Thinking About Morning Market Action: Framing Trading Ideas

Let's take a look at Twitter comments thus far this AM. Note how observation of a fly in the bull ointment began with an observation of NQ weakness before the open; open minded watching of how we traded around the open price (and 7/30 high price); and then observation of weakness within 10 minutes of the open.

8:17 AM CT - I'll be watching NQ this AM; it's off its overnite and 7/30 highs. Financial stks set to open abt 2% up. Watching those too

8:37 AM CT - Watching how we trade rel to 994.25 ES open price; USD weak; TICK strong; 1793 more advancers than declines.

8:39 AM CT - 17 stks up from open, 23 dn; mixed open so far despite pos opening gap. XLP, XLV weak; XLB, XLE rel strong.

8:41 AM CT - Note that mkt open is also near that 7/30 high; if we can't stay above open, that also means we're bk into 2 day range. ;-)

8:49 AM CT - Seeing some unwinding of intermarket themes: USD strengthening, gold, oil seeing some selling; most sectors dn fm open

8:51 AM CT - Note that inability to stay above 2 day trading range targets pivot level as price target.

8:55 AM CT - IWM showing rel weakness from open; 12 stks up from open, 28 dn; mixed TICK distribution

9 AM CT - Significant buying burst on 9 AM CT news; watching to see if we can get and stay above the early AM highs.

9:02 AM CT - Once again that 994 level proving crucial; Russell, NQ off highs; mkt having difficulty sustaining rally.

9:05 AM CT - Note renewed dollar weakness providing bid to stocks, gold, and oil; we appear to be trading off USD; moving to new highs

9:07 AM CT - Marginal new high in ES not confirmed by other indexes; 18 stks up from open, 22 dn.

Given all the above, how would you be trading now? What would you be thinking about to frame a trade idea?

What I'm trying to illustrate is both a way of thinking about price action and a way to provide an extra set of eyes for traders as they're trading.

Morning Briefing for August 3rd: Marching Toward 1000?

Here's a quick look at how we're setting up for today's stock market open. Note that we were in a multi-day trading range from July 23rd through 29th before vaulting higher on the 30th and starting a new trading range. We're now peeking above the July 30th highs, so the big question is whether we'll fall back into the range from July 30th or sustain a breakout to the SPX 1000 level. We're seeing weakness in the U.S. dollar vs. euro, strength in commodity prices, a rise in 10-year Treasury yields, and firmness in overseas stocks--particularly emerging markets. All of those intermarket themes weigh on the bullish side for stocks.

I'm watching the 994 level in ES, which is the high from July 30th, to see how we trade around that price early in the trading day. That will provide good indication of whether institutions are ready to accept value higher with a breakout move vs. sell into the opening price strength. To this point, indicators remain bullish and sectors largely remain in uptrends. I'll post intermittent updates via Twitter and the blog to gauge market dynamics (follow Twitter feed here).

Indicator Update for August 3rd

The recent sector review found that most of the S&P 500 sectors continue to trade in short-term uptrends. The indicators support this bullish view, as we see significant positive momentum among stocks (top chart) and new 20-day highs greatly outnumbering new lows (middle chart). The ability of the index to steadily post new highs in the face of strong Demand vs. Supply (i.e., more stocks closing above the volatility envelopes surrounding their moving averages than closing below them) is typical of bull market action. Generally, we don't see significant market corrections until the cumulative Demand/Supply line (top chart) posts lower highs on market strength.

Similarly, we're not seeing any expansion of new 20-day lows, which typically precedes intermediate-term market corrections. Indeed, new 65-day highs made a new peak for this upmove on Thursday, suggesting that market strength has been quite robust.

Finally, note the new highs in the advance-decline line specific to NYSE common stocks, as posted by the excellent Decision Point site. The breadth of market strength on the new highs suggests that we are not yet seeing meaningful topping behavior.

In sum, while upside momentum has tailed off and we could see a normal pullback following strength, the indicators suggest underlying strength to the market rise. Since the momentum and strength measures tend to top well ahead of price, I expect to see higher prices for stocks before we have to be concerned about a fresh bear market. A move below 950 in the ES futures, accompanied by expanding new 20-day lows, would have me questioning the bull thesis.

Evening Briefing for August 2nd

* MARKET THEMES FROM FRIDAY: Friday saw range bound trade consolidating the strength that we saw on Thursday. Low readings for both the Demand and Supply indicators suggest a range environment going into Monday's trade, with important support at Friday's premarket lows and resistance in the 990-992.50 area in ES. We saw a weaker dollar vs. euro on Friday and strength in gold and oil. Those intermarket themes have been supportive of higher stock prices in recent sessions.

* OVERSEAS/OVERNIGHT NUMBERS: 1:00 AM CT - Germany, retail sales; 8:30 PM CT - Australia, retail sales.



-- Wages fall in Japan;

-- Asia opens firm;

-- Excellent review of the market week;

-- China and the global recovery;

-- Why China's stimulus is working better that that of the U.S.;

-- Higher taxes for the middle class?

Important Notice: Change In The Blog Publishing Schedule

Dear Readers,

Starting Tuesday, I will be traveling to Europe and South Africa for much of the next two weeks. As a result, the publishing schedule to TraderFeed, as well as Twitter updates, will be affected. Specifically, I won't be trading the markets or tracking them in real time, but will still post market data, links, and relevant blog posts.

During the long flight times, I won't be posting on markets at all.

Sorry for any inconvenience; thanks for your understanding--


Finding Successful Teamwork in Your Trading

In response to the posts on teamwork and performance and creativity and teamwork, several readers have asked how they might connect with others and enjoy the potential fruits of collaboration.

In her comment to the performance post, Michelle B. makes an excellent point. Teamwork cannot substitute for self-development. Before you have something to offer a team, you must first learn to coach yourself and bring the best out in you. Rarely can we offer more to others than we can provide to ourselves. Or, as Ayn Rand put it, one must have an "I" before meaningfully verbalizing "I love you."

This is why, in the Trading Coach book, Lesson 45 (Making the Most of Your Coaching Relationship with yourself) precedes Lesson 46 (Finding Positive Trading Relationships with others). Mastering our own self talk is helpful if we're going to talk constructively with others.

Michelle rightly points out that the Web offers a virtual treasure trove of potential collaborators. Take a look at your favorite websites and those that offer the best comments on those. Take a look at those who are sharing their work in blogs. Put your own comments and work out there. You'll be surprised at how many people you can network with and how many reach out to you.

Consider coaching in the world of athletics: the coach works with players in real time, during practice and during actual performance events. Teaching and coaching are seamlessly intertwined with the act of performing. Much of what makes teamwork powerful is that it occurs in real time, in the actual learning environment.

Real time electronic communications, from Twitter to IM and teleconferencing apps, make collaboration more possible than ever before. It is unfortunate that many of these efforts to date are pursued by performers who hope that teamwork will substitute for independent learning and gurus who desperately seek to profit from them.

You would not believe how many out-and-out frauds there are in the trading education, mentorship, and coaching worlds.

Don't let it get you down. Wherever and however it appears, seek out talent and let others share in your talents. Become your best and search for others who are doing the same. Over time, your team will coalesce.

More on Gnarls Barkley, Teamwork, and Trading

A trader contacted me this weekend. He blew out at the end of the day Friday, playing for an upside breakout with big size. Many, many days of profit were lost with one hail mary trade at the end of the week.

How would our trading performance change if we had just one small voice of reason sitting on our shoulder while we traded?

How might our trading performance improve if we just had one more pair of eyes--one perceptive set of lenses--watching and filtering the markets with us?

Might we have noticed that the new highs in the ES contract (top chart) were not confirmed by NQ?

Might we have seen that those highs were also not confirmed by many S&P 500 sectors: XLP, XLB, XLV, and XLK?

Might we have integrated those pieces of information with a recognition of the range day to fade those highs and make our day?

Might we have noticed the broader market context of a market losing momentum day over day, making an upside breakaway move less likely?

How much success do we miss because we lack teamwork?

I posted recently about
Danger Mouse, Cee-Lo, and the creativity that can come from the chemistry of good teamwork. How the whole can be so much more than the sum of the parts in a performance.

That Gnarls Barkley collaboration gets it. Watch their teamwork in the studio. Observe how it's all about getting it right that first time--in real time--because that's when you *feel* it. Note how one team member can surprise another by feeling it in real time, generating a novel outcome from a creative work.

How many people never find their greatness because they never find the teams that bring the best out in them? In marriages? In business? In trading?

Sector Update for August 1st

The prior sector update found that the market uptrend was healthy, with sectors showing positive Technical Strength and indicators in bullish unison: "It would not be surprising for traders and investors to use pullbacks in Technical Strength as buying opportunities, given the increasingly common belief that the S&P 500 Index will vault above 1000 before there is any correction of significance." Indeed, we approached the 1000 area before seeing selling enter the market late in the week.

As we can see above, Technical Strength for the eight S&P sectors that I follow weekly remains largely bullish, with Consumer Discretionary and Energy shares in neutral territory. Recall that Technical Strength is a proprietary measure of short-term trending; sector readings of +300 to +500 suggest significant uptrending; -300 to -500 indicates significant downtrending. Readings between -100 and +100 suggest that a sector is not trending in a meaningful way.

Here's how the sectors are looking as of Friday's close:


While the market overall was hitting new high prices during the week, the relative weakness of economically sensitive Discretionary and Energy shares is of some concern. I also note that new 20- and 65-day highs, while still outpacing new lows, remain below their July 23rd levels. All of this suggests to me that we could be seeing the start of topping action as prices approach that 1000 level in the S&P 500 Index. I will be updating indicators daily via Twitter to see if we can sustain recent market strength (follow here). If we do, indeed, see a market topping, we should begin to fall off in both Technical Strength and Demand/Supply readings.

Archived Trading Lessons: Resources for Developing Traders

With over 2500 blog posts on TraderFeed alone and nearing 8000 (!) market tweets, it's a bit daunting for new readers to jump into the site.

That is why I'm using a separate blog, Become Your Own Trading Coach, to archive posts specific to topics of high interest. My latest post archives trading lessons from the past month, illustrating market patterns and ways of thinking about markets.

Previous archives focused on how-to trading patterns and trading setups.

Archives dealing with trading psychology include posts on self-coaching and readings in trading psychology.

July's summer seminar was a test run. Soon to come will be further live events to integrate the material into trading practice.

The Challenging Economics of Trading for a Living

A reader sent in this heartfelt personal story as a comment to an earlier blog post. I thought I would post it separately as a possible learning experience for those who aspire to trade for their livings:

This is the one advice I would have for anyone wanting to start trading for a living:

Open a new checking account (or empty your current account) and trade for a month. After each successful trade, send half of the gains to the checking account. The other half stays in your trading account to compensate for losses and increase your capital.

After a month, start paying all your bills from the new checking account. Keep doing this for several month and be totally honest. And see where that takes you.

This is the best wake up call I can think of.

I started trading for a living 8 years ago, because there was nothing else I could think of that I could do to make a living.

At the age of almost 50, I found myself alone. I had never worked. Had no education and had a physical handicap that prevents me from doing much manual work. All I had was a tiny savings account.

I looked into what I could do with it, and became very interested in economics and how the financial markets work. Actual trading was the part I liked least, the research, the part I liked best.

For the first 5 years, I doubled my account 4 times. I believed I was becoming a good trader. I was, but what really helped was that I was in the right sectors at the right time. The charts of my trades show many mistakes, but I was riding a bull, and making money.

At the same time, I was staying with a friend, and my expenses were at a minimum, so my account grew.

Four years ago, I had made enough to buy a small house for cash and still have a trading capital. Now I started having more normal expenses. I have always been a very frugal person and live on well below average expenses. And yet, my gains never completely covered my expenses.

I didn't follow my advice, because I never thought of it then. I paid my expenses from my capital rather than my gains. For the past 3 years, my capital has been reduced to almost nothing.

Today, I face a very uncertain future, if any future at all.

You might think I must be pretty mediocre as a trader. My expectancy is 1.46. For every dollar at risk I make an average of $0.46 gain. Or an annual average of 46%. Not bad. But the gains were never enough to pay the bills, and my capital melted away, a little at a time, every month.

I hope someone can learn something from this.

Now we can quibble about details of the writer's account; I'm not sure taking money out of one's account after each successful trade is the way to go, for example. The writer's broader point, however, is very well taken:

If you're going to trade for a living, you need to tightly control your overhead. You cannot assume that past, high returns will continue indefinitely into the future. You need to harvest money in the good times to ride out lean periods. You need to protect your base capital in case profits are wiped out. You cannot win the game if you cannot stay in the game.

What happens with too many traders is that they begin with aspirations that do not match their account sizes. They want to trade for a living, but their base capital will not support their goals if returns are anything less than consistently stellar. When good returns are achieved, those traders keep all their earnings as risk capital to build their account size. When the inevitable slumps hit, they take a decent percentage drawdown from a larger capital base. That can leave them worse off than when they began.

For instance, take a simple example: If I start with a capital base of $100,000 and make 50% in a year, keep profits as trading capital, and then have a 50% losing year, I'll finish my second year of trading with $75,000--down 25%!

A business owner cannot sell off parts of her restaurant to pay the bills--at least not for long. A baseball team owner cannot sell off one player after another in order to keep the team afloat. A solid business plan details how the business will be self-sustaining: how profits will support the ongoing maintenance and growth of the firm.

Trading for a living is much harder than people assume: profits after expenses must be sufficient not only for you to live off of, but also to grow your account. Little wonder that so many businesses begin with investor loans; that so many traders begin by trading the capital of others. It is difficult for any business to start up with enough capital to both support the founders *and* fund the firm's growth.

This is the "afflicting the comfortable" part of the blog. Few gurus, educators, and mentors will emphasize the financial challenges associated with making trading a living and even fewer will linger to tell the stories of those who have fallen short in their efforts. It is wonderful to lift your eyes to the stars, but always make sure your feet remain firmly planted on ground. Failing to generate and follow a workable business plan too often amounts to planning to fail.

For more on this topic, see the post on performance expectations for traders.

Readings for Week’s End

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

* Excellent article on reflation and its implications;

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

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

* Revisions show recession worse than initially thought;

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

* Worthwhile articles on trading trend days;

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

* Are we in a primary bull market for stocks?

* Why healthcare companies might not want a public plan.

Teamwork and Trading Success

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

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

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

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


Three Ways You Know Economic Numbers Are Game Changers

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

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

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

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

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

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

Morning Briefing for July 31st: Sustaining the Breakout

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

Countries and People: Reflections on Getting Old

When does a person become "old"?

If you ask my teenage kids, 40 seems ancient.

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

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

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

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

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

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

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

Evening Briefing for July 30th

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

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



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

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

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

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

-- Volume can be deceptive and more excellent updates;

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

How Do We Know a Trend is Ending?

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

My reply: Think in terms of structure.

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

By the afternoon, however, I posted to Twitter:

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

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

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

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

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

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



New TraderFeed E-Mail Policy

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

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

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

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

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

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


Midday Briefing for July 30th: Consolidating the Upside Breakout

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

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

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

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

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