9:13 AM CT - I added the top chart to show how we made fresh morning lows before 9 AM CT, but those lows were accompanied by relatively modest negative TICK readings and a non-confirmation from the Russell 2000 stocks. Seeing the divergence, I bought some IWM and rode a pop higher toward the top of the morning and yesterday afternoon ranges. It's a nice little illustration of how choosing what you're trading (a relative strength leader if you're expecting a rise) is as important as getting your timing right.
We've pulled back into the multiday trading range in early trade today, breaking below the range of the past two trading sessions. I'm now looking to see if we can sustain price and build value below yesterday's low price. Despite the stock weakness, other risk assets are firm: USD is weak vs. euro and we're seeing some strength in gold and oil; rates are a bit lower. Also, we're not yet seeing the Russell 2000 Index or the NASDAQ 100 set up for new lows relative to yesterday; I'll be watching closely to see if those divergences continue. More later this AM-- .
I want to thank readers for their continued support of the blog. This month has seen another record number of visitors (above) and page views to the site.
In appreciation, I will be posting the specific proprietary formulas I use to calculate price targets for the S&P 500 Index.
This will include formulas for calculation of levels that I have not shared at all on the blog to this point.
Keep an eye out...I'll be posting later today. I will not keep this information on the blog permanently; it's for current readers only.
As we can see, the CBOE equity put/call ratio has averaged about .60 since the fourth quarter of 2009. We've tended to spike higher than average (showing relative bearishness) near intermediate-term low points and have tended to register below average (showing relative bullishness) readings around intermediate-term peaks. That ratio has been largely below average for a while now, indicating that traders remain relatively bullish following the market's rise to fresh highs.
Although we're trading relatively near those bull highs, the number of stocks registering fresh 20-day highs vs. lows has remained subdued. As I noted in my recent tweet, we saw 969 stocks across the NYSE, NASDAQ, and ASE make fresh 20-day highs on Tuesday and 398 score new lows. Earlier this month, we had over 3000 new 20-day highs.
That being said, the recent movement has suggested more sector rotation than outright correction: of the 40 stocks in my basket (five from eight S&P sectors), fully 32 are trading in uptrends according to my Technical Strength measure. (That indicator is also updated each morning prior to the market open via Twitter). We're also hovering near bull market highs in the advance-decline line specific to NYSE common stocks, as noted by Decision Point. While sentiment could constrain the near-term upside here, we're not seeing the kind of technical deterioration that generally precedes major market selloffs. .
I want to thank the many traders who have responded to the post regarding forming virtual trading groups. My hope is that those who commented to the post can follow through with mutual contacts and explorations of common interests.
It always surprises me that people who otherwise seem to desire success don't follow through on their desires with solid, persistent networking.
Life is a team sport. You learn from others, you benefit from their experience, you develop your thinking by incorporating their perspectives--and they learn, benefit, and develop in their interactions with you.
Never, ever be afraid to make yourself visible. Put yourself out there: your ideas, your experience, your interests. Cold call 20 promising people; it's the one or two that respond meaningfully that will add to your life and career.
No one will cheerlead for you; no one will discover you; no one will take you under their wing if they don't see and hear from you.
Reach out to likeminded traders. Put out enough information that likeminded traders can reach out to you. No matter how inexperienced you might be, don't be afraid to reach out to those who are more accomplished.
It's not about crass self-promotion. It's about recognizing the synergies that are possible in positive working relationships.
While my work with trading firms prevents me from actually forming and participating in such groups at this time, I would be pleased and honored to have this blog serve as a place where traders could connect with likeminded peers.
If you have an interest in forming or joining a group, by all means feel free to communicate via comments to this blog post.
My sense is that each experienced trader can both benefit from peer mentorship and can contribute to the mentoring of other traders. If you can gain insight from others and share yours in turn, that sounds like the best winning trade of all. .
"I never teach my pupils," Albert Einstein once remarked. "I only attempt to provide the conditions in which they can learn."
A great number of trading educators attempt to teach their pupils. What they don't necessarily provide are the conditions in which learning can occur.
At one firm that I visited a long time ago, traders were given very small amounts of money to trade and risk was managed very tightly. As soon as the trader lost a couple hundred dollars in a day, they had to stop trading for the day.
The traders were taught some setups and ways to look at markets.
But what they learned was that it was not OK to lose money. They never learned confidence, and they never learned to be aggressive when they were right in their views.
To my knowledge, none of the traders developed into ones that could sustain a living from their trading.
So what are the conditions in which traders can learn?
They have to be conditions in which it is OK to make mistakes, but important to learn from those. They have to be conditions in which traders can count on regular feedback to guide their efforts. They have to be conditions in which clear, attainable goals guide development and learning.
For the many traders that don't belong to trading firms, we have to establish our own learning conditions. That is a central challenge to self-coaching: we not only move forward as students, but as coaches of our own learning processes. .
Note how often in recent market action we've seen prices move above or below a recent high or low, only to snap back into the prior trading range. These false breakouts can be challenging for traders, as they assume that we'll see range extension and the beginning of a trending market. Instead, the market simply sustains a longer-term trading range.
By the time the market does experience a catalyst to move it outside the extended range, many traders are so beaten up by getting chopped up on false breakouts that they can't participate in the directional move.
What I find among short-term traders is that they often will presume that breakouts will continue in their direction without actively planning for the possibility of retracement. When we see that stocks have broken to new highs (as we did this morning), but that other asset classes aren't participating significantly and that the number of stocks making new highs has been waning, we want to actively build a scenario for a possible reversion trade. Once the correlated asset classes begin to retreat, stock prices stall out, and we see NYSE TICK pulling back, we're then prepared to act on the scenario we've built.
It is much easier to act on market action if you've visualized and planned for it in advance. .
10:35 AM CT - Note the downside break that occurred from the range that had prevailed going into today's open. The inability to hold the move above the pre-opening lows led to selling that has taken us back into the thick of the multiday range. It's a good example of how a breakout move at one time scale is actually a mean reversion move at another. If we persist with a negative bias to NYSE TICK, I would expect a test of the multiday range lows around 1160.
As we can see, we're trading within a multiday range, with prices recently caught within a narrow range inside the larger range. We're also seeing mixed trading among asset classes, with not much movement from gold and oil. There's some strength in AUD vs USD but not much happening with EUR. I'm continuing to watch small cap stocks vs. the large caps and the Cumulative NYSE TICK; those should point the way toward how this range environment will ultimately be resolved directionally. More later this AM. .
Municipal bonds (TFI; above) have fallen from recent highs and have not exceeded their 2009 peak thus far in 2010. Nonetheless, they remain popular investments, given rising tax burdens for high-income investors and a shift toward taxable debt among municipalities (the Build America Bonds).
At present, 10-year triple-A rated, general obligation municipal debt offers an average yield of 3.23%, up from 2.95% six months ago, according to Bloomberg. The current yield on two-year debt is .69%, down from .75% six months ago. So we've seen some steepening of the muni yield curve. Muni rates overall are attractive relative to Treasury debt, but not screamingly so as they were during the 2008 bear market, when tax free rates were substantially higher than taxable Treasury rates.
An important post from last year linked goal setting in trading with emotional well-being--and especially with sound trading discipline.
Discipline problems typically begin with experiences of frustration.
Frustration is a function of not meeting goals and expectations.
Many times, traders try to adopt psychological strategies for combating frustration. These can be helpful, but they don't get at the root of the frustration problem.
If we do not set challenging, but feasible goals, we cannot experience ourselves as effective, successful people. Goals that are perfectionistic cannot be met and thus generate frustration.
Goal-setting is not just essential to mastering markets; it's essential as a tool of psychological management. We shape our experience of ourselves by controlling what we pursue and how we evaluate the pursuit. .
The volume-weighted average price (VWAP; red line above) is an excellent reference point in range bound markets. In a good range trade, we'll tend to see a narrow value area (volume will be transacted within a narrow price band) and moves away from value will tend to return back to (and usually through) VWAP. In a true range trade, we'll also see little slope to VWAP, as we transact volume relatively evenly above and below that average price.
If you're playing for a range breakout, it often makes sense to track the distribution of NYSE TICK, Cumulative Delta, and intermarket themes. Often we'll see buying or selling unable to pierce VWAP prior to a breakout to the downside or upside. It's the inability of price to trade through VWAP that shows buying or selling drying up--and that emboldens traders to probe lower or higher value levels. .
9:13 AM CT - I added the top chart to show how we're trading in a range thus far today, with volume building between 1167 and 1169 and the value-weighted average price at 1168. Cumulative Delta is very modestly positive on the day thus far; NYSE TICK is mixed. Note how we continue to see sector rotation: the sectors that have been relatively weak of late (commodity-related sectors, health care) have caught a bid today; the sectors that have been stronger (consumer discretionary, financial) have seen some selling. Overall, that keeps us in a range.
We're seeing stocks trading in a multiday range, with resistance in the 1170 area and support around 1160. We're also seeing a weak USD and firm commodities; I'll be looking to some of these intermarket relationships to handicap the odds of a break from the trading range. Note also that Russell 2000 stocks are continuing to underperform the large caps--another relationship I'll be watching in early trade today. I'll update this post later in the AM. .
Last week's indicator review found that we had retreated from a momentum peak, but could likely experience higher prices going forward. Little has changed since that report; upside momentum has waned, but price has corrected only modestly.
We can see from the Technical Strength (a proprietary short-term measure of trending) of the sectors that most of the sectors remain in a bullish mode. The exceptions are the commodity-related sectors, Materials and Energy, and the uncertainty-laden Health Care stocks. Particularly strong are the Consumer Discretionary, Financial, and Technology areas, suggesting that we're responding to themes of strong economic performance. Most important from the vantage point of the sectors is that we seem to be correcting via sector rotation, rather than by wholesale selloff.
Momentum, as measured by the Cumulative Demand/Supply Index (middle chart), has moved toward the zero area. In a bull mode, we can get successively higher price highs on lower Cumulative DSI readings before the market as a whole turns over. New 20-day highs only slightly outnumbered new lows on Friday (bottom chart), with the 20-day lows expanding to over 500. This is a measure I'll be watching for possible further deterioration. As long as new highs outnumber new lows, I consider the intermediate-term trend to be bullish.
While the trend remains higher, I am vigilant for divergences that could show up if we test the bull market highs. Those would have me cautious about chasing the upside, as we could see further rotation and correction before starting any fresh leg higher. As always, I'll be updating indicators daily via Twitter before the market open. .
I thought it might be enlightening to take a longer-term look at three markets. All the above are weekly charts.
We can see that the China ETF (FXI; top chart) retraced approximately half of its bear market decline before pulling back late in 2009 and now failing to register new highs in 2010.
The performance of commodities (DBC; middle chart) has been even weaker, only recovering a small proportion of their dramatic bear market decline. They have failed to better their January highs lately.
The stock markets for Europe, the Far East, and Australasia (EFA; bottom chart) have recovered less than half of their bear market losses. Note that they also have failed to beat their January highs in recent trade.
While the recovery from the bear market lows has been impressive in percentage terms, that in part is a reflection of how low we had gotten. At least thus far, it appears that many risk assets are losing strength of late, not exactly what you'd expect if a global recovery were gaining steam. .
I can think of several very successful intraday traders I know well. All keep score meticulously. All are on top of when they're doing well and when they're not.
When they're trading well, they identify what's working and aren't afraid to push on the accelerator. When they're trading poorly, they're quick to pull in their risk and figure out what's going wrong.
They have the ego to get big and take risk and the humility to get small and acknowledge weaknesses.
This is not like most career fields, where an average teacher, middle manager, or sales person can sustain a living. An average performance in trading is one in which the trader does not make money at all. The Times article cites research suggesting support for the often-cited statistic that 80% of daytraders lose money.
I'm in an interesting position, because--as a trading coach--I see the actual trading of actual traders, not the performance claims of wannabee gurus. I also see which traders have been able to sustain meaningful livings from their trading and which have not.
Ultimately, the most important contributors to trading success are twofold:
1) The development of concrete trading skills: pattern recognition, ability to execute sound trade ideas to create a positive expectancy, sound risk management;
2) The cultivation of the mental toughness, continuous learning, and discipline that enable you to adapt to new, challenging market conditions.
Sitting at a computer each day, not having a concrete strategy for the day, and relying on a vague sense of intuition to get you through is not going to cut it.
Success is something the great traders do, not just something they have. They work on building skills, they work on building themselves, and they have routines in place for accomplishing both.
An older book that I'm rereading--and finding useful--is Constance Brown's text on Technical Analysis for the Trading Professional. She emphasizes unconventional ways to construct and interpret conventional indicators, many of which are quite creative and useful.
I used ideas generated by her work to configure a momentum indicator based upon the Demand and Supply data that I post each morning via Twitter. The scale is different, so that we get more uniform peaks and valleys in the data, with momentum frequently leading price change.
Note that we've been seeing higher prices with successive pullbacks in momentum, the hallmark of a bull market. Price has held up well during the recent momentum retreat, leading me to believe that the bull market has not yet given up. That being said, we're not quite at momentum lows that have characterized recent intermediate-term buying opportunities. .
Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), The Daily Trading Coach (Wiley, 2009), Trading Psychology 2.0 (Wiley, 2015), The Art and Science of Brief Psychotherapies (APPI, 2018) and Radical Renewal (2019) with an interest in using historical patterns in markets to find a trading edge. Currently writing a book on performance psychology and spirituality. As a performance coach for portfolio managers and traders at financial organizations, I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014.
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