work orders far from the market. If I want in at a good price, I'll try to buy at the current bid or sell at the current offer. But I'm not a scalper and, if I'm telling myself I have to be first in the order queue to get filled and make my trade work out, that suggests my trade idea is not so robust.
Bottom line: You have to know *your* market. The meaning of a rogue price spike in one market could be very different from that in another.
AnaTrader Adds:
From Brett: This is indeed an advanced trading method. To place orders in the book ahead of an economic release, you need to have a keen sense for how far a market is likely to move under various scenarios. This means studying past releases and reactions to those. It is not at all uncommon for the market's first, knee-jerk price spike after, say, the release of Fed minutes to not be the direction the market ultimately takes for its subsequent price direction. If you can enter at a good price, it's possible to benefit from the rapid reversal. Prudent position sizing is needed, however, to guard against catastrophic losses should the spike become an outright trend in itself. Thanks to AnaTrader and Ray Barros for the excellent perspectives on price spikes.
From Brett: The best practice takeaway from AnaTrader's post is that, in the Forex market, it is important to not overreact to false price spikes that may appear. It sounds as though this is just what the traders are trying to cause in the first place.
A different kind of spike is caused by "fat finger" episodes in which a trader might mistakenly buy 10,000 contracts at the market rather than 1000. The resulting purchase takes out quite a few price levels and can lead to further short covering before anyone figures out that this was simply a mistake. A trader who might be working an order to sell above the market would find themselves short and immediately down a couple of points or so on their position. This is not common, but it is an occupational hazard of working orders in the book. Another occupational hazard is working orders in the book prior to the release of an economic report. If the report does not fall within expectations, a spike of price movement created by automated trades can fill you at very bad prices. Unlike the situations mentioned by AnaTrader, these trades will not be "outed". Rather, you'll be out some capital! My own practice is not to work orders far from the market. If I want in at a good price, I'll try to buy at the current bid or sell at the current offer. But I'm not a scalper and, if I'm telling myself I have to be first in the order queue to get filled and make my trade work out, that suggests my trade idea is not so robust.
Bottom line: You have to know *your* market. The meaning of a rogue price spike in one market could be very different from that in another.
AnaTrader Adds:
For your added information and illustration, just before any major economic news release like last Friday's PPI, one could put in a buy stop and sell stop order for say, GBP/USD, to catch the entry if it spikes up or down. If the figures were to be outside expectations, it would spike either up or down so fast that you cannot get filled at your price level unless you place a straddle order of buy stop and sell stop. Once either order gets hit, one can delete the other not filled or leave it as a protective stop. One has to determine in advance which way an instrument will go if the news were to be outside expectations.
For last Friday, I expected the GBPUSD to spike up should the expectations were outside, and only placed a buy stop order just a few minutes before the economic release at 8.30ET.
Quote of economic releases:
The latest read on inflation at the wholesale level also hit the wires at 8:30 ET. Total PPI and core PPI matched economists' forecasts; but since the data won't alter inflation expectations, the report failed to provide investors with overwhelming evidence that pricing pressures are abating. The focus now turns to next week's more closely-watched CPI report.
Since the reports were within expectations, there was no spike in the GBPUSD immediately after release and I just deleted my buy stop order.
For a novice, it is generally not advisable to trade before any major economic release, but in my case, I am a mentor student and therefore, have an added advantage of being coached and guided in this complex trading method, which has given me some experience in such volatile trade entries.
From Brett: This is indeed an advanced trading method. To place orders in the book ahead of an economic release, you need to have a keen sense for how far a market is likely to move under various scenarios. This means studying past releases and reactions to those. It is not at all uncommon for the market's first, knee-jerk price spike after, say, the release of Fed minutes to not be the direction the market ultimately takes for its subsequent price direction. If you can enter at a good price, it's possible to benefit from the rapid reversal. Prudent position sizing is needed, however, to guard against catastrophic losses should the spike become an outright trend in itself. Thanks to AnaTrader and Ray Barros for the excellent perspectives on price spikes.
Saturday, February 17, 2007
Stock Screening for Index Traders: A Best Practice in Trading
We normally think of stock screeners as tools for stock pickers. The stock picker screens for stocks that possess certain fundamental and/or technical characteristics that presumably affect supply and demand and then trades those stocks. So it's quite possible the stock picker will be trading energy stocks one day, tech stocks the next--or both simultaneously. The index trader, on the other hand, has a more limited array of options. Many only trade one thing, such as the ES futures. In my experience, active traders of the indices do relatively little stock screening. They are more likely to look at aggregate market indicators, such as the number of stocks advancing vs. declining or the total market volume for the day.
To see how stock screening might aid the index trader, let's take a hard look at that aggregate indicator: advancing vs. declining stocks. When a NYSE issue is counted as an advancing or declining stock, it means that the shares are trading above or below their previous day's close. While that is useful information, it also has its limitations--particularly for the daytrader. First, what is going on in the broad NYSE universe may not be reflective of what is happening within the stocks in the trader's index. If, say, the trader is trading a sector index of energy issues (XLE), what is happening across all stocks is only partly relevant. Second, calibrating stock strength from the prior day's close doesn't tell the intraday trader much about strength during the day session. If stocks as a whole open higher but then trade in a narrow range for the entire morning, a strong advance/decline reading hardly tells the whole story.
Suppose we redefine criteria for advancing and declining stocks. When a stock opens for trading, its opening price reflects the balance of supply and demand coming from a number of factors, including overseas interest, pre-opening economic news, overnight movement of the index futures, etc. During the first minutes of trade, the stock establishes a range of prices that we can consider to be its opening range. This is the market's initial attempt to set value for the shares.
If a stock moves above this opening range and sustains that move, we can truly say--on a day timeframe--that the stock is advancing. If the stock moves below the initial range of prices and stays below, we can say that it is declining on the day. The stock may or may not be up or down relative to the previous day's close. What we want to know is whether that stock is strong or weak relative to that day's initial estimate of value.
Taking this logic one step further, it makes sense that if we track a universe of stocks in this way, we can obtain a sense for whether the stocks that make up a particular index are--as a whole--advancing or declining relative to their opening range. If a significant number of stocks are moving below their initial estimates of value, we want to think long and hard about buying that index, and vice versa.
So where can we get statistics, customized for the stocks that are in the indices that we are trading, that will show day timeframe advances vs. declines? The answer lies in stock screening.
Above you'll notice my Trade Ideas screen from 2/9/07, tracking the 17 stocks that make up my large cap basket. (Please note that I have no commercial relationship with Trade Ideas; nor have they solicited this post or been involved in its writing). These stocks, followed daily on my Trading Psychology Weblog, represent a mix of tech, consumer, cyclical, and financial stocks. I've found over time that they do an admirable job of tracking the S&P 500 Index. I've set Trade Ideas to spit out upside and downside breakouts of the stocks' opening 10 minute trading range. This shows me in real time which stocks are turning into advancers and which into decliners. A nice feature of this particular screen is that the breakout move has to be sustained for 1 minute before it registers as an alert. This provides a modicum of assurance that the stock isn't simply peeking above or below its range and creating a whipsaw with a move in the other direction.
February 9th was interesting in that the market opened higher, with strong NYSE TICK readings in the opening minutes of trade. Four stocks in my basket quickly established upside breakouts from their opening 10-minute range, but then four just as rapidly registered downside breakouts. That is not what you'd expect in a trending market and was a great initial signal to the index trader that strength was selective. As we approached 9:00 AM CT, the ES futures were still trading above their open and above their previous day's close, but stocks advancing vs. declining relative to their opening range were dead even.
As you can see from the alerts, from 9:00 AM CT forward, one stock after another pierced its opening range to the downside. The index weakness lasted much of the next hour, providing plenty of opportunity for the short-term trader to join the move back into the prior day's trading range.
The stock screen showed us that what looked like strength (relative to the previous day's close) really wasn't strength at all. Indeed, the strong buying sentiment, as registered by the NYSE TICK, was unable to move a majority of stocks in my basket above their opening range. As a rule when buyers lifting offers can't move price higher, it's only a matter of time before sellers become emboldened and existing longs liquidate their positions.
The nice thing about the Trade-Ideas screen is that it is highly customizable. I could have set the screen to register 5, 15, or 30 minute breakouts, depending on my trading style. I also could have entered any universe of stocks into my watchlist, including all energy stocks or all stocks in the NASDAQ 100 Index. That ensures that the screens are providing information about the stocks that are most relevant to what we're trading: from stock index futures to ETFs.
Indices are deceptive because many are capitalization weighted. A relatively small number of stocks can make the index look strong or weak. By tracking a universe of stocks in real time and screening for their strength or weakness, we can see if a breakout move in the index is genuine or artificial. We can also determine if leading sectors are breaking out to directional moves prior to the index.
Index traders may not be stock pickers, but they can benefit by taking a look under the hood and seeing how the stocks in their index are really trading. That, for me, makes it a trading best practice.
Friday, February 16, 2007
Friday, February 16th Morning Market Comments
9:47 AM - Volume has really tailed off here. You know, one thing I've always hated is when traders blame their losses on the market. They blame the big traders who "manipulate" the market; they blame news events or lack of news events; they blame low volatility. Energy spent externalizing blame is energy used up without working on yourself. I came into the day with a leaning--that we'd opened lower but would trade back well into the previous day's range--and I was slow to revise that leaning, even as selling picked up in NQ and ER2. That flexible thinking that I've emphasized in the past (and occasionally demonstrated myself!) just wasn't there. Sizing initial positions reasonably and having good stops in place ensured that I didn't get burned by my mistake, but it *was* a mistake nonetheless and is something I will bring to next week's trade as a learning lesson. Sometimes, like yesterday, I develop an early opinion based on a read of the market and really capitalize. But sometimes I can get married to that opinion and don't focus sufficiently on what would tell me I'm wrong (and should make me flip my perspective). That happened for me today. And, yes, I can blame expiration trade and phone calls that interrupted, but if I'm honest with myself, that's not it. The research helps, and knowing market tendencies helps, but you need to also be sensitive to what's happening in the moment. Maintaining that Janus face: one side looking to historical tendencies and the other looking to what's happening *now* is a real psychological challenge. And it's a skill I'll probably always be working on. That, my friends, is the takeaway for today. Have a great long weekend. Wrap up tonite on the Weblog and Best Practices posts this weekend. Thanks for all the recent emails and expressions of support.
9:34 AM - Well, you can see why many traders sit out these expiration days. Let me show you something. Notice what happened to the TICK at 9:15 - 9:22 AM CT. We had several pushes down and selling dried up. A big trader tried to knock ES down around 9:21 AM, but no follow through. That should have been a fine time to enter long. And, yes, we did get a bounce. But then there was no follow through whatsoever. That's why I said I would just scalp trade. I could see the next couple of ticks, but not the next couple of points. But let's not blame all that on the market and expiration; it's time for the Doc to cure himself. Back on that topic in a min.
9:23 AM - Another phone call; just a bit too much distraction, I'm afraid. As a result, I'm done trading for the day. Some very whippy buy and sell programs hitting ER2; very tough to short-term trade. Note slow down in volume recently. Back in a few.
9:14 AM - Volume has remained quite healthy, so we're getting movement. I need to see price hold at higher lows on TICK pullbacks to think about the long side again. I don't have much downside conviction despite the break. My expectations may get the better of me, but I don't see this as a trend day in the making.
9:10 AM - Back after a phone call. My nibbling led to a couple of ticks, but as you can see, there wasn't anything more in the market than that as we broke below the preopen lows and sustained the negative TICK with ER2 leading the way down. No question I was leaning the wrong way in the market and should have been selling those bounces. Now watching to see if we re-enter that AM range vs. trend downward with expansion of volume.
8:54 AM - I am nibbling long on TICK pullbacks that hold above recent lows, but these will be scalp trades for me, so I won't post. Too quick to type them in a timely way. Just wanted to let you know my intentions.
8:50 AM - We may yet get the range trade and I may yet reenter that position, but the weakness in ER2 and NQ turned my risk reward upside down. Better a small loss than a possible significant one.
8:48 AM - Stopped out.
8:44 AM - Bought some ES tight stop.
8:35 AM - Solid volume to open, some related to expiration. Let's see how it goes from here. Leaning to long side if we don't fall out of bed in TICK and ER2.
8:27 AM - I'm showing 1458.75 in ES as the "point of contol" at which we've done the most volume lately, so will use that as my initial estimate of average trading price for this market and then will evaluate the strength and volume participation of moves away from this level for odds of continuation vs. reversal. This, BTW, will be an abbreviated trading (and blogging) session for me, as I have a writing project for my academic department in Syracuse that needs to be completed.
8:21 AM - OK, housing starts came in a bit weak; PPI was in line; and we have Michigan sentiment numbers coming out at 9:00 AM CT, but remember that subscribers to their service do get the data a bit early. We dipped as low as 1456 in ES overnight and now trade just a tad below yesterday's VWAP (pivots and VWAP published daily on the Weblog). With a 3 day weekend coming up and options expiration today, general expectations are for a slow, range bound day. A reader asked me to look into what happens after the Dow has been outperforming the Russell stocks. We've been up a bit more than 1% over the past five days in the Dow (DIA), but actually down over the same period in the Russell 2000 Index (IWM). That has happened 18 times since the start of 2004. The Dow, over the next week, has averaged a gain of .56% (9 up, 9 down), but the Russell has been especially impressive, averaging a gain of 1.11% (13 up, 5 down). In other words, when the Dow has been strong and Russell weak over a five-day period, the next five days in Russell have tended to play catchup. Note also the interesting stats on the Yen vs. the S&P in my latest post on the carry trade. That's definitely a relationship worth watching going forward, IMO. My leaning is to be a buyer if we can see selling dry up above the overnight lows; I also would not want to be chasing highs if we don't get a nice influx of volume. My usual strategy when I anticipate range bound trade is to identify (and keep updating) my estimate of the market's average trading price and fade moves away from that. Back after the open.
8:12 AM CT - And a very good morning to all. I'm getting a very nice response from experienced programmers who are interested in working with experienced traders in testing out trading ideas. As I've mentioned recently, this process can greatly help both parties. If you're a trader with some good ideas and would like to have those tweaked and expanded in a confidential fashion, do send me an email (address is on the TraderFeed home page under the heading "About Me") and I'll use the upcoming long weekend to help connect interested parties. Of course there's no charge or obligation; this is simply an effort to help traders expand skill sets and learn from each other. Ditto the "Open Mic" idea posted recently. If you'd like to co-lead a morning session and blog your ideas, setups, etc., do get in touch! Great way to build some visibility and share with others.
9:34 AM - Well, you can see why many traders sit out these expiration days. Let me show you something. Notice what happened to the TICK at 9:15 - 9:22 AM CT. We had several pushes down and selling dried up. A big trader tried to knock ES down around 9:21 AM, but no follow through. That should have been a fine time to enter long. And, yes, we did get a bounce. But then there was no follow through whatsoever. That's why I said I would just scalp trade. I could see the next couple of ticks, but not the next couple of points. But let's not blame all that on the market and expiration; it's time for the Doc to cure himself. Back on that topic in a min.
9:23 AM - Another phone call; just a bit too much distraction, I'm afraid. As a result, I'm done trading for the day. Some very whippy buy and sell programs hitting ER2; very tough to short-term trade. Note slow down in volume recently. Back in a few.
9:14 AM - Volume has remained quite healthy, so we're getting movement. I need to see price hold at higher lows on TICK pullbacks to think about the long side again. I don't have much downside conviction despite the break. My expectations may get the better of me, but I don't see this as a trend day in the making.
9:10 AM - Back after a phone call. My nibbling led to a couple of ticks, but as you can see, there wasn't anything more in the market than that as we broke below the preopen lows and sustained the negative TICK with ER2 leading the way down. No question I was leaning the wrong way in the market and should have been selling those bounces. Now watching to see if we re-enter that AM range vs. trend downward with expansion of volume.
8:54 AM - I am nibbling long on TICK pullbacks that hold above recent lows, but these will be scalp trades for me, so I won't post. Too quick to type them in a timely way. Just wanted to let you know my intentions.
8:50 AM - We may yet get the range trade and I may yet reenter that position, but the weakness in ER2 and NQ turned my risk reward upside down. Better a small loss than a possible significant one.
8:48 AM - Stopped out.
8:44 AM - Bought some ES tight stop.
8:35 AM - Solid volume to open, some related to expiration. Let's see how it goes from here. Leaning to long side if we don't fall out of bed in TICK and ER2.
8:27 AM - I'm showing 1458.75 in ES as the "point of contol" at which we've done the most volume lately, so will use that as my initial estimate of average trading price for this market and then will evaluate the strength and volume participation of moves away from this level for odds of continuation vs. reversal. This, BTW, will be an abbreviated trading (and blogging) session for me, as I have a writing project for my academic department in Syracuse that needs to be completed.
8:21 AM - OK, housing starts came in a bit weak; PPI was in line; and we have Michigan sentiment numbers coming out at 9:00 AM CT, but remember that subscribers to their service do get the data a bit early. We dipped as low as 1456 in ES overnight and now trade just a tad below yesterday's VWAP (pivots and VWAP published daily on the Weblog). With a 3 day weekend coming up and options expiration today, general expectations are for a slow, range bound day. A reader asked me to look into what happens after the Dow has been outperforming the Russell stocks. We've been up a bit more than 1% over the past five days in the Dow (DIA), but actually down over the same period in the Russell 2000 Index (IWM). That has happened 18 times since the start of 2004. The Dow, over the next week, has averaged a gain of .56% (9 up, 9 down), but the Russell has been especially impressive, averaging a gain of 1.11% (13 up, 5 down). In other words, when the Dow has been strong and Russell weak over a five-day period, the next five days in Russell have tended to play catchup. Note also the interesting stats on the Yen vs. the S&P in my latest post on the carry trade. That's definitely a relationship worth watching going forward, IMO. My leaning is to be a buyer if we can see selling dry up above the overnight lows; I also would not want to be chasing highs if we don't get a nice influx of volume. My usual strategy when I anticipate range bound trade is to identify (and keep updating) my estimate of the market's average trading price and fade moves away from that. Back after the open.
8:12 AM CT - And a very good morning to all. I'm getting a very nice response from experienced programmers who are interested in working with experienced traders in testing out trading ideas. As I've mentioned recently, this process can greatly help both parties. If you're a trader with some good ideas and would like to have those tweaked and expanded in a confidential fashion, do send me an email (address is on the TraderFeed home page under the heading "About Me") and I'll use the upcoming long weekend to help connect interested parties. Of course there's no charge or obligation; this is simply an effort to help traders expand skill sets and learn from each other. Ditto the "Open Mic" idea posted recently. If you'd like to co-lead a morning session and blog your ideas, setups, etc., do get in touch! Great way to build some visibility and share with others.
Is the Carry Trade Carrying the Stock Market?
When my wife and I bought our new house in Fayetteville, NY, we originally planned to make the purchase outright. We heard, however, of an adjustable rate mortgage with a very low initial teaser rate, no points, and no prepayment penalty. So we took out the mortgage, paid a couple points of interest, and kept our money in high yielding CDs for that year. Altogether we netted about 5% on our money with no downside risk.
Little did we know it back then, but we were engaging in a version of the "carry trade" now popular among institutional investors. Japan is acting as the generous world bank, offering money at very low interest rates. This enables investors to borrow Yen and invest money in the higher yielding debt markets, such as those of New Zealand. Those investors net several percent return essentially risk free.
An excellent summary of the carry trade is provided by Michael Shedlock, aka Mish. He reports, "The yen has thus been tantamount to the ATM of the global credit world – spewing out (almost) free cash."
This free cash has also encouraged riskier trading. After all, if I can go to my local bank and get very low interest loans, I can participate in the stock and commodity markets and pay very little for this new source of margin debt. This dynamic has helped lift multiple markets simultaneously, as we've had bull markets in equities, commodities, and fixed income markets.
An interesting view of the impact of the carry trade can be obtained by examining the relationship between the Yen/Dollar and the S&P 500 Index (both cash markets). Let's see what happens in stocks when the Yen is weak vs. strong.
Going back to 2003 (N = 1017 trading days), we have 380 occasions in which the Yen has been above its 10, 20, and 40 day moving averages. Twenty days following such Yen strength, the S&P 500 Index has been down by an average of -.40% (153 up, 227 down). A strong Yen has not been kind to stocks, perhaps because--reflecting interest rate firmness in Japan--it is associated with a more expensive carry trade.
Conversely, since 2003, we've had 394 occasions in which the Yen has been below its 10, 20, and 40 day moving averages. Twenty days later, the S&P 500 Index has been up by an average of .44% (222 up, 172 down). Returns have been more favorable following periods of weak vs. strong Yen, as we'd expect from the carry trade.
Since 2005, a strong Yen has been especially toxic for stocks. When the Yen has been above its three moving averages (N = 125), the next 20 days in the S&P 500 cash index have averaged a decline of -1.30% (34 up, 91 down). That is an amazingly negative performance during a bullish market period. Interestingly, however, weak Yen periods since 2005 have not been associated with the bullish edge that they possessed in 2003 and 2004. Indeed, 20 days following periods of Yen weakness, stocks have averaged a loss of -.15% (119 up, 146 down).
What this might suggest is that the U.S. equity market is obtaining diminishing returns from the carry trade. Stated otherwise, stocks might be growing more sensitive to an unwinding of the carry trade (via stronger Yen and higher rates in Japan) than to further Yen weakness. If that is the case, the carry trade may have more potential to carry us lower than higher.
Little did we know it back then, but we were engaging in a version of the "carry trade" now popular among institutional investors. Japan is acting as the generous world bank, offering money at very low interest rates. This enables investors to borrow Yen and invest money in the higher yielding debt markets, such as those of New Zealand. Those investors net several percent return essentially risk free.
An excellent summary of the carry trade is provided by Michael Shedlock, aka Mish. He reports, "The yen has thus been tantamount to the ATM of the global credit world – spewing out (almost) free cash."
This free cash has also encouraged riskier trading. After all, if I can go to my local bank and get very low interest loans, I can participate in the stock and commodity markets and pay very little for this new source of margin debt. This dynamic has helped lift multiple markets simultaneously, as we've had bull markets in equities, commodities, and fixed income markets.
An interesting view of the impact of the carry trade can be obtained by examining the relationship between the Yen/Dollar and the S&P 500 Index (both cash markets). Let's see what happens in stocks when the Yen is weak vs. strong.
Going back to 2003 (N = 1017 trading days), we have 380 occasions in which the Yen has been above its 10, 20, and 40 day moving averages. Twenty days following such Yen strength, the S&P 500 Index has been down by an average of -.40% (153 up, 227 down). A strong Yen has not been kind to stocks, perhaps because--reflecting interest rate firmness in Japan--it is associated with a more expensive carry trade.
Conversely, since 2003, we've had 394 occasions in which the Yen has been below its 10, 20, and 40 day moving averages. Twenty days later, the S&P 500 Index has been up by an average of .44% (222 up, 172 down). Returns have been more favorable following periods of weak vs. strong Yen, as we'd expect from the carry trade.
Since 2005, a strong Yen has been especially toxic for stocks. When the Yen has been above its three moving averages (N = 125), the next 20 days in the S&P 500 cash index have averaged a decline of -1.30% (34 up, 91 down). That is an amazingly negative performance during a bullish market period. Interestingly, however, weak Yen periods since 2005 have not been associated with the bullish edge that they possessed in 2003 and 2004. Indeed, 20 days following periods of Yen weakness, stocks have averaged a loss of -.15% (119 up, 146 down).
What this might suggest is that the U.S. equity market is obtaining diminishing returns from the carry trade. Stated otherwise, stocks might be growing more sensitive to an unwinding of the carry trade (via stronger Yen and higher rates in Japan) than to further Yen weakness. If that is the case, the carry trade may have more potential to carry us lower than higher.
Thursday, February 15, 2007
Open Mic: A TraderFeed Invitation
Well, it struck me that I talk a lot about being consistent in trading, but--as the fine folks at Despair.com note--that only matters if you're not consistently bad.Fortunately, there are many traders who read this blog who are not screwups, so I'd like to extend an invitation:
If you would like to be a morning host and post your ideas about how the market is trading, what trades you're making, etc., I will be very happy to turn the "mic" over to you for a session. What this means is that we'd have the possibility of learning from more people and seeing a variety of ways of approaching markets.
I'm open to traders who trade different instruments and time frames. Nor do you need to be a "Market Wizard" in order to post your ideas and trades. It just takes a willingness to share ideas, even when those come from losing trades. But all of us learn from how to take losers (and how to use losing trades as information), just as we can learn from winners.
So if you'd like to be a morning host or co-host for the market comments, I'll give you authorship access for the blog for that day. I might also comment on your comments (but will let you lead the way). And I look forward to being a student, too. If you're a blogger/trader, author, or trading coach, I'll be only too happy to use this site to highlight the good work that you do.
Don't be shy; let's learn from each other! My email address is at the right on the TraderFeed home page under the heading "About Me". Thanks for your interest and support--
Brett
Thursday, February 15th Morning Market Comments
10:34 AM - One quick note: I see that the Teach Me Futures site is hosting a presentation on business planning in trading from Joseph Mertes of Alexander Trading. That is after the market close today; registration required. John Conolly of Teach Me Futures does a fine job of attracting good Webinar presenters.
9:48 AM - OK, volume tailing off and my sense is that we'll oscillate around a mean trading price for the day. The only way I know to trade that kind of market is to wait for moves away from that mean and then wait for buying or selling to dry up and then enter in the direction back toward that mean for a short-term trade. I continue to be unimpressed with the price action in ER2. Takeaway lesson for the day is to try to figure out the type of day you're in as early as possible and adjust your trading accordingly. When I saw low volume early on, I went with the assumption of a range day and was willing to fade short term market moves for quick trades. By not allowing the trading of the last two days to color my view of what's happening today, I didn't try playing for big breakout moves, and that--so far--has paid off. If we get a downward shift in the distribution of the TICK, I'd be looking for TICK bounces to fade ER2, with the idea that we've put in a top for the day in that index. Hope that's been helpful; wrap up tonite on the Weblog. Have a great rest of your day!
9:39 AM - What happened there was that a buy program hit the ER2 stocks and you could see TICK jump as a result. I waited for that to pass, got the usual pullback that results when the buy programs aren't across the board and persistent, and then did my best to scratch the trade. I may reenter that short ER2 position on bounces that fail to take out the recent high.
9:36 AM - Out for small loss.
9:29 AM - Volume has slowed down, and I expect movement to do the same going forward.
9:23 AM - I'm short some Russells
9:18 AM - For these morning posts, folks, the specific trades I make are less important than the reasoning behind them. I'm trying to illustrate how to think about trading on a short-term basis by knowing price levels, volume patterns, and how correlated markets behave. It's not the only way to trade and, since Jack Schwager isn't banging my door down for another edition of Market Wizards, we can conclude it's not the *best* way to trade. But it has brought me consistent profitability ever since leaving my full-time position with the prop firm and just might supplement what you're already doing. But the idea is to take away what makes sense to you from these posts and then integrate into what you do best. The idea is not to try to imitate me, trade like me, etc. At some point, I'll use these sessions to try to illustrate longer-term trade setups and strategies (swing trades).
9:14 AM - Volume did turn up on the rise, but not anywhere near like yesterday. My leaning is to fade highs, esp if we see heaviness in ER2. In fact, my leaning is to short ER2 if continued bounces in TICK can't take that index higher. If volume tails off, I'd be just taking small profits on those positions. No major selling pressure in the TICK, but advances only slightly ahead of declines for the day and ES volume at offer vs. bid relatively even. Not how a trend day sets up.
9:04 AM - What happened with that trade is that I saw large traders stop selling ES as we hit that average trading price from Wed. Rates were down and we're still in a bull mode, so my idea was to go with that direction. Had we seen NQ and ER2 fall out of bed, I surely wouldn't have been long ES. In retrospect I could have held that position longer for a test of the Wed. highs, but was not impressed with volume and decided to take the quick profit. NQ and SMH looking strong here.
9:00 AM - Took profits again.
8:52 AM - Bought some ES; very tight stop.
8:46 AM - Volume continues quite modest; that also leads me to take smaller profits, anticipating smaller price moves and ranges.
8:44 AM - That was simply my old standby: if you get buying early and can't promptly test the overnight highs, look for a reversion back to the previous day's VWAP/pivot. We hit VWAP, I waited a bit to see if it would go further, decided to take what I got.
8:42 AM - Took profits.
8:37 AM - Short some ES here
8:35 AM - Pretty flat open, with subnormal volume. I'm on alert for a range day.
8:28 AM - Note that rates continue to tumble, and the dollar continues to weaken. That was supportive of stocks yesterday.
8:22 AM - And, oh yes, we have continued testimony from our Fed chief starting at 9:00 AM CT. That lit things up yesterday; no change in testimony expected, but some nuances might emerge from the different questions posed.
8:20 AM - OK, initial claims came in a bit high, but no major market impact. Yen is up across the board; I'll be posting on this topic tomorrow. With yesterday a strong day (up in price, expansion of 20-day new highs), I'd be looking to test yesterday's high in ES and the R1 level. I'm also aware, however, that we saw some selling in the broad market (esp. ER2) during the afternoon, which may well create some divergences at new price highs. I'll be watching for that, and especially watching to see if that selling spills over to the large caps to help us transition to a range bound trading mode. Remember: as VIX declines, we tend to see narrower trading ranges. I need ES to stay above 1456.25 (and preferably above the overnight lows) to sustain a bullish posture. Pivot targets once again are posted to the Weblog. Failure of buyers to take out the Wednesday high would target the day's pivot/VWAP as initial targets. Philly Fed is out at 11:00 AM. Here's a great article on that economic indicator from Briefing.com. Back after the open.
8:13 AM CT - And another good morning to you. Markets have held up reasonably well overnight after yesterday's jump on Fed testimony, lower rates, and a weaker dollar. We also dipped in option volatility; see my post this AM on that topic. If you've emailed me lately re: best practices, connecting with programmers/experienced traders, etc., I may not have yet gotten back to you. The inbox has been bulging lately, and I'm doing my best to keep up! I hope to get caught up by the end of the day today. Don't let that stop you from emailing me, however, if you're an experienced, successful trader who would like to expand your edge by connecting with an experienced programmer, or if you're an experienced programmer who would like to collaborate (and learn from) an experienced, successful trader. My email address is on the TraderFeed home page under the "About Me" heading. If you haven't read the best practice post on testing trade ideas, I encourage you to check it out; it's a source of edge that is easier to pursue than many people believe. Back with market overview shortly.
9:48 AM - OK, volume tailing off and my sense is that we'll oscillate around a mean trading price for the day. The only way I know to trade that kind of market is to wait for moves away from that mean and then wait for buying or selling to dry up and then enter in the direction back toward that mean for a short-term trade. I continue to be unimpressed with the price action in ER2. Takeaway lesson for the day is to try to figure out the type of day you're in as early as possible and adjust your trading accordingly. When I saw low volume early on, I went with the assumption of a range day and was willing to fade short term market moves for quick trades. By not allowing the trading of the last two days to color my view of what's happening today, I didn't try playing for big breakout moves, and that--so far--has paid off. If we get a downward shift in the distribution of the TICK, I'd be looking for TICK bounces to fade ER2, with the idea that we've put in a top for the day in that index. Hope that's been helpful; wrap up tonite on the Weblog. Have a great rest of your day!
9:39 AM - What happened there was that a buy program hit the ER2 stocks and you could see TICK jump as a result. I waited for that to pass, got the usual pullback that results when the buy programs aren't across the board and persistent, and then did my best to scratch the trade. I may reenter that short ER2 position on bounces that fail to take out the recent high.
9:36 AM - Out for small loss.
9:29 AM - Volume has slowed down, and I expect movement to do the same going forward.
9:23 AM - I'm short some Russells
9:18 AM - For these morning posts, folks, the specific trades I make are less important than the reasoning behind them. I'm trying to illustrate how to think about trading on a short-term basis by knowing price levels, volume patterns, and how correlated markets behave. It's not the only way to trade and, since Jack Schwager isn't banging my door down for another edition of Market Wizards, we can conclude it's not the *best* way to trade. But it has brought me consistent profitability ever since leaving my full-time position with the prop firm and just might supplement what you're already doing. But the idea is to take away what makes sense to you from these posts and then integrate into what you do best. The idea is not to try to imitate me, trade like me, etc. At some point, I'll use these sessions to try to illustrate longer-term trade setups and strategies (swing trades).
9:14 AM - Volume did turn up on the rise, but not anywhere near like yesterday. My leaning is to fade highs, esp if we see heaviness in ER2. In fact, my leaning is to short ER2 if continued bounces in TICK can't take that index higher. If volume tails off, I'd be just taking small profits on those positions. No major selling pressure in the TICK, but advances only slightly ahead of declines for the day and ES volume at offer vs. bid relatively even. Not how a trend day sets up.
9:04 AM - What happened with that trade is that I saw large traders stop selling ES as we hit that average trading price from Wed. Rates were down and we're still in a bull mode, so my idea was to go with that direction. Had we seen NQ and ER2 fall out of bed, I surely wouldn't have been long ES. In retrospect I could have held that position longer for a test of the Wed. highs, but was not impressed with volume and decided to take the quick profit. NQ and SMH looking strong here.
9:00 AM - Took profits again.
8:52 AM - Bought some ES; very tight stop.
8:46 AM - Volume continues quite modest; that also leads me to take smaller profits, anticipating smaller price moves and ranges.
8:44 AM - That was simply my old standby: if you get buying early and can't promptly test the overnight highs, look for a reversion back to the previous day's VWAP/pivot. We hit VWAP, I waited a bit to see if it would go further, decided to take what I got.
8:42 AM - Took profits.
8:37 AM - Short some ES here
8:35 AM - Pretty flat open, with subnormal volume. I'm on alert for a range day.
8:28 AM - Note that rates continue to tumble, and the dollar continues to weaken. That was supportive of stocks yesterday.
8:22 AM - And, oh yes, we have continued testimony from our Fed chief starting at 9:00 AM CT. That lit things up yesterday; no change in testimony expected, but some nuances might emerge from the different questions posed.
8:20 AM - OK, initial claims came in a bit high, but no major market impact. Yen is up across the board; I'll be posting on this topic tomorrow. With yesterday a strong day (up in price, expansion of 20-day new highs), I'd be looking to test yesterday's high in ES and the R1 level. I'm also aware, however, that we saw some selling in the broad market (esp. ER2) during the afternoon, which may well create some divergences at new price highs. I'll be watching for that, and especially watching to see if that selling spills over to the large caps to help us transition to a range bound trading mode. Remember: as VIX declines, we tend to see narrower trading ranges. I need ES to stay above 1456.25 (and preferably above the overnight lows) to sustain a bullish posture. Pivot targets once again are posted to the Weblog. Failure of buyers to take out the Wednesday high would target the day's pivot/VWAP as initial targets. Philly Fed is out at 11:00 AM. Here's a great article on that economic indicator from Briefing.com. Back after the open.
8:13 AM CT - And another good morning to you. Markets have held up reasonably well overnight after yesterday's jump on Fed testimony, lower rates, and a weaker dollar. We also dipped in option volatility; see my post this AM on that topic. If you've emailed me lately re: best practices, connecting with programmers/experienced traders, etc., I may not have yet gotten back to you. The inbox has been bulging lately, and I'm doing my best to keep up! I hope to get caught up by the end of the day today. Don't let that stop you from emailing me, however, if you're an experienced, successful trader who would like to expand your edge by connecting with an experienced programmer, or if you're an experienced programmer who would like to collaborate (and learn from) an experienced, successful trader. My email address is on the TraderFeed home page under the "About Me" heading. If you haven't read the best practice post on testing trade ideas, I encourage you to check it out; it's a source of edge that is easier to pursue than many people believe. Back with market overview shortly.
When Option Volatility is Low on a Relative and Absolute Basis
We recently made 20-day lows in the option volatility indicators for the NASDAQ 100 Index (VXN) and for the S&P 500 Index (VIX). In past posts, I've reported that option volatility captures how much opportunity is likely to be present for daytraders going forward, as low volatility is associated with more narrow trading ranges. It also defines the average size of gaps we're likely to see between the market close and open. When option volatility itself becomes volatile, we tend to see further volatility and bullish implications in the short run. Low option volatility readings tend to be associated with subnormal near-term market returns in the Dow , in the NASDAQ 100 Index, and also in the S&P 500 Index.
I went back to 2005 (N = 513 trading days) and found that the option volatility for the NASDAQ 100 Index (VXN) has varied on a closing basis between 25.73 and 12.61. We closed a bit above 15 on Wednesday, which places us on the low side of option volatility for this period.
When we've made a 20-day low in VXN (N = 60), the next five days in the NASDAQ 100 Index (QQQQ) have averaged a loss of -.28% (26 up, 34 down). That compares to an average five-day gain of .20% (249 up, 204 down) for the remainder of the sample. Once again we see that low option volatility is associated with subnormal returns in the near term.
If we break down those 20-day VXN lows by their absolute VXN values based on a median split, the pattern is even more stark. When we make a 20-day VXN low and VXN is in the lower half of its range of values for those occasions, the next five days in QQQQ average a loss of -.55% (10 up, 20 down). When we make a 20-day VXN low and VXN is in the upper half of its range of values for those occasions, the next five days in QQQQ average a loss of only -.01% (16 up, 14 down). In other words, it's when VXN is low on a relative and on an absolute basis that we see the weakest short-term market returns.
Now let's see how that pattern shapes up in the S&P 500 Index. I note that, since 2005, we have varied between a VIX level of 23.81 and 9.9. That puts our most recent reading of 10.23 on the very low end of the continuum.
Since 2005, we've had 63 occasions in which S&P 500 Index option volatility (VIX) has made a closing 20-day low. (On Wednesday we hit a 20-day low intraday, but did not close at such a low). Five days later, the S&P 500 Index (SPY) has averaged a loss of -.01% (34 up, 29 down). Across all other occasions, SPY has averaged a five-day gain of .22% (266 up, 184 down). Once again, we see inferior near-term returns following 20-day lows in option volatility.
When we again split the 20-day low occasions in half based on absolute VIX level, we once again see the pattern highlighted. When we've had a 20-day low in VIX and VIX has been in the lower half of its range of values for those occasions (N = 31), the next five days in SPY have averaged a loss of -.28% (14 up, 17 down). When we've had a 20-day low in VIX and VIX has been in the upper half of its range of values for those occasions (N = 32), the next five days in SPY have averaged a gain of .10% (20 up, 12 down).
It thus appears that when option volatility is low on a relative basis but also in absolute terms that we have the weakest returns in the short run. Further declines in option volatility would put us at those levels in both the NASDAQ 100 and S&P 500 markets and would have me looking for consolidation and/or a short-term pullback.
I went back to 2005 (N = 513 trading days) and found that the option volatility for the NASDAQ 100 Index (VXN) has varied on a closing basis between 25.73 and 12.61. We closed a bit above 15 on Wednesday, which places us on the low side of option volatility for this period.
When we've made a 20-day low in VXN (N = 60), the next five days in the NASDAQ 100 Index (QQQQ) have averaged a loss of -.28% (26 up, 34 down). That compares to an average five-day gain of .20% (249 up, 204 down) for the remainder of the sample. Once again we see that low option volatility is associated with subnormal returns in the near term.
If we break down those 20-day VXN lows by their absolute VXN values based on a median split, the pattern is even more stark. When we make a 20-day VXN low and VXN is in the lower half of its range of values for those occasions, the next five days in QQQQ average a loss of -.55% (10 up, 20 down). When we make a 20-day VXN low and VXN is in the upper half of its range of values for those occasions, the next five days in QQQQ average a loss of only -.01% (16 up, 14 down). In other words, it's when VXN is low on a relative and on an absolute basis that we see the weakest short-term market returns.
Now let's see how that pattern shapes up in the S&P 500 Index. I note that, since 2005, we have varied between a VIX level of 23.81 and 9.9. That puts our most recent reading of 10.23 on the very low end of the continuum.
Since 2005, we've had 63 occasions in which S&P 500 Index option volatility (VIX) has made a closing 20-day low. (On Wednesday we hit a 20-day low intraday, but did not close at such a low). Five days later, the S&P 500 Index (SPY) has averaged a loss of -.01% (34 up, 29 down). Across all other occasions, SPY has averaged a five-day gain of .22% (266 up, 184 down). Once again, we see inferior near-term returns following 20-day lows in option volatility.
When we again split the 20-day low occasions in half based on absolute VIX level, we once again see the pattern highlighted. When we've had a 20-day low in VIX and VIX has been in the lower half of its range of values for those occasions (N = 31), the next five days in SPY have averaged a loss of -.28% (14 up, 17 down). When we've had a 20-day low in VIX and VIX has been in the upper half of its range of values for those occasions (N = 32), the next five days in SPY have averaged a gain of .10% (20 up, 12 down).
It thus appears that when option volatility is low on a relative basis but also in absolute terms that we have the weakest returns in the short run. Further declines in option volatility would put us at those levels in both the NASDAQ 100 and S&P 500 markets and would have me looking for consolidation and/or a short-term pullback.
Wednesday, February 14, 2007
Wednesday, February 14th Morning Market Comments
10:27 AM - Until we can attract sellers, you have to lean long on pullbacks. That's what happened with that last trade. Once ER2 started holding its pullback lows and TICK couldn't get much below zero, I concluded that sellers were drying up and expected another run at the highs. The distribution of the TICK is quite positive, and it doesn't make sense to fight that. A psychology takeaway for today is to not make regret part of your trading repertoire. I missed the big upmove on the economic news because I was busy managing to get out of a small ER2 short position. I wasn't aligned with the trend and missed the move. I didn't get angry or frustrated and didn't chase highs. I waited for the pullback and stabilization and found an entry. I'm not as profitable as I would have been had I been long from the open, but neither did I succumb to revenge trading/frustration/regret. There will always be another day and another trade. Keep losses reasonable and your opportunity will come. Just a couple of good opportunities per trading day can make a career; the important thing is to capitalize on those, not to regret the moves not traded. Have a great rest of the day; wrap up tonite on the Weblog.
10:15 AM - Wasn't seeing big influx of volume as before and ER2 still isn't looking great, so I decided to take the sure thing. Back for wrap up shortly.
10:14 AM - Took profits here.
10:04 AM - Still consolidating after the big rise. As long as we don't see an influx of sellers in TICK and ER2, my inclination is to hang with a long bias for a test of highs.
9:52 AM - We continue to sell down toward that zero TICK area on reduced volume; so far more a pullback of buyers than an influx of sellers, which is why I'm willing to stick with the initial long position.
9:40 AM - Long some ES here, but again, tight stop on an initial position.
9:33 AM - It would not at all surprise me to see new highs in ES as we move forward; I'd lean toward using such upmoves to unload longs rather than chase highs if we continue to see relative weakness in ER2.
9:29 AM - Watching ER2 carefully for non-confirmations of any move toward highs in the other indices.
9:23 AM - TICK remains positive, so I am not selling, but I want to see what buyers have left before we're off to new highs across the board. Note some selling in semiconductors. We're either going to break big to the upside here or fall back into the longer-term trading range. I'm sitting back handicapping that.
9:15 AM - With us knocking at the door of highs in ES and ER2, I'm looking to see if the higher prices *sustain* this buying interest. If we started getting TICK upmoves that fail to make new price highs, I'd be cautious chasing the upside and might even try a scalp trade short. I'm not going to post anything I do in that scalping vein; just can't post it quickly enough.
9:09 AM - Extremely high volume and high TICK; those TICK pullbacks are the buying areas as long as this persists.
9:06 AM - As long as we see the positive TICK distribution and relative strength in ER2 and NQ, I would not be short this market.
9:05 AM - Big drop in rates, drop in dollar vs. Euro, rally in stocks. Don't think the market is expecting Fed tightening!
9:04 AM - Note we are knocking on the door of new highs in ES. Let's see how we react to that level.
9:02 AM - Clear upside breakout in TICK and averages vs. their AM ranges; need to stay above those ranges to be buying on TICK pullbacks.
9:01 AM - Had to scramble to get out when ER2 sold but other indices stayed firm. One problem posting my trades is that I can't execute and blog quick enough to stay very timely.
8:59 AM - Took quick profit
8:55 AM - Narrow range ahead of the testimony, cross currents, but no real direction. Not adding to my position at this time. Need more evidence of selling in TICK.
8:46 AM - Short some ER2 on TICK bounce; tight stop.
8:40 AM - Note we are well back inside Tuesday range in ER2.
8:36 AM - Seeing a bit of early buying and relative strength in NQ; not much in ER2. Mixed bag thus far, with the tilt toward buyers in the TICK. Volume is healthy so far.
8:26 AM - 1449 is the low end of the overnight range; 1451.50 is the upper end. I like to track how we trade early in the day relative to that range to see how much fresh buying or selling is entering the market early. In that sense, I treat the overnight/preopen range just like any range and look for breakout vs. "mean reversion" moves based on volume and its distribution.
8:18 AM CT - And a very good Valentine's morning to you! The snow has moved eastward and soon we'll all be digging ourselves out of winter's fury--even my former stomping grounds in Upstate New York, which (in some areas) got 12 *feet* of snow recently. Homeowners were frantically shoveling off their *rooftops* to avoid the pressure of the gathering snow. No such snowing under yesterday, as stocks started strong and, despite lagging NQ and ER2 through much of the day, still registered healthy gains. We closed near the day's highs and now are trading yet higher, awaiting the 9:00 AM CT Congressional testimony of Fed Chair Bernanke. It would not surprise me to see some slow, rangebound trade ahead of that testimony. It would also surprise me to see testimony that differs significantly from recent Fed minutes and statements. We're getting a bit of dollar weakness vs. Euro, and interest rates dipped on the retail sales news, which was weaker than expected at unchanged. 9:00 AM CT we have business inventories and 9:30 we have crude oil inventory data. Normal expectations for a strong day are to at least test the R1 pivot level (pivots are posted daily to the Weblog) in follow through trade. Failure to do so would target the Tuesday pivot/VWAP. Do check out the Best Practice post this AM: there's a link to an article by Henry Carstens that is a phenomenal introduction to developing and testing trading ideas. I immediately talked with Henry by phone after reading his article and told him he had outdone himself. Thanks to everyone so far who has submitted a Best Practice! Back after the open.
10:15 AM - Wasn't seeing big influx of volume as before and ER2 still isn't looking great, so I decided to take the sure thing. Back for wrap up shortly.
10:14 AM - Took profits here.
10:04 AM - Still consolidating after the big rise. As long as we don't see an influx of sellers in TICK and ER2, my inclination is to hang with a long bias for a test of highs.
9:52 AM - We continue to sell down toward that zero TICK area on reduced volume; so far more a pullback of buyers than an influx of sellers, which is why I'm willing to stick with the initial long position.
9:40 AM - Long some ES here, but again, tight stop on an initial position.
9:33 AM - It would not at all surprise me to see new highs in ES as we move forward; I'd lean toward using such upmoves to unload longs rather than chase highs if we continue to see relative weakness in ER2.
9:29 AM - Watching ER2 carefully for non-confirmations of any move toward highs in the other indices.
9:23 AM - TICK remains positive, so I am not selling, but I want to see what buyers have left before we're off to new highs across the board. Note some selling in semiconductors. We're either going to break big to the upside here or fall back into the longer-term trading range. I'm sitting back handicapping that.
9:15 AM - With us knocking at the door of highs in ES and ER2, I'm looking to see if the higher prices *sustain* this buying interest. If we started getting TICK upmoves that fail to make new price highs, I'd be cautious chasing the upside and might even try a scalp trade short. I'm not going to post anything I do in that scalping vein; just can't post it quickly enough.
9:09 AM - Extremely high volume and high TICK; those TICK pullbacks are the buying areas as long as this persists.
9:06 AM - As long as we see the positive TICK distribution and relative strength in ER2 and NQ, I would not be short this market.
9:05 AM - Big drop in rates, drop in dollar vs. Euro, rally in stocks. Don't think the market is expecting Fed tightening!
9:04 AM - Note we are knocking on the door of new highs in ES. Let's see how we react to that level.
9:02 AM - Clear upside breakout in TICK and averages vs. their AM ranges; need to stay above those ranges to be buying on TICK pullbacks.
9:01 AM - Had to scramble to get out when ER2 sold but other indices stayed firm. One problem posting my trades is that I can't execute and blog quick enough to stay very timely.
8:59 AM - Took quick profit
8:55 AM - Narrow range ahead of the testimony, cross currents, but no real direction. Not adding to my position at this time. Need more evidence of selling in TICK.
8:46 AM - Short some ER2 on TICK bounce; tight stop.
8:40 AM - Note we are well back inside Tuesday range in ER2.
8:36 AM - Seeing a bit of early buying and relative strength in NQ; not much in ER2. Mixed bag thus far, with the tilt toward buyers in the TICK. Volume is healthy so far.
8:26 AM - 1449 is the low end of the overnight range; 1451.50 is the upper end. I like to track how we trade early in the day relative to that range to see how much fresh buying or selling is entering the market early. In that sense, I treat the overnight/preopen range just like any range and look for breakout vs. "mean reversion" moves based on volume and its distribution.
8:18 AM CT - And a very good Valentine's morning to you! The snow has moved eastward and soon we'll all be digging ourselves out of winter's fury--even my former stomping grounds in Upstate New York, which (in some areas) got 12 *feet* of snow recently. Homeowners were frantically shoveling off their *rooftops* to avoid the pressure of the gathering snow. No such snowing under yesterday, as stocks started strong and, despite lagging NQ and ER2 through much of the day, still registered healthy gains. We closed near the day's highs and now are trading yet higher, awaiting the 9:00 AM CT Congressional testimony of Fed Chair Bernanke. It would not surprise me to see some slow, rangebound trade ahead of that testimony. It would also surprise me to see testimony that differs significantly from recent Fed minutes and statements. We're getting a bit of dollar weakness vs. Euro, and interest rates dipped on the retail sales news, which was weaker than expected at unchanged. 9:00 AM CT we have business inventories and 9:30 we have crude oil inventory data. Normal expectations for a strong day are to at least test the R1 pivot level (pivots are posted daily to the Weblog) in follow through trade. Failure to do so would target the Tuesday pivot/VWAP. Do check out the Best Practice post this AM: there's a link to an article by Henry Carstens that is a phenomenal introduction to developing and testing trading ideas. I immediately talked with Henry by phone after reading his article and told him he had outdone himself. Thanks to everyone so far who has submitted a Best Practice! Back after the open.
Testing Your Trading Ideas: A Best Practice in Trading
Note: I'm doing the writeup, but credit this idea to professional trader and system developer Henry Carstens. His article linked below is one of the best trading articles I have ever read. If you recall, Henry is the developer who worked with one of the blog readers to develop his trading edge. From that interaction, we learned quite a bit about what it takes to succeed at trading. Most important, we saw that the partnership of programmers and traders is of benefit to both: traders learn which of their ideas work best (and how they can be improved), and developers gain new market insights from experienced traders. For that reason, today's Best Practice is to test your trading ideas, either by learning one of the testing platforms yourself or by partnering with a programmer already familiar with the testing process. At the end of this post, you'll see how Henry's article can help you take steps in these directions.
Brett
Traders often think of trades in terms of "setups". These are conditions that have to be met in order to enter the market. A setup typically defines a situation in which demand and supply become sufficiently imbalanced that they lead to directional market movement. A setup can be defined as a configuration in an oscillator, a chart pattern, or an indicator reading.
Of course, much more goes into a trade idea than the initial setup. There is also the issue of money management: how much capital to allocate to the trade, and there is the issue of exiting the setup once entered. Traders also typically address the issue of stop loss points--where to get out when a trade turns out poorly--and they also make assumptions about which trading instruments to utilize in pursuing the setup.
As you can see, there are many different components to a trade. When we review our P/L, we tend to attribute our results to our setups. But that isn't necessarily accurate. Our results are also a function of our money management, our stops, and our exit criteria. Results also vary as a function of *what* we trade, not just how we trade it.
This is a major challenge for the discretionary trader. We might be making money--or just approaching profitability--but we don't really know which parts of our trading are working for us and which aren't. Because we don't know if our setups, exits, stops, etc. are holding us back or contributing to our success, it is difficult to maximize our performance.
That's where testing our trading ideas comes into play. When we test ideas, we go back into recent history and see, first hand, how each component of our trading contributes to P/L. Very often, as was the case with the recent trader, we find that our ideas work for us, but still can be improved. Sometimes we find that what we thought was working really isn't adding to our success. A while back, for instance, I tested my morning setups and found they were working better in the Russell futures than in the S&P 500. As a result, I commonly place trades in both markets, which has improved my profitability.
The prospect of testing trading ideas is daunting for many traders, who might be intimidated by the programming. Current platforms, however, make such testing easier than ever. This article by Henry Carstens is the clearest summary of how to test ideas that I've yet encountered. I strongly recommend it as reading for any trader who wants to better understand what goes into good trading ideas. There are also sections on how to test the significance of trading ideas and how to optimally allocate capital to those ideas. An additional, fantastic feature of the article is the template at the end, written in TradeStation code, than enables you to drop in your ideas and test them out for yourself!
If you've been successful with your ideas but don't want to tackle the programming yourself, consider teaming up with an experienced programmer. To help traders with this challenge, I will collect names and contact information from all experienced traders and experienced programmers who might want to collaborate. Simply email me at the address given at the right side of the TraderFeed homepage (under the section "About Me") and I will do my best to get you connected.
My goal is not just to help traders learn, but to help traders learn from their own experience and from each other. Henry's idea of using testing to sharpen our trading is a great way to move ourselves to the next level of performance. That's why I consider it a "best practice".
Brett
Traders often think of trades in terms of "setups". These are conditions that have to be met in order to enter the market. A setup typically defines a situation in which demand and supply become sufficiently imbalanced that they lead to directional market movement. A setup can be defined as a configuration in an oscillator, a chart pattern, or an indicator reading.
Of course, much more goes into a trade idea than the initial setup. There is also the issue of money management: how much capital to allocate to the trade, and there is the issue of exiting the setup once entered. Traders also typically address the issue of stop loss points--where to get out when a trade turns out poorly--and they also make assumptions about which trading instruments to utilize in pursuing the setup.
As you can see, there are many different components to a trade. When we review our P/L, we tend to attribute our results to our setups. But that isn't necessarily accurate. Our results are also a function of our money management, our stops, and our exit criteria. Results also vary as a function of *what* we trade, not just how we trade it.
This is a major challenge for the discretionary trader. We might be making money--or just approaching profitability--but we don't really know which parts of our trading are working for us and which aren't. Because we don't know if our setups, exits, stops, etc. are holding us back or contributing to our success, it is difficult to maximize our performance.
That's where testing our trading ideas comes into play. When we test ideas, we go back into recent history and see, first hand, how each component of our trading contributes to P/L. Very often, as was the case with the recent trader, we find that our ideas work for us, but still can be improved. Sometimes we find that what we thought was working really isn't adding to our success. A while back, for instance, I tested my morning setups and found they were working better in the Russell futures than in the S&P 500. As a result, I commonly place trades in both markets, which has improved my profitability.
The prospect of testing trading ideas is daunting for many traders, who might be intimidated by the programming. Current platforms, however, make such testing easier than ever. This article by Henry Carstens is the clearest summary of how to test ideas that I've yet encountered. I strongly recommend it as reading for any trader who wants to better understand what goes into good trading ideas. There are also sections on how to test the significance of trading ideas and how to optimally allocate capital to those ideas. An additional, fantastic feature of the article is the template at the end, written in TradeStation code, than enables you to drop in your ideas and test them out for yourself!
If you've been successful with your ideas but don't want to tackle the programming yourself, consider teaming up with an experienced programmer. To help traders with this challenge, I will collect names and contact information from all experienced traders and experienced programmers who might want to collaborate. Simply email me at the address given at the right side of the TraderFeed homepage (under the section "About Me") and I will do my best to get you connected.
My goal is not just to help traders learn, but to help traders learn from their own experience and from each other. Henry's idea of using testing to sharpen our trading is a great way to move ourselves to the next level of performance. That's why I consider it a "best practice".
Tuesday, February 13, 2007
Replaying the Trading Day: A Best Practice in Trading
Note: Today's Best Practice post is from reader Bonnie Lee Hill, who has shared with me a number of insights and perspectives into what makes a trader successful. Below is Bonnie's post; I follow it with a few observations of my own. Her premise is that you can improve your learning of markets by increasing your exposure to trading patterns.
Since trading is a performance art, a trader must practice his craft. A trader needs time to trade, research, test his ideas, update his trading journal, etc. There are not enough hours in the day (unless you are a FOREX trader who never sleeps :-) I daytrade the QQQQ, and require a lot of screen time. I have found a way to become more efficient. I can replay any day's trading action. The replay can occur at any desired speed -- normal, 2X, 10X, etc. This allows me to increase my amount of "screen time".
I can use my replay time in many different ways. I can test a new idea on randomly selected days. In this situation, yesterday's market action can not be used to help me trade "today". I can study a particular situation in the market. For instance, I can replay all the FOMC days in one study session. This helps me to see the "pattern" in that volatile day. I can replay all the Options Expiration Fridays as a group. I also have a group of Congestion Days. These are the days in which a trader may try to force a trade. These days are a very good test of a new idea or indicator.I have a group of Runaway Days. These are the days in which the market can leave the trader behind. Again, these days are great for testing a new idea or indicator.
I also practice the same trading day at multiple speeds. There are times at which the market may seem too fast for me to handle. I can replay trading days at faster speeds. Let's assume I replayed several trading days at the 10X speed. The next actual trading day seems to move very slowly. The market didn't "slow down", I "speeded up" :-)
A playback (or simulation) feature should be included in a good charting package. I am using the Playback feature of Ensign Software. The website maintains a collection of Playback files which can be downloaded by the user. The user can also generate a Playback file for anything he wishes to study.
If you are interested in studying this technique, here are a few links:
Playback Instructions
Video which describes how to use the Playback files
An article on Playback
How to open the Demo chart
Bonnie Lee Hill
From Brett: This is truly an excellent feature and aid to learning. What makes this a best practice in my view is the archiving of particular market days, such as FOMC days or breakout days. This enables traders to concentrate their practice and achieve months' worth of experience is a single learning session. The ability to speed up the market's action is also a very useful tool for sharpening rapid perception and judgment. It reminds me of basketball drills in which we used to take 25-30 foot jump shots, one after another. That made the standard 20 foot 3-point shot look like a layup! For the active trader, speed of mental processing is a core skill. By practicing at different speeds, a trader can actively work on cultivating that speed. Thanks, Bonnie, for the excellent ideas! I welcome comments to this post if traders have ideas of their own to add.
Since trading is a performance art, a trader must practice his craft. A trader needs time to trade, research, test his ideas, update his trading journal, etc. There are not enough hours in the day (unless you are a FOREX trader who never sleeps :-) I daytrade the QQQQ, and require a lot of screen time. I have found a way to become more efficient. I can replay any day's trading action. The replay can occur at any desired speed -- normal, 2X, 10X, etc. This allows me to increase my amount of "screen time".
I can use my replay time in many different ways. I can test a new idea on randomly selected days. In this situation, yesterday's market action can not be used to help me trade "today". I can study a particular situation in the market. For instance, I can replay all the FOMC days in one study session. This helps me to see the "pattern" in that volatile day. I can replay all the Options Expiration Fridays as a group. I also have a group of Congestion Days. These are the days in which a trader may try to force a trade. These days are a very good test of a new idea or indicator.I have a group of Runaway Days. These are the days in which the market can leave the trader behind. Again, these days are great for testing a new idea or indicator.
I also practice the same trading day at multiple speeds. There are times at which the market may seem too fast for me to handle. I can replay trading days at faster speeds. Let's assume I replayed several trading days at the 10X speed. The next actual trading day seems to move very slowly. The market didn't "slow down", I "speeded up" :-)
A playback (or simulation) feature should be included in a good charting package. I am using the Playback feature of Ensign Software. The website maintains a collection of Playback files which can be downloaded by the user. The user can also generate a Playback file for anything he wishes to study.
If you are interested in studying this technique, here are a few links:
Playback Instructions
Video which describes how to use the Playback files
An article on Playback
How to open the Demo chart
Bonnie Lee Hill
From Brett: This is truly an excellent feature and aid to learning. What makes this a best practice in my view is the archiving of particular market days, such as FOMC days or breakout days. This enables traders to concentrate their practice and achieve months' worth of experience is a single learning session. The ability to speed up the market's action is also a very useful tool for sharpening rapid perception and judgment. It reminds me of basketball drills in which we used to take 25-30 foot jump shots, one after another. That made the standard 20 foot 3-point shot look like a layup! For the active trader, speed of mental processing is a core skill. By practicing at different speeds, a trader can actively work on cultivating that speed. Thanks, Bonnie, for the excellent ideas! I welcome comments to this post if traders have ideas of their own to add.
Tuesday, February 13th Morning Market Comments
9:59 AM - We continue to see weakness in ER2 and NQ, and that keeps me out of the long side in the large caps. Note the transition we made from solid buying to mixed performance on new highs (small caps, semis, NQ underperforming) to reduced volume on buying to outright selling. Those transitions are what you want to be sensitive to in handicapping the odds that market moves will continue vs. reverse. Note how, with the inability to sustain the price highs relative to Monday, we fell back into the Monday range and back toward average trading prices from Monday in the 3 indices. The key to identifying that, as you review charts tonite, is the reduced volume on TICK upthrusts and especially the reduced lifting of offers in the Market Delta chart. That has led to increased downside volume and outright selling. We'll need to see a similar transition, with selling drying up, before we can again take the long side. Hope this has been helpful; have a great remainder of the day. Update tonite on the Weblog.
9:53 AM - Just not a lot of buying volume here so far. I need to see that *before* committing to a position. I'll wrap up in a few.
9:46 AM - Watching 5 min Market Delta to see if we can put in a short-term bottom here. If so, I'd expect to take out the day's highs. What I need to see on buying, however, is expanded volume. So far, volume has turned anemic on buying.
9:40 AM - A reader just passed along this tool for assessing market trend in ES. Much thanks. Note that we really haven't had extensive selling in TICK, just a lack of follow through in buying. Energy issues continue strong; semis weak.
9:36 AM - Note weakness in semis.
9:35 AM - Very nice volume lesson right there. If a move cannot attract fresh volume, the odds of reversal are quite high. Looking to see if we put in a short-term top in ER2 and NQ.
9:30 AM - Volume has tailed off substantially here. One of the reasons I've stayed profitable is that I'm willing to sit and not trade. I wasn't seeing consistent buying across the indices once ES broke the Monday highs, so I took what the market gave and just sat back. The buying right now is on reduced volume; let's see if new buyers commit and sustain the move.
9:23 AM - Seeing weakness in NQ and semis. I'm out and need to see these rises in TICK produce better price action before I'd get long again.
9:12 AM - Got a high in the Dow and ES, but not ER2 or NQ so far. I use the TICK pullbacks as buying opportunities as long as they come at higher price levels. If we get a TICK surge and we see non-confirmations, I take quick profits.
9:06 AM - If we break that 811.40 low in ER2, I'd be more cautious about the long side. NQ looking a bit heavy. Need to stay above 1793.5.
9:05 AM - My trade idea was to take out the prior day's high and that also got me out for a very short-term trade. I'm still viewing pullbacks as buying opportunities as long as we stay above the AM lows.
9:00 AM - Took profits, ready to re-enter if we get better ER2 action.
8:55 AM - ER2 having some trouble catching a bid, now getting selling; watching closely.
8:47 AM - I'm using weakness to gradually add ES. Tight stops.
8:40 AM - Targeting the Monday highs in ES; already there in ER2 and NQ.
8:38 AM - Energy stocks strong; semiconductors falling back into Monday range. Advancers lead declines by well over 1000 issues. Solid open.
8:35 AM - Solid buying out of the gate across the three indices. Note that we're very close to taking out Monday's high in ER2. Volume is above average for this time of day, which shows institutional involvement in picking up bargains. I'm looking at that 1438 low as the potential low for the extended trading session, which would have me buying dips.
8:23 AM - I'm looking to see if we can hold that 1438 overnight low; 1440.75 is the overnight high thus far. We're trading pretty much in the thick of the market's value area, so my leaning is to wait for tests of the edges of the overnight range before entering. Thanks to a reader (and excellent trader) for passing along this link for following world markets. If there are other tools you find helpful in tracking markets, do email me and I'll be happy to pass along. I find the Economic Calendar at Briefing.com to be a useful resource. It summarizes the economic reports due out and the expectations for those. See ya in a bit.
8:12 AM CT - Good morning! Chicago is pretty well shut down because of the snow, and I'm still fighting off this flu, but maybe we'll get some warmth and cheer from the markets. I just posted some expectations following weak market days, so that will help guide my thinking in early trading. We're currently trading above the pivot level and VWAP from Monday (posted on the Weblog, along with other pivot-based targets), so basically, we want to see if buying can keep us above that benchmark. If so, we'll target Monday's high; if not, we'll look for a test of those average prices and then a test of Monday's low. My general leaning is to be a buyer if we see selling dry up above Monday's lows and to be a seller if buying cannot sustain a move above Monday's average trading price. No big movement from the Trade Deficit number; no other big numbers scheduled for today. Thanks to all those who have submitted "best practice" ideas: I'll be posting those, one a day, for the next several days. Great stuff; I really appreciate the willingness to share ideas and collaborate. Back after the open.
9:53 AM - Just not a lot of buying volume here so far. I need to see that *before* committing to a position. I'll wrap up in a few.
9:46 AM - Watching 5 min Market Delta to see if we can put in a short-term bottom here. If so, I'd expect to take out the day's highs. What I need to see on buying, however, is expanded volume. So far, volume has turned anemic on buying.
9:40 AM - A reader just passed along this tool for assessing market trend in ES. Much thanks. Note that we really haven't had extensive selling in TICK, just a lack of follow through in buying. Energy issues continue strong; semis weak.
9:36 AM - Note weakness in semis.
9:35 AM - Very nice volume lesson right there. If a move cannot attract fresh volume, the odds of reversal are quite high. Looking to see if we put in a short-term top in ER2 and NQ.
9:30 AM - Volume has tailed off substantially here. One of the reasons I've stayed profitable is that I'm willing to sit and not trade. I wasn't seeing consistent buying across the indices once ES broke the Monday highs, so I took what the market gave and just sat back. The buying right now is on reduced volume; let's see if new buyers commit and sustain the move.
9:23 AM - Seeing weakness in NQ and semis. I'm out and need to see these rises in TICK produce better price action before I'd get long again.
9:12 AM - Got a high in the Dow and ES, but not ER2 or NQ so far. I use the TICK pullbacks as buying opportunities as long as they come at higher price levels. If we get a TICK surge and we see non-confirmations, I take quick profits.
9:06 AM - If we break that 811.40 low in ER2, I'd be more cautious about the long side. NQ looking a bit heavy. Need to stay above 1793.5.
9:05 AM - My trade idea was to take out the prior day's high and that also got me out for a very short-term trade. I'm still viewing pullbacks as buying opportunities as long as we stay above the AM lows.
9:00 AM - Took profits, ready to re-enter if we get better ER2 action.
8:55 AM - ER2 having some trouble catching a bid, now getting selling; watching closely.
8:47 AM - I'm using weakness to gradually add ES. Tight stops.
8:40 AM - Targeting the Monday highs in ES; already there in ER2 and NQ.
8:38 AM - Energy stocks strong; semiconductors falling back into Monday range. Advancers lead declines by well over 1000 issues. Solid open.
8:35 AM - Solid buying out of the gate across the three indices. Note that we're very close to taking out Monday's high in ER2. Volume is above average for this time of day, which shows institutional involvement in picking up bargains. I'm looking at that 1438 low as the potential low for the extended trading session, which would have me buying dips.
8:23 AM - I'm looking to see if we can hold that 1438 overnight low; 1440.75 is the overnight high thus far. We're trading pretty much in the thick of the market's value area, so my leaning is to wait for tests of the edges of the overnight range before entering. Thanks to a reader (and excellent trader) for passing along this link for following world markets. If there are other tools you find helpful in tracking markets, do email me and I'll be happy to pass along. I find the Economic Calendar at Briefing.com to be a useful resource. It summarizes the economic reports due out and the expectations for those. See ya in a bit.
8:12 AM CT - Good morning! Chicago is pretty well shut down because of the snow, and I'm still fighting off this flu, but maybe we'll get some warmth and cheer from the markets. I just posted some expectations following weak market days, so that will help guide my thinking in early trading. We're currently trading above the pivot level and VWAP from Monday (posted on the Weblog, along with other pivot-based targets), so basically, we want to see if buying can keep us above that benchmark. If so, we'll target Monday's high; if not, we'll look for a test of those average prices and then a test of Monday's low. My general leaning is to be a buyer if we see selling dry up above Monday's lows and to be a seller if buying cannot sustain a move above Monday's average trading price. No big movement from the Trade Deficit number; no other big numbers scheduled for today. Thanks to all those who have submitted "best practice" ideas: I'll be posting those, one a day, for the next several days. Great stuff; I really appreciate the willingness to share ideas and collaborate. Back after the open.
Weak Day in the Stock Market: What Comes Next?
In a recent post, I found that, in the trading session following a day of broad downside momentum, markets tend to take out that day's lows. That led me to short the market in early trade on Monday, which followed the historical scenario quite nicely. As it turns out, Monday also finished as a weak day in the stock market. By that, I mean that Monday: a) was a down day in the S&P 500 Index (SPY); b) closed in the bottom half of its daily range; and c) had a level of stocks making new 20-day highs minus new 20-day lows lower than the day previous.
Going back to 2004 (N = 776 trading days), I found 206 occasions meeting the above criteria of weakness. Out of those, we broke the prior day's lows on 131 occasions during the follow day of trade in SPY or nearly 2/3 of the time. Conversely, during the remainder of occasions in the sample (N = 570), we broke the prior day's lows 220 times, or about 40% of the time. This fits with the earlier research: weakness tends to follow through in the short run during the next trading session.
Once again, however, by the end of the next day's trading, that downside edge is lost: the market closes up 112 times and down on 94 occasions for an average gain of .05%--no bearish edge at all. Indeed, if we look three days out from a weak day, SPY averages a gain of .20% (123 up, 83 down), stronger than the average three-day gain of .07% (315 up, 255 down) for the remainder of the sample. What that means is that downside follow through after weakness has been very short term on average. Several days out, SPY has tended to rebound following such weakness.
These ideas will again inform my trading on Tuesday. By handicapping the odds of hitting key price levels--and determining the likelihood that moves will continue vs. reverse--we can develop a basic road map for the coming day's activity.
Going back to 2004 (N = 776 trading days), I found 206 occasions meeting the above criteria of weakness. Out of those, we broke the prior day's lows on 131 occasions during the follow day of trade in SPY or nearly 2/3 of the time. Conversely, during the remainder of occasions in the sample (N = 570), we broke the prior day's lows 220 times, or about 40% of the time. This fits with the earlier research: weakness tends to follow through in the short run during the next trading session.
Once again, however, by the end of the next day's trading, that downside edge is lost: the market closes up 112 times and down on 94 occasions for an average gain of .05%--no bearish edge at all. Indeed, if we look three days out from a weak day, SPY averages a gain of .20% (123 up, 83 down), stronger than the average three-day gain of .07% (315 up, 255 down) for the remainder of the sample. What that means is that downside follow through after weakness has been very short term on average. Several days out, SPY has tended to rebound following such weakness.
These ideas will again inform my trading on Tuesday. By handicapping the odds of hitting key price levels--and determining the likelihood that moves will continue vs. reverse--we can develop a basic road map for the coming day's activity.
Monday, February 12, 2007
Monday, February 12th Morning Market Comments
9:38 AM - OK, it's been a good AM of trading, my being under the weather notwithstanding. Our research told us we had good odds of taking out the Friday low. When we saw early selling in ER2 and no taking out of the overnight high in ES, that was a nice time to get short for a good trade. When I saw program trades enter on the buy side, esp. in ER2 (which had been leading the downside), I flipped my bias and took a quick long trade for a modest winner. I needed more confirmation that the market was bottoming, and now, as I write, we'll see if that thesis holds up, as we're getting some fresh selling. The takeaway for this AM is that research into historical trading patterns once in a while will turn up a nice edge and form the basis for a worthwhile trade idea. Still, you have to closely monitor trading conditions in real time. Those institutions doing the program trading are among the participants you want to be following. I'm watching for an opportunity to get long, but need to see selling dry up. Have a great rest of your day; wrap up tonite on the Weblog.
9:30 AM - An upside breakout in TICK and continued relative strength in ER2 would cement my idea of having put in a bottom this AM and would have me leaning long the remainder of the day. If we test the AM lows, watch closely for non-confirmations and for volume (expanding or drying up at the bid) in ES to determine if that is part of a bottoming process or the start of a new leg down. Unfortunately, I'm as sick as can be with the flu and will need to wrap up shortly. More in a bit.
9:21 AM - Notice how my entire market perspective shifted when I saw program buying at the 9:10 time area. More on that later.
9:18 AM - Took a quick profit, but ready to reenter long if TICK declines hold at higher price levels. Recall the research: strong market if we don't take out prior day's low. I'm looking to see if we put in a bottom for the day this AM, but I need the market to show that to me.
9:13 AM - Bought a little ES here, but tight stop.
9:10 AM - Program buy in ER2; note shift upward in TICK. That will have me watching TICK declines carefully to see if we are getting a transition from selling to buying.
9:08 AM - Observe that we really haven't seen extreme low TICK readings this AM and declining stocks only lead advancers by about 600 issues. It's a down morning to be sure, but this is lighter selling than we saw on Friday, and the volumes, while elevated to the downside, are more modest than Friday as well. Selling the TICK bounces continues to work as long as those occur at lower price levels with less volume than we see on the declines.
9:02 AM - Note semis holding up relatively well recently.
9:01 AM - Note we've taken out the Friday lows in NQ; very close in ER2. Still gotta lean short.
8:58 AM - Took some profits here; might reenter quickly.
8:46 AM - I'd need to see buying in ER2 and semis and upside TICK breakouts to think about being a buyer; until that happens, I see the TICK bounces as opportunities for shorting as long as we stay below the overnight highs.
8:39 AM - Also note weakness in semiconductors; Dow is relatively strong.
8:37 AM - Note that ER2 has broken below its overnite range. I'm looking for that to lead.
8:35 AM - Real mixed bag early on; greater strength in ES than NQ or ER2. If that continues, I'd expect to see all the averages test those Friday lows. I have an initial short position in ES with a tight stop.
8:19 AM CT - Good morning! Alas, the good Doctor is ailing this AM--a wicked case of flu going around our household--so my comments may be abbreviated this morning. My recent post noted high odds of taking out the previous day's low following a strong momentum decline, but also observed strong market behavior if we cannot take out that low. So let's see if we can track volume at bid/offer and various sectors to handicap the odds of continuing Friday's decline. No major economic reports on tap this AM; interest rates are a bit higher this AM, as is the dollar vs. the Euro. Oil is lower; the DAX is down, but off its lows from earlier in the session. The 1445 area in ES represents short-term overnight resistance; 1441 represents near-term overnight support. A breakout from that range--and whether such a breakout can be sustained--will provide us with information about who is in control: buyers or sellers. Pivot levels for the day have been updated on the Weblog; note also the first Best Practices post on Market Profile. Back after the open.
9:30 AM - An upside breakout in TICK and continued relative strength in ER2 would cement my idea of having put in a bottom this AM and would have me leaning long the remainder of the day. If we test the AM lows, watch closely for non-confirmations and for volume (expanding or drying up at the bid) in ES to determine if that is part of a bottoming process or the start of a new leg down. Unfortunately, I'm as sick as can be with the flu and will need to wrap up shortly. More in a bit.
9:21 AM - Notice how my entire market perspective shifted when I saw program buying at the 9:10 time area. More on that later.
9:18 AM - Took a quick profit, but ready to reenter long if TICK declines hold at higher price levels. Recall the research: strong market if we don't take out prior day's low. I'm looking to see if we put in a bottom for the day this AM, but I need the market to show that to me.
9:13 AM - Bought a little ES here, but tight stop.
9:10 AM - Program buy in ER2; note shift upward in TICK. That will have me watching TICK declines carefully to see if we are getting a transition from selling to buying.
9:08 AM - Observe that we really haven't seen extreme low TICK readings this AM and declining stocks only lead advancers by about 600 issues. It's a down morning to be sure, but this is lighter selling than we saw on Friday, and the volumes, while elevated to the downside, are more modest than Friday as well. Selling the TICK bounces continues to work as long as those occur at lower price levels with less volume than we see on the declines.
9:02 AM - Note semis holding up relatively well recently.
9:01 AM - Note we've taken out the Friday lows in NQ; very close in ER2. Still gotta lean short.
8:58 AM - Took some profits here; might reenter quickly.
8:46 AM - I'd need to see buying in ER2 and semis and upside TICK breakouts to think about being a buyer; until that happens, I see the TICK bounces as opportunities for shorting as long as we stay below the overnight highs.
8:39 AM - Also note weakness in semiconductors; Dow is relatively strong.
8:37 AM - Note that ER2 has broken below its overnite range. I'm looking for that to lead.
8:35 AM - Real mixed bag early on; greater strength in ES than NQ or ER2. If that continues, I'd expect to see all the averages test those Friday lows. I have an initial short position in ES with a tight stop.
8:19 AM CT - Good morning! Alas, the good Doctor is ailing this AM--a wicked case of flu going around our household--so my comments may be abbreviated this morning. My recent post noted high odds of taking out the previous day's low following a strong momentum decline, but also observed strong market behavior if we cannot take out that low. So let's see if we can track volume at bid/offer and various sectors to handicap the odds of continuing Friday's decline. No major economic reports on tap this AM; interest rates are a bit higher this AM, as is the dollar vs. the Euro. Oil is lower; the DAX is down, but off its lows from earlier in the session. The 1445 area in ES represents short-term overnight resistance; 1441 represents near-term overnight support. A breakout from that range--and whether such a breakout can be sustained--will provide us with information about who is in control: buyers or sellers. Pivot levels for the day have been updated on the Weblog; note also the first Best Practices post on Market Profile. Back after the open.
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