Info!! Useful Trading Tools - Business Office Two: Volume

The starting fourth dimension postal service inward this series covered the NYSE TICK together with how it offers insights into who is participating inward markets.  In this post, we'll direct keep a human face at what tin sack hold upwards learned from raw book data.

The inward a higher house nautical chart covers today's trading inward the belatedly forenoon inward the S&P 500 e-mini (ES) futures.  Notice how nosotros were trading inward a narrow make for much of the fourth dimension alongside book averaging nearly a brace chiliad contracts traded per minute.  At 11:49 AM, nosotros got a menstruation to the upside, alongside over 9400 contracts traded that minute.  NYSE TICK hitting a high of 587 during that infinitesimal together with nosotros traded correct dorsum into the make subsequently.

What did that nation you?

Buyers came inward together with couldn't elevator the marketplace position higher.  There was a relatively large buying flow, but it could non heighten the TICK to statistically important levels.  That tells us that the buying was non heavy across the total stock universe.  It was aggressive buying (significant volume), but it could non generate important directional movement.  

Not a bad slice of marketplace position information.

Sure enough, at 11:58 AM--just nine minutes later--the ES contract prints over 9900 contracts during the infinitesimal together with volatility expands, breaking us out of the range.  Moreover, NYSE TICK plunged to -797 together with and then to -997 the next minute.  That is significantly wide selling on important marketplace position volume.  

In Market Profile terms, nosotros direct keep rejected value inward the prior make together with at i time are trending to institute a fresh, lower value area.  The fact that the displace out of the make occurred alongside significant, wide marketplace position participation is an indication that directional participants direct keep taken command of the market.  As yous know from the ease of the hateful solar daytime session, they did indeed direct keep command together with nosotros shut nigh the lows of the day.

It is mutual for traders to advert to the minute-by-minute drive of the marketplace position equally "noise".  For those who sympathise the dynamics of toll action, however, at that topographic point tin sack hold upwards of import signals amidst the noise.  When nosotros direct keep depression to average volume, nosotros know that marketplace position makers are dominant together with directional participants are relatively inactive.  When nosotros direct keep significantly expanded volume, nosotros know that directional traders direct keep taken the marketplace position reins together with nosotros tin sack suit expectations accordingly.  Influenza A virus subtype H5N1 meaningful shift inward book is ofttimes a overnice nation for meaningful shifts inward trading patterns.

Further Reading:  Relative Volume together with Volatility

Info!! Trading Notes, Calendar Week Of January 18, 2016

Friday, Jan 22nd

*  Yesterday's postal service noted the possibility that nosotros had set inwards a momentum depression for the recent marketplace position cycle.  Price activity on Th was supportive of that hypothesis, every bit nosotros saw real important selling pressure level inwards the afternoon, alongside multiple NYSE TICK readings below -1000.  That was similar inwards selling intensity to the puking nosotros saw at the cost lows, precisely immediately nosotros were asset higher inwards price.  The market's might to brand higher cost lows together with higher highs is what nosotros expression for if we've indeed set inwards a momentum low.  Meanwhile, we've moved higher overnight, 1 time to a greater extent than consistent alongside the momentum depression notion.  (Note the recent important forcefulness inwards crude oil prices, every bit well).  Bottom trouble is that, short-term, nosotros look to travel transitioning from a "sell the bounce" to a "buy the weakness" mode. 

*  Here's a dainty persuasion of breadth amid SPX stocks, which tracks the number of stocks making 5, 20, together with 100-day novel highs vs. lows.  Note how we've stayed oversold far longer than during recent declines; besides banking firm complaint how we're silent inwards oversold territory despite the recent bounce.  I hold back stronger breadth numbers earlier nosotros consider a seek of recent marketplace position lows.

*  Yesterday was the start twenty-four hr menstruum inwards xi sessions inwards which nosotros registered fewer than one 1000 stocks across all exchanges registering fresh monthly cost lows.  Still, alone 46% of SPX shares are trading inwards a higher house their 3-day moving averages together with alone 31% inwards a higher house their 5-day averages every bit of yesterday's unopen (data from Index Indicators).  Those curt term breadth measures should decease on to strengthen if we've indeed seen that momentum low.

Thursday, January 21st

*  We saw concentrated selling early on inwards the twenty-four hr menstruum followed past times a vigorous rally alongside important buying forcefulness that erased much of the day's losses.  The breadth numbers were peculiarly extreme alongside 44 stocks registering fresh monthly highs against 3250 novel lows.  The depth of the oversold condition, combined alongside the vigor of the buying, opens to the door to the hypothesis that we've set inwards a momentum depression for this downward cycle.  With the reaction to the ECB coming together well-nigh recently, we've moved higher inwards trading.  We should consider farther upside follow through together with divergences inwards the breadth information on farther weakness if, indeed, we've set inwards a momentum low.

*  That beingness said, to reiterate a signal made for a piece now, this wheel has been deeper on the downside than cycles over the past times ii years together with is to a greater extent than consistent alongside downward moves inwards 2010 together with 2011 than 2014 together with 2015.  These deeply oversold declines inwards 2008, 2010, together with 2011 eventually went on to brand farther cost lows good later the momentum signal at which we'd maxed out the number of shares making novel lows.

*  Here is an overbought/oversold mensurate that I rail based on number bars rather than time-based bars.  What I expression for inwards a comport marketplace position is overbought levels at lower cost highs; those are ofttimes expert regions for shorting.  In a bull market, yous expression for oversold levels at higher cost lows.  Those are ofttimes expert areas for buying.  In a attain market, you'll consider successive overbought together with oversold levels at similar cost extremes.

Wednesday, Jan 20th

*  Stocks came good off their highs during merchandise Tuesday alongside accompanying crude oil weakness together with that weakness has continued inwards overnight trading.  That has taken us to novel cost lows together with pretty good negated whatever divergences nosotros were seeing inwards the data, every bit noted yesterday.  The of import say inwards Tuesday's trading was the inability of rallies to sustain either inwards fourth dimension or price, every bit nosotros made successive lower highs.  If nosotros were coming off a momentum low, we'd hold back to consider value buyers sustain buying.  When buying is non sustained, there's a expert likelihood that it's to a greater extent than short-covering than initiatory interest.

*  Meanwhile, whether yous expression at VIX, volume, or the pure volatility mensurate that I follow (volatility per unit of measurement of trading volume), all are elevated, precisely none of seen the kinds of capitulation spikes that get got characterized past times sudden declines.  H5N1 interruption of the 2014 together with 2015 lows may aid yield such spikes; it's something I'm watching for.

*  Once again, to emphasize the themes from concluding week's notes, in that location is every prove that this spend upwards is unlike inwards graphic symbol from the corrections we've seen during the past times ii years.  Oversold levels that had led to sustained rallies--characteristic of a attain trade--are no longer finding buying interest.  It is hard to imagine sustaining a movement higher until nosotros tin let on a bottom inwards crude oil together with related commodities.  

*  It is besides hard to imagine the Fed sustaining a programme of charge per unit of measurement hikes inwards the confront of deteriorating fiscal conditions.  The marketplace position spend upwards is getting to the signal where it volition dent consumer confidence.  Note the superior relative functioning of utility shares.  Yield becomes attractive every bit a flying to safety, precisely yield is besides to a greater extent than attractive if rates are probable to remain lower for longer.

Tuesday, Jan 19th

*  Everyone wants to merchandise alongside confidence together with conviction, but that agency that nosotros get got to maintain heed together with torso inwards peak conditioning, especially during busy markets.

*  We traded to novel lows for this movement on Friday, precisely interestingly nosotros saw the start prove of divergences inwards the novel lows information for SPX stocks.  For example, nosotros had 129 to a greater extent than novel 100-day lows than novel highs on Friday, surprisingly curt of the 167 differential on Wednesday.  Only 8.96% of SPX stocks traded inwards a higher house their 10-day moving averages on Friday, precisely that was silent higher than Wednesday's degree of 4.98%.  (Data from Index Indicators).  Among SPX sectors failing to brand novel lows on Fri were XLU, XLE, together with XLV.  The relative forcefulness of the XLE shares is notable, given the recent weakness inwards oil.  We've bounced good off Friday's lows inwards vacation together with pre-market trade. 

*  Last week's trading notes observed prove that the electrical flow marketplace position downturn has been to a greater extent than persistent than recent corrections.  When we've had important declines inwards August, 2011 together with May, 2010, nosotros saw follow-through weakness fifty-fifty later a momentum depression was reached.  I am opened upwards to that possibility inwards the acquaint market.  If, however, nosotros get got indeed set inwards a momentum low, nosotros should consider to a greater extent than of a two-way merchandise going forrad than what we've seen thence far inwards 2016.

*  My intermediate term forcefulness measure, which takes into concern human relationship 5, 20, together with 100-day novel highs vs. lows amid SPX shares, opens the calendar week inwards unusually oversold territory.  With VIX closing inwards a higher house 25 on Friday, nosotros should decease on to consider meaningful volatility.

Info!! Employing Proper Leverage Inwards Life In Addition To Markets

I'd similar to give thank yous @NASTrading for including this weblog inward his listing of Top 10 Websites for traders.  Nat makes a real skillful signal inward his post:  the importance of leveraging one's fourth dimension together with effort.  By focusing on reading the sites, query pieces, together with data most relevant to yous together with your trading, yous minimize distraction together with growth the odds of synthesizing the useful cloth into promising views.  Nat's listing is a corking house to origin for leveraging spider web surfing time.

There are other spheres of trading where leveraging efforts is important.  I of late met amongst a grouping of traders to hash out best together with worst trading practices.  One topic that came upwards a few times relates to what I telephone yell upwards "selectivity":  taking the best trades together with avoiding marginal bets.  Many times traders inquire most how they tin give the axe avoid overtrading when they haven't clearly defined proper trading.  What impressed me most the traders I spoke amongst is that they had made ongoing efforts to review their trading together with seat the "setups"--the patterns of price, volume, guild flow, etc.--that constituted their best trades.  Once yous define the parameters of skillful trades, you're inward a much stronger seat to leverage your resources together with focus your attending on solely the most promising situations.  

For example, because book correlates therefore highly amongst marketplace movement, I volition non house daytrades unless book hits a threshold level.  If the marketplace is slow, it's apt to move noisy together with express inward opportunity, therefore I stand upwards aside.  Other traders mightiness leverage their efforts amongst dissimilar criteria:  this is where stock screening tin give the axe move useful.  Many of the best portfolio managers I utter amongst volition solely accept a merchandise if they tin give the axe clearly define a item ratio of vantage to risk.  That enables them to move patient inward their entry execution until the risk/reward threshold is reached.

But the value of leverage goes fifty-fifty farther inward life:  

*  Doubling downwards on your fourth dimension amongst the people who enrich your sense emotionally together with intellectually together with minimizing fourth dimension amongst people who sap your liberate energy or resent your success;

*  Maximizing lineament fourth dimension exterior of markets to construct your relationships, strengthen yourself physically, extend your learning, together with rejuvenate yourself spiritually together with minimizing depression lineament fourth dimension that is non productive inward whatever of these regards;

*  Focusing activity toward the most of import personal together with life goals together with minimizing activity that keeps yous busy merely doesn't displace yous forward.

In life, equally inward markets, nosotros tin give the axe "overtrade".  We pursue marginal courses of activity together with thereby dilute our most promising efforts.  By knowing what moves us forwards equally people, nosotros tin give the axe leverage our best personal "setups" for success. 

Further Reading:  Overtrading together with Unrealistic Expectations
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Info!! Bonus Ship #2: A Dissimilar Method For Calculating Volatility-Adjusted Toll Targets

My recent bonus post explained ane of the ways that I've constitute helpful to scream upwards most together with calculate cost targets for the trading day. As background for this topic, delight banking concern fit out the posts on defining effective cost targets together with the importance of volatility inward merchandise planning.

This volition live my minute together with lastly bonus postal service on the topic. As amongst the before one, I volition live keeping it on the site for a express fourth dimension equally a thank y'all to electrical flow readers. If the ideas involvement you, y'all mightiness desire to impress the postal service out or jot downward the relevant ideas.

In this post, I volition explicate how I calculate the daily cost targets that I postal service each morning time in the before post, the overnight high together with depression cost together with the prior day's high together with depression are to a greater extent than ofttimes than non my get-go cost targets. Along amongst the pin order together with VWAP, those are to a greater extent than ofttimes than non targets for the get-go trades I volition house during the day. Once I know those targets, it's a affair of: 1) discerning the residual betwixt buying together with selling sentiment, likewise equally sector together with intermarket dynamics, to gauge direction; 2) assessing today's book relative to yesterday's (and the prior 5 days' average volume) to gauge evolving volatility; 3) executing the merchandise inward the identified management at a cost that provides a favorable order of vantage relative to risk; together with 4) belongings the merchandise to the cost target most probable to live hitting given the market's electrical flow forcefulness together with volatility.

(The inward a higher house paragraph is a concise description of how I merchandise on the twenty-four hours fourth dimension frame).

The cost targets inward a higher house the prior day's high are identified equally R1, R2, together with R3. The cost targets below the prior day's depression are identified equally S1, S2, together with S3.

To calculate this levels, nosotros require an guess of recent volatility. That guess inward my calculations is the median daily cost arrive at for the yesteryear 5 trading sessions inward SPY. Thus, each twenty-four hours nosotros calculate the Daily Range: DR=((H-L)/O)*100. That is the departure betwixt the day's high together with depression prices divided yesteryear the opening cost multiplied times 100 (to plow over us a percentage). The Volatility guess (V) for our calculations is the median of the prior 5 days' DR values.

As I mentioned earlier, going dorsum to 2002, the median volatility for the prior 5 days correlates amongst today's volatility yesteryear .80. Knowing V gives us a practiced thought for today's DR.

So similar a shot nosotros tin move define our R together with southward cost targets:

R1 = Pivot + (.60*V)
S1 = Pivot - (.60*V)

Going dorsum to 2002, nosotros touching on R1 or S1 most 84% of the time. If the book today is anything similar yesterday's volume, R1 or S1 should live hitting during the day.

R2 = Pivot + (.80*V)
S2 = Pivot - (.80*V)

Going dorsum to 2002, nosotros touching on R2 or S2 most 66% of the time. If today's book is inward a higher house average, nosotros should hitting R2 or S2 during the day.

R3 = Pivot + V
S3 = Pivot - V

Going dorsum to 2002, nosotros touching on R3 or S3 most 50% of the time. If today's book is meaningfully inward a higher house average, nosotros should hitting R3 or S3 during the day.

R4 = Pivot + 1.2 V
S4 = Pivot - 1.2 V

Going dorsum to 2002, nosotros touching on R4 or S4 most 36% of the time. We require to run across book today much greater than the recent average book to bring confidence inward hitting R4 or S4.

Obviously, y'all could define R5 together with S5 levels (and beyond) accordingly for relatively rare occasions of high book trending together with arrive at breakouts.

NOTES ON THE CALCULATIONS

These cost levels were calculated together with tested empirically inward Excel using historical data. They are non based on whatever Fib or whatever other numerical scheme.

A worthwhile tweak on the inward a higher house methodology would live to purpose today's Open cost inward lieu of the Pivot for the calculations.

Another tweak substitutes weekly information for daily information to purpose for swing trading.

Another tweak is to adjust the formulas to dissimilar trading markets.

Knowing how far a marketplace is probable to deed inward a management is invaluable inward guiding the placement of halt together with piece of job out levels together with calculating the risk/reward parameters of a trade. By adjusting cost targets for recent volatility, traders tin move adjust apace to faster together with slower marketplace conditions. The cost targets are non necessarily difficult piece of job out levels; rather, they furnish anticipation of where those proper exits are probable to occur.
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Info!! An Introduction To Trading - Marketplace Auctions In Addition To Multiple Timeframes

The most recent post for the Introduction to Trading ebook introduced the catch of the auction marketplace equally a framework for agreement the stock market, using the uncomplicated illustration of an eBay auction. Now let's expand the conceptual framework to catch how auction markets tin choose together participants who operate at differing fourth dimension frames.

Central to whatever auction procedure is the notion of value. Value is the price--or arrive at of prices--that choose together buyers in addition to sellers. Because the auction exists to facilitate trade, the auction procedure constantly hunts for value: that cost grade that volition enable buyers in addition to sellers to transact with i another.

It is of import to recognize that value has both an objective in addition to a subjective meaning. An objective Definition of value inward the Market Profile framework is that arrive at of prices during a twenty-four hours or calendar week that covert to a greater extent than or less 2/3 of the bulk for that period. This value arrive at represents the prices that brought together the bulk of buyers in addition to sellers; it is objectively measurable equally a share of time, price, in addition to volume.

Value too has a subjective important to auction participants, equally each has his or her ain ideas of what a marketplace is worth. Influenza A virus subtype H5N1 value investor may define value good below the market's electrical flow level, because that is what stocks are worth according to his or her metrics. Influenza A virus subtype H5N1 short-term trader may perceive value inward an uptrend when a marketplace pulls dorsum to a 20-day moving average line. Influenza A virus subtype H5N1 longer-term trader mightiness give away value when at that topographic point is a important expansion of the release of stocks making fresh 52-week lows.

Trading occurs at the intersection of a trader's subjective Definition of value in addition to the market's objectively determined placement of value. If I recall "true" value is good higher upwardly or below the market's electrical flow assessment of value, I own got an incentive to instruct inward an fellowship to own got payoff of this discrepancy. My merchandise reflects my supposition that the market's assessed value will, over time, movement toward my value assessment. If I house value where the marketplace is currently trading, I may own got no incentive to instruct inward the market. By my subjective criteria, the marketplace is fairly priced, in addition to I volition hold off for the marketplace to movement below my value grade to brand buying profitable.

Imagine an auction with participants at many dissimilar fourth dimension frames, each with real dissimilar subjective definitions of value. An automobile auction, for example, mightiness characteristic active participation with people who own got used cars to sell in addition to others who wishing to instruct used vehicles. Bidders in addition to sellers own got an catch of what constitutes fair wholesale in addition to retail prices in addition to essay to obtain prices equally closed to those extremes equally possible.

Suppose, however, that--lurking inward the background of the wholesale machine auction--is a grouping of dealerships that brand their living past times buying inexpensive used cars, fixing them up, in addition to and hence selling at closed to retail prices. They volition entirely bid on cars when an oversupply province of affairs pushes prices to or fifty-fifty below traditional wholesale levels; this enables them to brand a prissy profit, fifty-fifty afterward they position operate into the vehicles. This way that a whole novel root of demand--and volume--will instruct inward the auction marketplace when prices striking levels that works life subjective value for large, longer-time frame participants.

Above in addition to below the market, yous ever own got value-oriented institutions (such equally usual funds) ready to instruct stocks when they're inexpensive (by the institutions' criteria) in addition to sell them when they're priced higher upwardly (the institution's Definition of) value. No incertitude you've seen markets that own got traded inward a narrow arrive at on placidity volume, entirely to movement higher on increased bulk next a arrive at breakout, in addition to and hence contrary sharply on fifty-fifty stronger volume. During the narrow arrive at bound action, marketplace makers were dominating the action; technical traders (including short-term prop traders) jumped into the marketplace on the breakout; in addition to value-oriented traders (including hedge funds) sold into the forcefulness equally stock index futures went to abrupt premium to cash. This is a uncomplicated event of how auctions choose together participants across dissimilar fourth dimension frames.

When I showtime began operate at a prop firm, I was surprised to detect that the traders focused on something quite dissimilar from the average traders I had run into. They used cost in addition to bulk information (including information from the fellowship book) to position *who* was inward the market. They wanted to know if at that topographic point was higher upwardly or below average institutional participation; if moves to novel cost highs or lows were attracting momentum participants; etc. By using "technical" marketplace information to brand inferences almost underlying auction processes, they were able to brand reasoned judgments equally to whether marketplace moves were probable to proceed or reverse.

In the side past times side segment of the book, we'll own got a closer expect at how savvy traders educate trading ideas from auction-generated marketplace data.
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Info!! Bayesian As Well As Static Reasoning Inward Markets: Trading Alongside An Opened Upwards Mind

In a recent post, I highlighted the make merchandise inwards the ES futures over the past times several months.  My signal was that the marketplace seat has been showing diminishing breadth at successive highs as well as also less weakness at successive lows during that range.  Generally, lengthier ranges Pb to lengthier directional moves, equally they are component division of longer-term marketplace seat cycles.  So the breakout from the electrical flow make should ultimately move a meaning one.  Will the marketplace seat interruption out of its make imminently, or volition the make proceed for only about other calendar month or more?  Will the ultimate breakout move to the upside or downside?  Will nosotros run across a fakeout, mistaken breakout prior to an eventual displace to novel highs or lows? 

My worst trading--and the worst trading I've observed of many traders--has been the resultant of what could move called static reasoning.  Static reasoning takes a diversity of evidence, assembles the show into a conclusion, as well as and hence places trades based on that conclusion.  Risk taking is ofttimes a component division of one's bird of belief inwards that conclusion.

Static reasoning is problematic for 2 reasons:  1) it is discipline to overconfidence bias, equally nosotros receive got a theatre opinion on a persuasion that nosotros own; as well as 2) it is discipline to confirmation bias, equally nosotros tend to procedure new, incoming data inwards the lite of our convictions.  When I've seen traders receive got larger than desired losses, it's by as well as large non been because they've held onto marginal views.  Rather, they receive got sized upward their preferred views, stuck amongst those views inwards the human face upward of opposite marketplace seat information, as well as ultimately lost the seat when drawdowns became uncomfortable.

I receive got institute my best trading to resultant from what could move called Bayesian reasoning:  a idea procedure that reflects a Bayesian, probabilistic way of thinking.  Bayesian reasoning begins amongst a hypothesis, but it is a flexible hypothesis that updates amongst new, incoming information.  One's confidence inwards the hypothesis waxes as well as wanes amongst novel information, as well as one's hypothesis tin chop-chop modify amongst novel information.

With static reasoning, a marketplace seat persuasion is something you lot receive got as well as merchandise with.  With Bayesian reasoning, a marketplace seat persuasion is fluid as well as continually evolving.  

Trading leading upward to as well as including this past times Fri was a practiced example inwards point.  We traded theatre for nigh of the week, amongst relative clit inwards modest cap shares.  Volume had been coming downward inwards recent sessions and, past times Apr 15th, nosotros saw novel highs inwards the wide NYSE Composite Index non accompanied past times an expansion inwards the discover of stocks registering fresh highs.  With each observation of depression book as well as diminished novel highs, my confidence inwards an upside breakout diminished.

Friday saw novel data come upward into the marketplace seat regarding Red People's Republic of China as well as Greece.  There was a rigid selloff inwards pre-market hours.  Volume expanded, equally did volatility.  New marketplace seat participants were joining the fray, as well as they were joining amongst a downside bias.  That led me to sell an early, pre-opening bounce inwards the ES futures.  At that point, the show tilted toward continuation of the make as well as a short-term handoff from bullish to bearish command of the market.  I reasoned at the fourth dimension that investors would non wish to request chances bad headlines over the weekend as well as hence would move probable sellers inwards early on New York trade.

That indeed materialized, but as well as hence something interesting happened inwards mid-to-late afternoon.  We had seen steady selling inwards stocks, equally measured past times the NYSE TICK.  When I ran a report of lopsided selling days such equally the i inwards progress, I noticed a style for the marketplace seat to bounce higher the side past times side twenty-four hours or two.  At the same time, I noticed continued selling pressure level inwards stocks (negative TICK values), but instantly the ES futures were asset inwards a higher house their lows for the day.  Selling was no longer able to larn cost higher.  I nonetheless liked the range-based persuasion but the merchandise no longer looked swell from a risk/reward perspective as well as I took profits.

Am I a bull?  Am I a bear?  Not actually either, as well as the enquiry presumes a bird of static reasoning.  What made Fri a practiced twenty-four hours inwards the marketplace seat was the fluid transitioning from waning bullishness to waxing bearishness to waning bearishness.  We could indeed gap lower inwards the nigh term as well as receive got out Friday's low, but that's non where the odds were at the time.  Let's allow the bulls receive got their plough as well as run across what they tin convey to the market.  Should nosotros larn a feeble rally as well as a lower high, at that topographic point volition move enough of chance to resume a downside merchandise targeting the lower destination of the recent range.  Should nosotros larn a to a greater extent than substantial rally, as well as hence nosotros tin update show for continued topping inwards the make or fifty-fifty upside breakout.

Bayesian reasoning agency trading amongst an opened upward heed as well as staying flexible inwards the human face upward of novel information.  Think of it this way:  we're inwards an ongoing conversation amongst markets.  In whatever conversation, if you lot rest locked inwards what you lot wish to say, you lot croak less sensitive to the other person.  H5N1 practiced conversationalist is a practiced listener, picking upward on subtle cues as well as adjusting one's ain musical note as well as answer accordingly.  In markets equally inwards conversations, unopen minds as well as rigid views Pb to tone-deaf interactions.

Further Reading:  The Importance of Emotional Creativity
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Info!! Trading Notes: Calendar Week Of 8/24/15

Friday, August 28th

*  Buying weakness yesterday ended upwards beingness a useful strategy for much of the day, exactly a potent selloff as well as and thus buying reversal inward the concluding 2 hours of the trading session made for volatile trading.  I hold to await these volatility aftershocks to endure amongst us, equally noted inward Wednesday's post.  That beingness said, the pure volatility mensurate has been mostly trending downwards over the yesteryear several sessions, though it's yet at historically high levels.  

*  The blueprint of improving breadth has continued.  Interestingly, nosotros had 131 stocks across all exchanges register fresh novel monthly highs as well as 136 brand novel lows.  That novel depression figure compares amongst 726 as well as 840 during the prior 2 sessions as well as 3553 at what appears to endure a momentum low.  As long equally nosotros encounter higher prices, potent NYSE TICK readings, as well as improving breadth, my game innovation is to purchase weakness, specially if it tin arrive at the axe concord higher upwards the overnight lows.

*    Pertinent to the number of declining, exactly yet high volatility, is the pass upwards inward book inward SPY over the yesteryear several sessions.  We peaked at 507 1 chiliad m shares traded on Monday, as well as thus roughly 369, 339, as well as 275 1 chiliad m the yesteryear iii days.  One of my quant routines estimates the probable day's arrive at (very helpful for establishing cost targets on trades), amongst book equally a major input.  By seeing how today's book unfolds, nosotros tin arrive at the axe approximate the probable day's book as well as brand informed estimates equally to probable cost arrive at for SPY.

*  H5N1 mensurate of the breadth of marketplace position clit that I rails daily is the number of NYSE shares that arrive at purchase vs. sell signals for diverse technical measures.  Yesterday nosotros had 520 purchase signals vs. 20 sells for the Parabolic/SAR measure.  We've had xi occasions where we've had over 400 purchase signals on that mensurate since June, 2014, when I began collecting the data.  Three days later, SPY has been upwards viii times, downwards 3 for an average gain of +.49%.  It's equally good pocket-size a sample to hang our hats on, exactly does serve equally a overnice reminder that potent upside thrust leading to a short-term overbought province of affairs (over 90% of SPX stocks are higher upwards their 3- as well as 5-day moving averages) does non necessarily atomic number 82 to "mean reversion".

Thursday, August 27th

*  Per yesterday's post, nosotros did indeed encounter a seek out of lows inward Wednesday's session, followed yesteryear important buying.  The NYSE TICK has provided really practiced tells for the recent marketplace position action, equally wide downticking was followed yesteryear wide upticking really early on inward yesterday's rally.  That clit has continued into the overnight, all of which is consistent amongst the view of having position inward a momentum depression per Tuesday's comment.

*  Another practiced state inward yesterday's merchandise was the continued drying upwards of the number of stocks making fresh novel lows on weakness.  We had 726 monthly lows across all exchanges yesterday versus 840 on Tuesday as well as 3553 (!) on Monday.

*  The pure volatility mensurate continues at high levels, suggesting that book as well as volatility powerfulness endure amongst us for a while.  We remain higher upwards xxx inward VIX, off the highs exactly significantly elevated relative to close of 2015.

*  I notice that the psychological issues faced yesteryear traders inward this recent marketplace position are related to difficulty adapting to the recent changes of trend, correlation, as well as volatility.  Per the recent Forbes article, a big purpose of emotional upheaval inward trading comes from the mismatch betwixt the patterns we've operate out accustomed to seeing inward markets as well as the novel patterns that are playing themselves out inward electrical flow marketplace position action.

*  I regime annotation that 89% of SPX stocks are right away trading higher upwards their three-day moving averages, exactly alone a piffling over 2% are trading higher upwards their 10-day averages.  I await that latter number to growth significantly, equally our correction from the recent weakness plays itself out inward fourth dimension equally good equally price.  My game innovation is to endure opened upwards to buying weakness equally long equally nosotros remain higher upwards the overnight lows.

Wednesday, August 26th

*  The pause of the 1920 degree inward ES referenced yesterday showed us that the mainland People's Republic of China cutting was non a game changer, as well as nosotros continued the volatile downward market.  Interestingly, fewer stocks made fresh novel lows yesterday relative to the twenty-four hours previous.  Specifically, nosotros had 3553 monthly lows across all exchanges 2 days agone as well as alone 840 yesterday.  This would endure consistent amongst having position inward a momentum low, which on major declines tin arrive at the axe precede ultimate cost lows yesteryear weeks or fifty-fifty months.  

*  Yesterday nosotros had fewer than 5% of all SPX stocks trading higher upwards their 3, 5, 10, 20, as well as 50-day moving averages.  Going dorsum to 2006, at that spot bring alone been iv occasions inward which we've seen similar wide weakness:  10/7 as well as 10/9 of 2008; 11/20 of 2008; as well as 8/8 of 2011.  Over the adjacent iii trading days, SPY moved -9.74%; 9.68%; 13.95%; as well as 4.75%, respectively.  Note the really high volatility going forward.

*  Note also that the dates higher upwards did non brand ultimate cost lows for a number of months, exactly ultimately led to major bull marketplace position moves.

*  I am warning for the possibility of our putting inward lows close term as well as am watching that 1830-1850 degree inward ES closely.  I would await the combination of brusk roofing as well as value buying inward the high volatility surround to create a major snapback rally from these really oversold conditions.

Tuesday, August 25th

*  The volatility warning proved useful for Monday's trade, equally nosotros blew out to a VIX of forty yesteryear the unopen as well as traded amongst a daily truthful arrive at inward excess of 8%.  We traded good off the day's lows, inviting the hypothesis that we've seen a momentum depression for this downwards move.

*  Contributing to the view of a momentum depression is the unusually broad, weak breadth.  Over 400 SPX stocks made fresh 20 twenty-four hours lows yesterday.  We haven't seen that form of wide weakness since early on August, 2011.  That indeed was a momentum low, exactly regime annotation that stocks drifted lower, albeit amongst fewer stocks registering novel lows, for a yoke of months after that.

*  I volition endure watching commodities closely, equally these bring been a useful warning for EM equity weakness as well as weakness inward States of America stocks.

*  I volition also endure watching the ES 1920 area, equally that was the close recent depression prior to the mainland People's Republic of China statement of a reserve ratio cut.  If that displace yesteryear mainland People's Republic of China was a game-changer, that degree inward ES should hold.  Game innovation is to purchase weakness that holds higher upwards that 1920 level.

Monday, August 24th

*  There's a really primal betoken toward the destination of the recent Forbes article:  many times what nosotros translate equally a trading occupation genuinely represents *information*.  For example, the trader who has difficulty pulling the trigger may really good intuit that the marketplace position surround has changed as well as that what had been practiced risk/reward may non endure thus at the moment.  Similarly, frustration could endure a really practiced early, emotional signal that regimes bring changed.  We pass a lot of fourth dimension trying to preclude as well as fighting emotions inward trading when mayhap nosotros should endure focused on learning from them.

*  With honour to the recent article, also regime annotation the v things I facial expression for to position changing regimes.  Very helpful inward adapting to marketplace position conditions.  These volition endure relevant 1 time we're cook for the conduct to turn.

*  We hold to encounter cost behaviour that is wildly unlike from what nosotros seen through close of 2015.  For example, from midnight to viii AM EST thus far today, we've printed 150 bars based upon 500 ticks of cost movement.  By contrast, on the Mon 2 weeks ago, from midnight to viii AM nosotros printed half-dozen such bars.  My pure volatility mensurate continues to brand novel highs, important that we're getting to a greater extent than crusade from to a greater extent than volume, exactly also to a greater extent than crusade per unit of measurement of volume.  This makes gamble management tricky, equally nosotros tend to rely on the same fourth dimension frames for asset periods without realizing that asset a merchandise for a sixty minutes right away is similar asset for a twenty-four hours before inward the year.

*  We closed Fri amongst fewer than 5% of SPX stocks trading higher upwards their 3, 5, as well as 10-day moving averages.  That form of wide short-term weakness has been to a greater extent than typical of 2010 as well as 2011 markets than recent ones.  Very often, when we've had such wide weakness, the showtime thrust downwards has been followed yesteryear farther weakness, which is what we've seen overnight.  I hold to favor selling bounces until there's approximately evidence that selling pressure level cannot hold to yield weakness across the vast bulk of sectors.
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