Monday, June 30, 2008

How the Market Really Works

Crude Still Rising

It is difficult to make a bullish argument for equities as energy prices continue to climb.

However, the S&P 500 Index has completed a three-wave market structure formation to the downside.

And, the ES Futures has remained above Friday's low despite negative oil news overnight. Also, the market is statistically more bullishg than bearish in the first week and a half of July.


Saturday, June 28, 2008

Keeping Your Cognitive Abilities in Top Form

On the Psychcentral web site, is an excellent article, titled "Forgo the Brain Training, Drugs, Vitamins & Meditation and Just Get Some Exercise" on how to keep your cognitive abilities in tip top shape. I found the same recommendation in the book, "Brain Rules" by John Medina, which is to physically exercise to keep your brain healthy.

Here is an except from the psychentral blog:

"Exercise, keep your body healthy (which in turn keeps your brain healthy), and keep yourself challenged with doing something new or different regularly. It doesn’t have to be with special brain exercises or cognitive seminars or training. It’s simply doing the daily crossword or Soduko. It’s taking a walk every day, or bicycling, or going to the gym. It’s trying to figure out a different way to do something at work or in your life that will make things better or easier. It’s taking the longer, more arduous path in your journey, rather than the easy, expected one.

But at the end of the day, it’s really about simple, cheap exercise, as Sandra Aamodt, the editor in chief of Nature Neuroscience

How might exercise help the brain? In people, fitness training slows the age-related shrinkage of the frontal cortex, which is important for executive function. In rodents, exercise increases the number of capillaries in the brain, which should improve blood flow, and therefore the availability of energy, to neurons. Exercise may also help the brain by improving cardiovascular health, preventing heart attacks and strokes that can cause brain damage. Finally, exercise causes the release of growth factors, proteins that increase the number of connections between neurons, and the birth of neurons in the hippocampus, a brain region important for memory. Any of these effects might improve cognitive performance, though it’s not known which ones are most important.
So instead of spending money on computer games or puzzles to improve your brain’s health, invest in a gym membership. Or just turn off the computer and go for a brisk walk.

I’m going for that walk! "


Friday, June 27, 2008

Friday Morning Review - 06/27/08

Yesterday was a good increase in range size compared to Wednesday, which means that today will probably be a much smaller range size day relative to yesterday.

As a result, the ES Futures is bouncing between the +1 and -1 Standard Deviations relative to the Nearest Range Extreme Average.

2008 VIX

No extreme panicking yet!

Oil - S&P 500 Index

Oil is breaking to the upside, and the dollar is weakening.

The reaction of the S&P 500 Index to the monthly open typically is a good tell as whether the month will be bullish or bearish. The market in June has not attempted to test the June open, and has been consistently bearish.
The last week of June is statistically bearish, according to the "Stock Trader's Almanac", with the first two weeks of July being more bullish, followed by a sell-off in July's third week. If long term investors are interested in being long for the second half of the year, they typically start buying in the last week of July. If there is low buying interest during the last week of July, the rest of the year could be weak also.
P.S.: On Wednesday, I took a day trip to Columbus, Ohio, which is a two hour trip for me. When I took this same trip last September, the Interstates were full with both trucks and passenger cars. On Wednesday, the traffic on the Interstate was noticeably less, and I would say much less than last September. Energy costs are having an effect.

Thursday, June 26, 2008

Thursday Morning - 06/26/08

The $TICK has been negative all morning. The $TRIN started trending up at the end of the 1025 ET , 5-minute bar. The $TICK and NYSE Advance - Decline Line started a down trend at the end of the 1035 ET, 5-minute bar.

For the first hour and a half, the ES Futures oscillated between the 0930 ET open and the Nearest Daily Range Extreme Average. It started to move downward after 1030 ET. The -1 Standard Deviation line is now acting as resistance.

SP500 Index and Fibonacci

Consistent and scary!


Tuesday, June 24, 2008

Financials Part II - 06/24/08

One day before the FOMC announcement, the Financials become a bargain. Maybe the big guns decided that the Federal Reserve will not raise rates. Who knows!


Monday, June 23, 2008

Financials - Morning 06/23/08

It is primarily the Financials that are holding the market down. The broader market is actually doing relatively OK. As long as the market has this split personality, the market probably will not go very far as it tests Friday's lows.


Friday's Indicators - 06/20/08

I decided to install John Carter's benchmarks (+/- 600, 800, 1000 and 1200) on the $TICK chart. The paintbar indications are nothing more than green when the close is greater than the previous close, and red when it is less. As you can see, the 6 period EMA of the $TICK pivot (H+L+C/3) was less than zero all day. Additional reading on the $TICK indicator can be found at TraderGav.

The vertical lines are located at 1320 ET and 1450 ET, which indicates a downtrend period for the ES Futures following the lunchtime sideways consolidation period. The market tends to move after 1315 ET, but sometimes stays quiet until 1400 ET. Each day is a little different.

On Friday, the $TRIN and NYSE Advance - Decline Line turned negative at about the same time around 1320 ET, and continuing the negative mood of the morning trading.

On the 380 tick chart of the ES Futures, the MACD of the On Balance Volume also turned negative at 1320 ET, while the futures broke below the lunchtime pivot low.
So all indicators were in agreement indicating an afternoon downtrend for the ES market.

Oil - Hurricanes - FOMC

This week's Economic Calendar shows an FOMC announcement at 1415 ET Wednesday, 06/25/08.
Light Crude has been stuck between 132 and 140 for most of June. One of the things that affect energy prices this time of year are hurricanes in the Gulf of Mexico. Looking at the Atlantic infrared Satellite Animation Loop, the storms are currently staying to the south. This satellite loop is a good tool to watch how the storms are developing and where they may be heading.

Friday, June 20, 2008

Thursday Market Recap - 06/19/08

On Thursday, the larger market led the Financials. The Financials tried most of the day to make lower lows, but the larger market refused to follow. The Financial bears had to give up at 1400 ET.

It is not uncommon for the market to start moving between 1400 and 1430 ET. It is a good time for longer term traders to adjust their positions for the next day, and it is the start of the close of the energy and bond markets.

The MACD of the On Balance Volume (OBV) did a good job at signaling the 1400 ET uptrend. The following divergence also did a good job signaling a top forming.

The NYSE Advance - Decline Line and $TICK was showing weakness forming in the early afternoon, but the $TRIN was indicating that the weakness was forming on low volume.

I decided to put all the indicators on one chart, and combine the ES and Financial markets on one chart. The MACD OBV indicator stays with the ES 380 tick chart.


P.S. From Chapter 10 of "Brain Rules" by John Medina titled "Vision": "Tests performed years ago showed that people could remember more than 2,500 pictures with at least 90 percent accuracy several days post-exposure, even though subjects saw each picture for about 10 seconds. Accuracy rates a year later still hovered around 63 percent." ...
"If information is presented orally, people remember about 10 percent, tested 72 hours after exposure. That figure goes up to 65 percent if you add a picture."

Maybe explains the popularity of blogs. May also help explain why most people can not remember what the Minister said during his sermon, but everyone who has seen it can remember the lastest MTV video or a particular scene in a recent movie.


Thursday, June 19, 2008

ES and Financials - 06/18/08

Interestingly after 1100 ET, the XLF started showing more strength than the rest of the market. As the ES Futures was making lower lows, the XLF was making higher lows after it had completed a higher high relative to the ES market.

An interesting indicator is the MACD of the On Balance Volume. As the ES Futures was making a lower low, the indicator was making higher lows and starting to show positive volume. The ES market then corrected to the upside to the 50% level. It is sometimes a good indicator to use to help determine volume sentiment for the short term.

In the afternoon as the ES Futures tested the lows for a second time, the $TRIN was bullishly trending down, and the EMA of the $TICK Pivot was making higher lows. The ES market then gave a nice bounce to the upside.


Tuesday, June 17, 2008

Tuesday Recap - 06/17/08

$TICK stayed in the negative range most of the day. The $TRIN was not overly bearish, but bearishly trended up most of the day. The -1 Standard Deviation level provided support until the close of the European markets. The futures then traded down to the -3 Standard Deviation level, which then acted as support with the -1 Standard Deviation level acting as resistance. The ES futures then closed below the -3 Standard Deviation level.

The Financial Sector was weak relative to yesterday, and weaker than the market overall. The combination of all 8 SPDR Sectors trended down all day along with the futures. Short positions was the play of the day.

Monday, June 16, 2008

Morning Review - 06/16/08

Surprisingly, the Financial Sector was much stronger than the rest of the market this morning; which probably kept the market from falling very far.

The $TICK and $TRIN remained bullish all morning providing opportunities for bulls on pullbacks.

The bullishness on corrections was confirmed by the NYSE Advance - Decline Line.


Saturday, June 14, 2008

Weekend Musings - 06/14/08

No matter how often I see it, market symmetry still amazes me.

Don't be surprised if the market tests 1400.

NYSE Advance - Decline Line is still one of the best indicators to determine market breadth during short-term corrections.


Thursday, June 12, 2008

Thursday Review - 06/12/08

In the morning, most of the indicators were showing a bullish market. The $TICK, however, did not show the same degree of bullishness. After 1130 ET, the $TICK spent most of its time below zero. As a result, the ES futures traded back down and tested yesterday's low.


Wednesday Review - 06/11/08

The market stayed between the -3 and -6 Standard Deviation a lot longer than I would have anticipated. The $TICK again stayed in negative territory all day.

The market cycled in 30 minute intervals, which is common. I like to pay special attention to the 1000, 1020-1030, 1100, 1400 and 1430 ET time points.

In the afternoon, the breadth of the equity market was more negative than the futures. After 1430 ET, the futures market had to play catch-up with the equity market to the down side.

Wednesday, June 11, 2008

Review of Tuesday

We did not get the range expansion that I was anticipating on Tuesday. As a matter of fact, Tuesday was a NR4 and NR7 day. This should give us a wider range day soon.

Rolling Over to the September (ESU08) contract on Thursday.

Financials (White Line) was stronger than the general market, which is bullish.

The NYSE Advance - Decline Line was in bearish territory, but showed slow, bullish improvement throughout the day. Maybe the result of a modest reduction in oil prices and stengthening of the dollar throughout the day.

$TRIN was bullish, but the $TICK remained bearish all day, which gave us a tie between the bulls and bears with the bulls with a slight advantage.


Tuesday, June 10, 2008

Corrective Wave of a Breakout Move

The probability is high that Tuesday will be a wider range than Monday.

Following the down breakout move or Initial Swing Wave after 1300 ET, the market corrected only 38% of the Swing Wave range. I personally prefer 50% corrections; however, when the market has a strong conviction to move in one direction, we are lucky to get the 38% correction in order to initiate a short-term fade.

So, how do we know that the market will only give a 38% correction rather than the preferred 50%? We don't know for sure. But, there are times when it is worth the risk to enter the trade near the 38% level.

I have more confidence in the trade when I see that the NYSE Advance - Decline Line has traveled considerably past a previous pivot point.

Further confirmation was that the $TICK spent most of the day below the zero line.

All in all however, it is a judgement call.


Monday, June 9, 2008

Avg. Travel Distance From Monthly Open - Market Symmetry

Looking at February through May on the S&P 500 Index Daily Chart, the average travel distance from the monthly open is about 66.94 points. With a June open at 1399.62, this would give a travel target at 1332.68.
For market symmetry, the target for June is 1339.15.

Sunday, June 8, 2008

Stess Affecting Our Ability to Learn and Think

From the book "Brain Rules" by John Medina, Chapter 8: STRESS.

"The Centers for Disease Control and Prevention asserts that a full 80 percent of our medical expenditures are now stress-related."

Constant exposure to stressful situations creates an abundance of stress hormones, primarily cortisol. If our bodies are constantly bombarded by this hormone, it can reduce the effectiveness of our immune system, and decrease our ability to learn and think.

"The perfect storm of occupational stress appears to be a combination of two malignant facts:
  1. a great deal is expected of you, and
  2. you have no control over whether you will perform well.

On the positive side, restoration of control can return groups to productivity."

In trading, it is true that we have no control over the markets, but we do have control of our position management. We can not force the market to go up or down, but we can decide when to liquidate a position. No one forces us to hold onto a losing position. We are free to push the button to liquidate a position at any time, as long as the markets are open.

However, if we are under constant stress, we may not be able to think clearly, or learn new markets patterns and relationships as market dynamics change.

To function properly, we must learn to control stress. Eliminating the causes of our stress, and meditation techniques help by reducing the production of stress hormones. Exercise also helps by producing something called the Brain Derived Neurotrophic Factor (BDNF), which acts by chemically neutralizing cortisol, and stimulating new neuron growth and new connections between neurons in the brain, which is essential in learning.

John Medina is an interesting speaker. Some of his lectures can be found on YouTube.


Friday, June 6, 2008

Monthly Tendency

The tendency lately of the S&P 500 Index is to treat the monthly open as support or resistance. If the market trades down from the monthly open, the open has been treated as resistance, or as support if the market trades up from the open as it happened in May.

The market is back to the June open from a trading down scenario. Today may decide if the market treats this level as resistance and trade back down, or trade up from here.


Thursday, June 5, 2008

Morning Bullishness - 06/05/08

It wasn't the Financials that were the leading Sector this morning, but it was the Technical Sector.

On the 30 Minute Chart, the ESM08 Pivot crossed its 38 Period EMA this morning. The $TICK Pivot EMA turned green mid-day yesterday. Both the $TRIN and NYSE Advance - Decline Line were bullish this morning relative to yesterday.

The Futures has been bouncing off the 50% corrections since late yesterday afternoon.

The $TICK Pivot EMA on the 5 Minute Chart has been positive all morning. The market is currently stalling at the +6 Standard Deviation line, but the market remains bullish.


Wednesday, June 4, 2008

Mid-Day Reversal - 06/04/08

The only indication that the market may weaken mid-day, was the weak Financial Stochastic relative to the rest of the market. There was no other divergent signal.


Wednesday Morning - 06/04/08

This morning we were given a nice three-wave advance with a text book 50% correction.

Once the market hit the +3 Standard Deviation line, the bodies of the candles remained between the +3 and +1 Standard Deviations, and then advanced to slightly above the +6 Standard Deviation Line. During the 50% correction wave, the $TRIN took a nose dive into bullish territory.

In the above three charts, I have superimposed the Stochastic for the Financial Spider (White Line) and the Stochastic for the combined 8 SPDR Sectors (Red/Green Line). Notice how the market is bearish when the Financial Stochastic is below the 8 Sector Stochastic, and bullish when it is above. An interesting observation for the indicated days anyway!