TraderFeed

What Commodity Prices Are Telling Us

2009-07-10T04:50:00.000-05:00

Commodities have become a pretty good proxy for sentiment regarding the prospects for global economic recovery, as growth can be expected to generate increased demand for oil, industrial metals, and food stuffs. After breaking out of the base extending from December through April, commodities (DBC, above) have pulled back into that base, as investors have renewed questions regarding growth prospects. With that, inflation themes have taken a back seat to deflationary concerns, strengthening the U.S. dollar and sending Treasury prices higher (and yields lower).

For investors, nothing is more important than scoping out the prospects for inflation vs. deflation. The movements of the various asset classes are a kind of voting mechanism regarding those prospects and, thus far, are voting for continued economic weakness.
.

Evening Briefing for July 9th

2009-07-09T21:33:00.000-05:00

* MARKET THEMES FOR THURSDAY: Early rally was unable to sustain and market traded mostly in range fashion following yesterday's weakness and afternoon recovery. That places us in a short-term range defined by Wednesday's low and the recent highs. If we are unable to take out today's highs in early trade tomorrow, I would expect a test of those lows. While we've had a bounce, that has not changed the market's downward short/intermediate term trend. Market wrap here.

* OVERSEAS/OVERNIGHT NUMBERS: 12:00 M CT - Japan, consumer confidence; 1:45 AM CT - France, industrial production, balance of payments; 3:00 AM CT - Italy, industrial production; 3:30 AM CT - UK, producer prices; 5:00 AM CT - France, unemployment; 6:00 AM CT - Canada, jobs reports; 7:30 AM CT - Canada, housing prices, trade balances.

* WORTH READING:

-- Chrome a game changer?

-- Commercial real estate as a time bomb;

-- Farming as an investment;

-- Upper income consumers are cutting back;

-- Relative sector performance, increasing bearish sentiment, and more links to like;

-- Buffett advocates a second stimulus.
.

Midday Briefing for July 9th: Sitting Near the Highs

2009-07-09T13:24:00.001-05:00

The Market Delta chart shows significant buying interest since 9:30 AM CT, which has returned us toward the overnight highs. Note how we've built volume in the 881 area for ES. If we are to break out to the upside, selling should be contained and hold above that level. Failure to hold the 881 area would target VWAP and the lower end of the day's range.
.

Finding Transition Reversals at Different Time Frames

2009-07-09T11:01:00.000-05:00

Yesterday I mentioned that the "transition" pattern of market reversals occurs at differing time frames. If you notice the three consecutive lows in ES this morning (chart above between 8 and 10 AM CT), you might also appreciate that they occurred on lower volume and that the last new low was not confirmed by either Russell or NASDAQ indexes. That drying up of selling led to a nice buying spurt that took us back above the day's volume-weighted average price.
.

Morning Briefing for July 9th: Following Significant Weakness

2009-07-09T07:28:00.001-05:00

Well, yesterday's research has been paying off nicely, as we turned around in afternoon trade and have seen higher prices for stocks overnight. I noticed that we made a 20-day price low yesterday, with the number of NYSE, NASDAQ, and ASE issues making fresh 20-day lows exceeding 2000. When this has been the case since September, 2002 (when I first began archiving the 20-day highs and lows), the S&P 500 Index (SPY) has averaged a subsequent 20-day gain of .90% (42 up, 29 down). That compares with an average .14% 20-day gain for the remainder of the sample (980 up, 623 down). It's one more reminder that significant weakness in the past does not necessarily imply further weakness going forward.

Between trader meetings, I'll be updating the blog and Twitter with market observations. More to come!

9:38 AM CT - After peeking above yesterday's high, the S&P 500 Index (ES) has moved back into the previous day's range toward the day's pivot. With a mixed TICK and mixed volume at offer/bid in Market Delta, it's shaping up as a range trade thus far.
.

Protecting Blog Content: A Useful Resource

2009-07-09T04:24:00.000-05:00

Nothing is more aggravating for bloggers than to put time and effort into their sites, only to have others copy their work--often without attribution. Nothing is more aggravating for teachers than to have students hand in papers that have been copied from material on the Web.

A sharp reader alerts me to a service that might help with this aggravation. The service, called FairShare, can scan billions of Web pages for particular phrases or paragraphs of material to see if they have been duplicated elsewhere. It has many other features Web authors might consider in protecting their work.

Score one for the good guys. Thanks, Josh, for the excellent catch!
.

Evening Briefing for July 8th

2009-07-08T20:00:00.000-05:00

* MARKET THEMES FOR WEDNESDAY - S&P 500 Index breaks below the May/June lows, with continued weakness in 10-year Treasury yields and commodity prices. We continue to extend the number of stocks making new lows, with 288 20-day highs and 2429 20-day lows. Small cap stocks, banking, and housing shares are relatively weak; a market rally in the afternoon lifted energy and consumer stocks. A complete market wrap here.

* OVERSEAS/OVERNIGHT NUMBERS: 1 AM CT - Germany, manufacturing, CPI, foreign trade; 6 AM CT - UK, BoE interest rate decision; 7:15 AM CT - Canada, housing starts.

* WORTH READING:

-- More China trade conducted with yuan, rather than dollars;

-- States using stimulus money to stay afloat;

-- California's budgetary woes largely political;

-- The challenges of market timing signals;

-- Google's operating system challenge to Microsoft;

-- AXP sees no economic recovery;

-- Elliott Wave look at today's trade;

-- Reflections on the habits of trading success.
.

A Look at a Transition Turnaround

2009-07-08T15:04:00.000-05:00

Here we see the transition bottoming pattern mentioned in the Twitter comments intraday. The high volume decline was followed by a nice bounce and then a lower price low in ES that occurred on lower volume (and lower volume at bid) and non-confirmations from NASDAQ and Russell indexes. Those were followed by a significant surge in buying, taking us back above the day's VWAP. It's a key pattern to watch for on different time frames.
.

An Updated Look at Two Sectors

2009-07-08T11:43:00.000-05:00

Here's a quick look at two sectors that I had earlier featured when they failed to confirm the June highs in the large cap stock indexes. Banks ($BKX, top chart) and homebuilder shares (XHB, bottom chart) are now retracing much of their rallies from March. As I stressed in the earlier post, it is difficult to imagine sustaining economic strength without the participation of these sectors.
.

Midday Update: Catching a Market Breakdown

2009-07-08T10:33:00.000-05:00

The Market Delta chart nicely shows the breakout from the morning trading range. If you look horizontally, from bar to bar, you can see how we expanded volume as the ES market broke below 879, with the majority of the volume concentrated at the bid, as sellers became more aggressive. With confirming moves in oil and the dollar, and the more speculative NASDAQ and Russell issues leading the downside, the breakout showed that it was not a flash in the pan move. Obviously, if this is a genuine downside break--with longer-term implications given the much noted head-and-shoulders pattern in the ES--we should not trade back into the morning range (and the volume bulge between 878.50 and 882).
.

Avoiding Getting Chopped Up in Range Markets

2009-07-08T09:22:00.000-05:00

When I talk with traders before the market open, it's common to hear their bullish or bearish expectations. Rarely do traders actively plan for a range bound trade, even though range trading is every bit as common as trending trade.

Today, thus far, we've seen several early signs of range trade:

* A clear overnight range;

* A mixed pattern of strength, with large caps outperforming small caps and NASDAQ shares;

* Relatively modest NYSE advance/decline numbers for the day;

* Mixed sector performance, with financial and tech shares underperforming and energy and materials shares outperforming;

* Oscillation of price around the value-weighted average price;

* Below average first half hour volume in the ES contract.

Knowing the signs of range markets that set up early in the day can help you avoid buying and selling anticipated breakouts from the range and getting chopped up in the process. It's another example of how accurate identification of the day structure is key to setting up good trades.
.

Morning Briefing for July 8th: Three Consecutive Weak Trading Days

2009-07-08T04:56:00.002-05:00

Once again I'll be blogging from my meetings with traders at a proprietary trading firm and will do my best to pass along nuggets of insight as the day progresses. My take at this point in the morning (4:51 AM CT) is that U.S. stock index futures are holding up pretty well, given the weakness in stocks overseas and the commodity weakness. As always, I'll update markets (and the blog) via Twitter during the day (follow here).

Here's a piece of research I'll be sharing: We've traded below the S2 support level for three consecutive days. Going back to 2000, when that has happened, the S&P 500 Index (SPY) has averaged a subsequent three-day gain of .25% (112 up, 69 down). By contrast, the remainder of the sample has averaged a three-day change of -.06% (1136 up, 1060 down). So while indicators look bearish at this point (see Twitter update), note that there is no bearish edge going forward when we've had three consecutive weak trading days. More to come...

6:44 AM CT - Here's a nice technical recap of the markets, emphasizing the intermediate-term downtrend. Apropos of Cobra's comments, I would emphasize that we now have fewer than 20% of SPX stocks trading above their 20-day moving averages and new 65-day lows now outnumber 65-day highs. As noted in my Twitter update earlier this morning, 34 of the 40 stocks in my SPX basket (highly weighted issues evenly chosen from eight sectors) are trading in short-term downtrends.

8:10 AM CT - Above we see the Market Delta chart for pre-market ES, which shows us trading in an extended overnight range not far off yesterday's pivot level. I would expect a test of yesterday's lows if we cannot sustain a move above this overnight range. More to come via Twitter.
.

Evening Briefing for July 7th

2009-07-07T20:17:00.001-05:00

* MARKET THEMES FOR TUESDAY - Continued weakness in stock market, as we move to the bottom of the May/June trading range. Themes of strong U.S. dollar, lower 10-year Treasury rates, and weak commodities continue. Weakness evident in commodity related materials and energy shares, as well as economically sensitive industrial and consumer discretionary stocks. Defensive health care and consumer staples sectors relatively stronger. Summary of the market day here.

* OVERSEAS/OVERNIGHT NUMBERS: 12:00 Midnight - Japan, economy survey; 4:00 AM CT - EU, GDP; 5:00 AM CT - Germany, industrial production; 9:00 AM CT - Germany, Ifo Euro-zone economic outlook.

* WORTH READING:

-- Hedge funds coming back in a new way;

-- A fiscal train wreck in the making;

-- Contraction in credit cards, lending;

-- Excellent economic summary; no bright spots for employment;

-- Interview with Matt Taibbi and more good reading;

-- What traders can learn from Andy Roddick;

-- Reflections on the death of the dollar;

-- Mortgage fraud rampant.
.

Trading Screens: Keeping Them Simple, But Comprehensive

2009-07-07T15:30:00.000-05:00

It's interesting; when I see traders who are disorganized in their decision processes, many times I notice that their screens are poorly organized as well. This is one area where more--more screens, more cluttered on a screen--is not necessarily better.

If you click on the screenshot above, you'll see one of the screens I use for monitoring the market in real time (e-Signal platform). By clicking on any of the symbols in the lower half of the screen, I can see the chart in the upper half. The symbols at bottom left show me sector and index changes from the market open; the symbols at bottom right show changes from the prior day's close and include several asset classes related to stocks (10-year rates, gold, oil, euro/dollar).

I find that keeping trading screens simple, with only the information I truly need, is helpful for decision making. When you work with a screen long enough, you know exactly where to look for relevant information--very helpful when making and executing rapid decisions.
.

Testing the May Lows

2009-07-07T14:15:00.000-05:00

Note the head and shoulders pattern in the S&P 500 Index (SPY) that has received much recent attention. The 20-day volume-weighted average price (blue line) that had acted as support during the rally became resistance during the recent upmove. Now we are testing the neckline of that head and shoulders pattern. Interestingly, I show 227 new 20-day highs among NYSE, NASDAQ, and ASE stocks today against 972 lows--fewer new lows than we saw yesterday. If those new lows don't expand with continued selling today, we could trap a few bears looking for a breakdown of that much noted pattern.
.

Executing Good Trades: Avoiding Getting Chopped Up in Trading

2009-07-07T09:19:00.000-05:00

Several readers have asked questions regarding how to execute trades to achieve a favorable risk-to-reward level. This is a most important topic; I find that many traders are losing traders, not because they fail to detect market direction, but because they fail to execute good trades that exploit that direction. Most often this means that they enter long trades after significant strength has already materialized and vice versa. By the time they chase the move, it's natural for a retracement to occur. Aware of the need to cut losses, they bail out after the retracement--only to see the market move their way eventually.

That's a big part of what traders mean by getting "chopped up". Very often, getting chopped up means getting direction right, but executing poorly.

I like using the NYSE TICK to guide my execution. If we're in an uptrend, for example, we should see TICK pullbacks at successively higher prices. I will look for the most recent notable price low and then will wait for a several minute pullback in TICK. If that pullback cannot move price below the most recent low, that becomes a spot where I consider either entering a long position or adding to one.

Should we actually break below that most recent low subsequently, that would stop me out. As a result, the distance between my entry point and the most recent low is my defined risk. The defined reward is the distance between my entry point and the next relevant target. (Price targets are posted each AM prior to the market open via Twitter). As long as the distance to the target exceeds the distance to my stop by at least a 2:1 factor, I'm willing to take that trade.

The key to making this execution approach work is being patient enough when you're a buyer to let sellers "take their turn"; when you're a seller to have the patience to wait out the buyers' next bounce. You want to see those sellers and buyers get trapped on the next leg of the trend; their exits will help your position. Much of execution boils down to patience and letting buyers and sellers *show* you that they cannot move markets higher or lower.

I'll be posting examples later this week. Thanks for the queries. In the interim, see this post on trade execution and this trading example. Note that these ideas are relevant for swing trades as well.
.

Pre-Opening Briefing: Watching Ranges and Intermarket Correlations

2009-07-07T08:00:00.000-05:00

Above you can see how a multi-day range is setting up in the S&P 500 e-mini (ES) futures, with resistance around the 897.50 level and support at yesterday's lows around 882.50. Note that the lower end of the range is also near the lower end of a much larger range defined by June's price highs and lows. With new 20-day lows expanding (see recent Twitter post), I would expect to see a test of these lows if we cannot break and stay above that 897.50 area. I would also be a buyer of those lows if we cannot further expand 20-day lows and see weaker downside momentum on any test. Meanwhile, keep an eye on the U.S. dollar and on commodity prices; those have been moving pretty reliably with stocks and have, at times, provided some useful tells regarding intermarket sentiment (stronger dollar and weaker commodities accompanying weaker stocks and vice versa).
.

Fear, Evolution, and the Genesis of Market Inefficiencies

2009-07-07T07:00:00.000-05:00

It makes evolutionary sense that we are particularly hard-wired to learn from episodes of danger. An animal that tastes a poisonous food and becomes sick learns to avoid that food forever. That is known as single-trial learning (see this very relevant post on the topic); it occurs when the fear-based emotions associated with danger leave a cognitive and behavioral imprint. Once burned, the animal learns to be twice shy--or it does not survive.

I encourage readers to carefully study this post from Victor Niederhoffer. It is not by accident that he writes about food webs and "who eats who". The markets offer a tableau of evolutionary challenge no less than nature herself.

What to make of the finding that large moves up in the stock market are relatively equally accompanied by moves up and down in bonds, but large moves down in stocks tend to be accompanied by large up moves in bonds?

The dynamics of fear are quite different from those of euphoria. Nature ensures more rapid imprinting in the case of fear; survival trumps life enhancement in the scheme of evolutionary priorities. The large down moves in stocks are accompanied by flights to safety in bonds, but the large up moves in stocks don't necessarily lead to a flight from safety.

To the extent, however, that we can map moves in and out of particular asset classes as reflections of degrees of fear and safety, however, we can begin to appreciate where nature is leaving her imprinting. And that tells us something about market reactions that morph into market overreactions.

And that is one important way market inefficiencies develop. To ensure survival, nature invariably overshoots her mark.

More to come; hats off to Daily Speculations.
.

Evening Briefing for July 6th

2009-07-06T20:40:00.000-05:00

* MARKET THEMES FOR MONDAY - Toward the bottom of the broad trading range defined by June's highs and lows, we followed the scenario laid out in the morning and picked up some support after early weakness, holding that strength following late negative news. Weak oil, gold; U.S. dollar off its early highs; 10-year Treasury rates off their early highs; consumer staples issues strong; small caps, tech weak. Detailed market and news wrap here.

* OVERNIGHT/OVERSEAS NUMBERS - 1:45 AM CT - France, foreign trade; 3:30 AM CT - UK, industrial production; 5 AM CT - Germany, manufacturing orders; 7:30 AM CT - Canada, building permits.

* WORTH READING:

-- Thought provoking article on whether we're more likely to see deflation or inflation;

-- A look at risks faced by the ECB;

-- The case for buying options volatility, single state ETFs, and more good reading.

-- Why inflation may be on the horizon as a significant risk;

-- Major averages looking for support levels;

-- Further developments in the most unusual trading/espionage case;

-- Thoughts on ratings agencies and implicit economic forecasts.
.

When Markets Are Oversold Across Time Frames

2009-07-06T18:32:00.001-05:00

7:34 PM CT - A reader kindly pointed out that not all of the conditions of the research below were met today, as we made a four day low, but not four consecutive lows in SPY. I believe the gist of the research is correct, but please take it with multiple grains of salt!

This morning's post discussed the value of historical research for perspective and gave an example that proved helpful during today's trade.

One key to doing historical research well is finding what makes the current market unique and distinctive, because--on average--that's where the greatest potential edges are to be found.

For example, we traded at a 20-day low today in the S&P 500 Index (SPY) and made a fourth consecutive lower low. This pattern has occurred 76 times since 2000. Two days later, SPY has averaged a sizable gain of 1.03% (53 occasions up, 23 down). By contrast, the average two-day gain for SPY for the remainder of the sample has been -.05% (1157 up, 1134 down).

What that suggests is that, on average, markets that have been weak in the short-term (four days lower lows) *and* weak on an intermediate term (20-day lows) have tended to bounce in the short term. That can then become a hypothesis for subsequent trading, and we can see if market action is supporting or disconfirming the hypothesis.

Either scenario provides useful information: whether a market is living up to its historical script or whether it's doing something different gives us useful information about how we're trading. (Hint: A historical look suggests that it's the markets that are weakest that fail to sustain bounces in oversold conditions.)
.

When Markets Can't Go Lower on Bad News

2009-07-06T15:04:00.000-05:00

Just a quick note to reflect what I was discussing with traders late in the afternoon. We had a negative news item regarding Fitch's downgrade of California debt, and selling in stocks quickly ensued. As we moved forward, however, that selling abated and we began to see the NYSE TICK accumulate positive values. When negative news cannot keep a market down, it's a good sign that sellers cannot dominate. Once that happens, those sellers have to cover, contributing to subsequent strength.

It's an important lesson: just as important as the news is how markets respond to news. When we can't go lower on bad news, that tends to be good news for bulls.
.

Tracking VWAP and Range Trading Days

2009-07-06T10:31:00.001-05:00

One thing I've been keeping an eye on with the traders is the day's volume-weighted average price (VWAP). In a range market (see bottom chart), we will often oscillate around this level, as the recent Twitter posts emphasized:

9:56 AM CT - Banks hovering at their 6/23 lows; 18 stks up from open, 22 dn; ES sectors more mixed than broad mkt. VWAP = 886.50

9:59 AM CT - Note than in range mkt, we should trade back to VWAP; XLP, XLV relatively strong (defensive sectors).

That means that fading the edges of ranges toward VWAP can be a high percentage trade, particularly when volume and TICK extremes fade near those range edges. I track VWAP with the red line in the Market Delta chart above; in general, trending markets will stay above or below this level; range markets will move around it.

12:55 PM CT - I've updated the chart to show further oscillation around VWAP (top chart), as we see strength in the ES market largely not confirmed by the broad market. Note how VWAP also represents the area where we have transacted the most volume (side histogram), as this represents our day's best estimate of value. In a range market, we want to fade moves away from this value area.
.

Making the Right Call on Day Structure

2009-07-06T09:21:00.000-05:00

Here we see an updated Market Delta chart for the ES contract this morning. Note the Twitter comments as we moved to new highs:

8:57 AM CT - TICK quite mixed, but volume at offer > bid in ES; Russell, NASDAQ underperforming; not acting like trending market thus far

9:03 AM CT - ES makes new high for AM, not confirmed by Russell or NASDAQ. 890 more declines than advances

By watching the indexes other than the large cap ES and following the broad market, we could see that the market was not acting as if we were in an upside trend day. Recognizing the mixed strength of the market and making the call re: range bound conditions helped with making the fade trade on those morning ES highs.

Your early task as an active trader is to make the basic call as to whether we're in range or trending market conditions. Much of your morning profitability will hinge on getting that call right.
.

Establishing Reference Ranges Early in the Market Session

2009-07-06T08:29:00.000-05:00

Note how we're building value in the 885 area of the ES contract just prior to the market open. We can view such a value area as a pre-opening range to gauge early buying and selling in stocks and determine morning market direction. A trending move should reject this range in early trade and never look back; a range market will tend to oscillate around this range. Finding such early reference periods can be highly useful for intraday traders.
.

Morning Briefing for July 6th: Inside a Prop Firm

2009-07-06T06:55:00.000-05:00

I'll be blogging and tweeting today from a proprietary trading firm, where I'm working with traders. Stay tuned, and I'll pass along insights during the day. You can read the latest five tweets on the blog page under "Twitter Trader" or you can follow the tweets on my Twitter page.

So how do I work when I'm at a prop firm? I roll into the office at 6 AM, well before anyone has arrived. I spend the early morning running historical studies that will provide insight (and perhaps some edge!) for the traders I work with. As a coach, I want to be able to speak knowledgeably not only about traders' psychological states, but also the states of the markets they're trading.

Most of the historical studies I research and share with my traders don't get posted to the blog. It's my desire that the traders I work with derive unique benefit from the research efforts. If I've done my work well, I've earned my day's keep before the opening bell has rung. Just one good idea to a trader who trades 200+ S&P e-mini futures at a time can provide a meaningful return.

For today, however, I'll share one of the ideas that I'll run by interested traders at the firm. On Thursday, we traded below the S3 support level on a weak day. Today, we're poised to open below the S1 support level in further weakness. When the S&P 500 Index (SPY) trades below S3 and then opens the next day below S1, what has happened historically from the open to the close in the coming trading day?

It turns out that such bearishness does not bring a bearish edge to the trading day. Since 2000, we've had 92 instances in which the market has followed a very weak session with a weak open. During the day session, the market has averaged a gain of .25% (51 up, 41 down). By comparison, the average day session change for the remainder of the sample has been -.03% (1149 up, 1138 down).

Recall that my previously posted research anticipated a lower market following Thursday's weak momentum. Now we have to temper that finding with the above research. Should we have difficulty breaking and staying below the overnight lows in early trade, I will entertain the possibility that we could see a bit of squeeze on the shorts. At the very least, I'll be encouraging traders to not automatically assume that recent weakness will bring a bearish edge to today's day session.
.