This is an unsolicited shout-out to one of my favorite sites, Barchart.com. The site is my source for the 20-day new high/new low data that I frequently refer to; it also features useful coverage of stock and futures markets--including heat maps that I've posted about.
Above is an interesting feature for subscribers that they call their "cheat sheet". I thought I would point it out for technically-oriented traders. If you click on the sheet above, you'll see key price levels for SPY going into today's market. Those levels include their calculations of pivot and resistance levels, as well as key levels from technical indicators.
You can get these levels for any stock or ETF, which can be useful for framing price targets and alerts; seeing where we're trading relative to overbought/oversold levels; etc. .
What do Materials shares (XLB; top chart) have in common with Energy stocks (XLE; second chart from top), Technology issues (XLK; second chart from bottom), and Health Care stocks (XLV; bottom chart)?
All have failed to better their January highs despite new bull market highs in the major stock market indexes.
This might just be a sign of large cap underperformance, given the solid bull highs seen among midcap ($MID) and small cap ($SML) shares, as well as the new highs seen in the advance-decline line for common stocks on the NYSE and the number of stocks making fresh 52-week highs.
What gives me pause is that many international equity indexes have also failed to exceed their January highs. Those include EFA (stocks from Europe, Far East, and Australasia) and EEM (emerging market stocks).
As long as the indicators plow to new highs and we see small cap and NASDAQ stocks outperforming the S&P 500 Index, I continue to lean to the bull side per the recent indicator update. Should we see those smaller cap and more speculative issues roll over, however, and generate deterioration in the indicators alongside lagging in these sectors and international indexes, then I would become more aggressive in looking to the downside for stocks. .
Just as we sharply rejected weakness on 3/15, sending stocks higher, we're seeing a similar move today. After opening lower, we have sharply rejected price below the 1150 area and now have traded back into last week's range. As long as we continue to see pullbacks at successively higher prices, this bull market is intact.
Note that small cap stocks have regained their leadership today and the NQ futures are trading at bull market highs. Crude oil has also turned positive on the day. This is an indication that risk appetite remains alive in the markets. .
Note how we opened the day lower, with more stocks ticking down than up in the first minutes of trading. Within a short period, however, we bounced to positive NYSE TICK readings and stayed above the (blue) zero line. When sellers finally did come into the market, we could not get TICK readings below -500 and could not get the Cumulative TICK back to negative. Unable to sustain selling pressure, we saw buyers come into the market with a vengeance.
I find that it rarely pays to bet against the Cumulative TICK line. When TICK readings are mostly staying above zero and cannot reach significant negative levels (-800 or lower), it's difficult for prices to sustain any retreat.
9:26 AM CT - Note the breakout move above the overnight highs and the key Friday low level mentioned below. NYSE TICK turned meaningfully positive and, despite overnight weakness, we've yet to get a significant negative TICK reading on the day. With bears trapped, we are now trading back into the range prior to Friday's break: clearly an indication that bulls are using short-term weakness as a reason to buy this market.
Note how we opened overnight trading at Friday's lows, on the heels of passage of controversial health care legislation. Since that time, attempts to move back into Friday's trading range have not gained traction. As long as we cannot sustain buying interest above Friday's lows, we should see a continuation of the short-term correction mentioned in the recent indicator post. Supporting that outlook is overnight weakness among other risk assets, including crude oil, AUD and EUR vs. USD, and gold. I'll be watching the distribution of NYSE TICK in early trade; also key to watch is the relative strength/weakness of small cap stocks. The small caps had been leaders during the market rise and then lagged on Friday. .
This past week, we saw excessive bullish sentiment but also considerable strength among the indicators. Last week's update noted that the bull market was still in force, but that we had lost upside momentum and could see a breather in the persistent rise. On Friday we got that breather, and price weakness continues into premarket trading on Monday as I write this.
The sectors that I track each week for Technical Strength (a proprietary measure of short-term trending) remain in bullish mode (top chart), with the exception of Materials shares, which fell back to neutral amidst late week commodity selling.
The Cumulative Demand/Supply Index (DSI; second chart from top), which tracks market momentum did indeed top out ahead of price as is usually the case, but remains above zero. In a solid bull trend, we can make fresh bull highs on successively lower DSI readings; that is my expectation as long as stocks can stay above their January highs and sustain their upside breakout.
We also saw 20-day new highs minus lows (second chart from bottom) top out ahead of the market and pull back on Friday. Friday was the first day in which we began to see an expansion of 20-day new lows, as I posted this morning to Twitter. I will be watching this measure closely. Should we continue to sustain expanded new lows even on a move back toward bull highs, I would start thinking of an intermediate-term topping process.
My proprietary measure of stock market momentum (bottom chart) also topped out ahead of price, but remains a bit above its neutral level of 1.0 and is not yet at levels that have characterized recent short-term market bottoms. Indeed, with over 70% of stocks still trading above their 20-day moving averages, we are nowhere near oversold levels that have characterized recent intermediate-term bottoms.
In sum, we have seen an unusually persistent move to new bull highs, confirmed by such indicators as advance/decline lines and new highs/lows. In the wake of weakening upside momentum, we're now seeing a pullback in stocks that is taking us off what could well be the momentum highs. I expect that we have not seen actual price highs for this move, which means that we should see a buying opportunity when the current correction runs its course. I would be especially bullish if we can hold the 1130-area support in the ES futures. A very significant expansion of 20-day new lows during this corrective move would turn my upside expectations much more cautious. .
"When you are your own trading coach, there is always a part of you that stands apart from your decision-making and execution, observing yourself and exercising control over what you do and how you do it. The real value of the trading journal is that it structures the process of self-awareness and helps make it more regular and automatic. If you were walking on a familiar street, you would hardly think about how you walk; everything would be on autopilot. If, however, you were taking the same walk in a minefield, you would be exquisitely self-aware, conscious of every step that you took. Trading is neither a walk in the park nor a minefield...perhaps it's more like a walk in a beautiful, but somewhat dangerous park. You want to be absorbed in the walk, but alert and aware at the same time. That is the function of the trading journal: it enables you to monitor yourself, even as you are immersed in what you're doing."
Do you find yourself on a performance roller coaster? This is a situation in which you make money for a while, begin to think you have it all figured out, only to fall back, lose money, and feel like a rookie all over again.
A while back, I wrote about the performance roller coaster and some of the emotional factors that sustain it. The gist of that important post was that how we process wins and losses affects our subsequent trading--and sometimes contributes to winning and losing streaks.
I just finished an enjoyable interview with Mark Wolfinger of the Options for Rookies site. One topic that came up was the way in which traders identify with their P/L. Once a trader's sense of identity and esteem becomes caught up in profits and losses, the trader begins an emotional roller coaster simply due to the natural ups and downs of markets.
There's an important difference between *wanting* to make profits and *needing* to make them. When the trader *needs* to win, performance pressures are magnified many-fold. Even normal losses can make the trader feel like a loser--and then trade like one!
Conversely, when our self worth becomes too wrapped up in trading results, periods of profitability can easily lead to overconfidence and even grandiosity. It's not at all unusual for traders to stop doing what was making them money once they've had a series of winning days or weeks. And that leads to the downhill portion of the roller coaster.
The advice I shared with Mark in the interview and that I've mentioned elsewhere is that it's vitally important to be psychologically diversified. If you're counting on trading to provide your sense of accomplishment and value, losses will become unduly threatening. If you don't have aspects of life to draw upon when trading goes bad--relationships, career, personal interests--it's going to be difficult to rise from the slump.
It is possible to care very much about trading and work hard at it without riding a performance roller coaster. You can feel very good about your evolving process as a trader, even as you struggle on a given day, week, or month with making money. Once you take yourself out of the equation, it becomes far more easy to focus on markets and the patterns we trade.
A while back I wrote about the worst loss that I ever suffered in financial markets and how I handled that very difficult setback. Recently I've heard from several traders who have experienced something similar: having built up their accounts over time, they lost much of their profits in a short period of time.
In the wake of my large loss, there were three steps I took that were very helpful:
1) I stopped trading. I took the time to process what had happened, figure out what I had done wrong, and make radical changes in my approach to markets. When I returned to the markets, it was as a very different trader;
2) I refocused. I used the time away from trading to work on other aspects of my life and career. In doing that, I remained opportunity-focused and not regret-focused. I also stayed focused on what I could control, not on what I couldn't;
3) I used the incident as motivation. The loss was so painful that I made sure that I would never go through such an episode again. I created a new balance between trading and the rest of my life so that I would never be dependent upon trading results for my happiness and fulfillment.
All three of these steps would not have been effective if I had not first taken a different step: I took ownership for the loss. I realized that I was wrong, that I had taken too much risk, and that I was employing trading methods that did not work. I didn't blame outside "manipulators" of markets or bad luck; I accepted that I had completely and utterly made a hash of things.
Initially that was depressing, and initially I did not handle my depressed feelings well. But that was better than brushing the episode aside and continuing to lose money in a state of denial. Depressed feelings are a normal response to loss: the loss of money, the loss of dreams. Sometimes you have to go through that loss before you can come out the other side as a different person, one who has learned from the experience.
My earlier post pretty well lays out how I managed to learn from my loss. We can find opportunity in a losing trade, and we can sometimes learn from losing, good trades. Trading teaches us how to lose: those principles extend to life itself. Sometimes in life you have to make large bets when the odds are with you, but only when you have enormous potential upside--and only when losing those bets will still allow you to make similar, high-odds bets again. .
What I'd like to highlight in response to Crosshairs Trader is the value of expressing one's strategies and tactics in terms of rules. His rules will differ from mine, and both of ours no doubt are different from yours. The value of rules, however, is that they cement sound trading practices and guide our behavior when we're "under fire".
Once we formulate rules for entering, exiting, and managing trades, we can mentally rehearse those rules prior to trading and ground ourselves in best trading practices. We can also draw upon those rules in difficult market conditions to help us make difficult decisions. Once we have sound rules, moreover, we can assess our performance relative to those rules and gauge how well we're trading.
One question I have posed to traders is: "How can you be disciplined when you haven't even formulated the rules for proper trading?" To be disciplined is to be rule-governed, and to be rule-governed is to be mindful of one's strategies and tactics.
A savvy reader recently passed along a quote from Mike Tyson, the boxer:
"Everyone has a plan 'til they get punched in the mouth."
That's one of the central challenges of trading. We set out with plans, then we get punched in the mouth with adverse movement.
Once we're jostled out of our game plan, we lose our edge. We're like the shaken boxer who no longer adheres to a fight plan. Without strategy, we cannot maximize our strengths and compensate for our vulnerabilities.
The flip side of Tyson's observation is that, until you're punched in the mouth, you don't really know if you have a solid plan. Making money is a lot easier when market conditions are favorable. It's when we have to deal with adversity that we discover how resilient we are and how effective our strategies can be.
One way to think of risk management is as a framework that allows you to be aggressive enough to occasionally get hit in the mouth, but not so wild that you'll get knocked out. Learning how to take a punch is key to boxing success, and it's also an important trading skill. That's how you train to dig down deep and find the competitive drive that will move you forward and help you weather adversity.
The transition pattern is a favorite; that's a reversal pattern. Another favorite are breakout trades: when stocks trade in a range and then establish value higher or lower on solid institutional participation. Still another favorite are "fade the range" trades: opportunities to play for a move back to VWAP when stocks can't sustain buying or selling at the top or bottom of a range and move back toward previously established value. Yet another setup is the failed breakout trade, which we see above.
The ES futures moved toward bull highs, but we did not see good early participation from the Russell 2000 Index, the broad list of stocks overall, or the NYSE TICK. That led to a prompt move back to the most recent range. Not long after, we actually broke through that range to the downside.
Much of short-term trading success is recognizing these patterns as they set up. Much of finding opportunity is recognizing that they set up across multiple time frames. .
9:38 AM CT - I've added the top chart to show how we've seen expanded volume and volatility this morning, with distinctly negative NYSE TICK, selling across risk assets, and continued weakness among small caps. That has led to our taking out, first the overnight lows, then yesterday's lows, as the failed upside breakout continues the consolidation of the recent market strength.
Note how we've broken above Thursday's high in the NASDAQ 100 (NQ) futures (bottom chart) and are hovering near the highs in the ES futures (top chart). I'll be watching closely to see how small caps behave if we can break to new highs in ES; while they've been rally leaders, they underperformed yesterday. The TICK distribution and intraday advance-decline figures should provide a useful indication of the relative breadth of participation in any upside break.
I'll be updating this post later in the morning; stay tuned... .
A recent article on the Minyanville site does a nice job of describing some of the cognitive biases that traders experience and what they can do about those biases.
A cardinal concept from behavioral finance is that we do not process information about risk, reward, and uncertainty in a purely objective manner.
A key idea in psychology is that you are less likely to fall prey to information-processing biases if you are fully aware of those biases.
Take recency bias for example. When I was in school, I created a simple experiment: I asked people to look at the charts of stocks and predict whether the next move was going to be up or down. The charts were identical, except for the last bars. In half the cases, the last bar was up (green color); in the other half, the last bar was down (red color).
Sure enough, significantly more people thought the market was going to go down if the last bar was red than if it was green. They overweighted the last piece of data in coming to their conclusions.
This happens to traders all the time. They see the market rise, become convinced that a trend is under way, don't want to miss the move, and they jump aboard the rising market. Sure enough, that's right about the time the market is ready to reverse.
If traders are cognizant of recency bias, however, they can make a conscious effort to look beyond the last bar and fully assess buying and selling pressure, longer-term trends and patterns, etc.
Understanding the behavioral finance literature may not make you a good trader, but it can be very helpful in preventing you from becoming a bad one.
So far, we're trading in a seven point trading range today. My earlier posts today have highlighted some trading ideas derived from the range day structure; a nimble trader had a few opportunities to buy below VWAP and sell above.
Given the narrow range, however, each trade has only been good for a relatively small move.
That's a big part of what leads traders to overtrade. If their account sizes are modest, they cannot make as much from small moves as they would like. If they are hoping to make a living from trading a small account, the small moves will be more like frustrations than the good trades that they are.
So, unable to trade larger, they trade more often.
They try to catch ever smaller swings--or they talk themselves into anticipating breakouts that never materialize.
Their problem is not just a trading problem; it's a psychological one: their expectations are unrealistic relative to their account sizes and relative to market volatility.
If you feel that you *need* to get market movement, you'll trade to make that happen--either by vainly playing for breakouts or by trading ever-smaller "setups". Trading expectations that reflect your needs--and not the realities of how markets are trading--is a formula for disappointment.
Note how we made a momentum low with heavy selling in the 10:45 AM bar (left arrow); we then made price lows over the next hour (middle arrows) on lower volume and volume at the market bid. With selling pressure drying up in the 12 N bar, we then saw buyers become bolder and lift offers, taking us back to VWAP. This transition pattern sets up across multiple time frames and makes for a nice trade when trapped traders need to exit their positions.
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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