Predict the day’s big trend — Here’s how
Monday’s market promised good things, as traders found their spirits lifted
by less-than-horrific news from the Gulf in the wake of Hurricane Rita.
Indeed, we opened over five points higher in the ES futures, vaulting above
Friday’s high. Eagerly I looked for signs of vigorous buying among Dow
Industrial issues during the first few minutes of the trade. There were
none. Seven minutes into the session, more Dow stocks traded at their bid
prices than their offers. As you can see from the table below (in Mountain
standard time), this continued for the next minute, and the next one, and the
three minutes after that. In fact, we had seven readings of -18 or less in
the Dow TICK during the first half hour of trade; no readings of +18 or
stronger.
| Date | Time | Open | High | Low | Close |
| 9/26/2005 | 7:30 | -2 | 11 | -2 | 7 |
| 9/26/2005 | 7:31 | 6 | 10 | -12 | 1 |
| 9/26/2005 | 7:32 | 9 | 14 | -8 | 2 |
| 9/26/2005 | 7:33 | 14 | 14 | -4 | 12 |
| 9/26/2005 | 7:34 | 8 | 13 | -1 | 7 |
| 9/26/2005 | 7:35 | 1 | 3 | -3 | -3 |
| 9/26/2005 | 7:36 | -1 | 5 | -11 | -11 |
| 9/26/2005 | 7:37 | -13 | 5 | -15 | 1 |
| 9/26/2005 | 7:38 | -2 | 4 | -14 | 2 |
| 9/26/2005 | 7:39 | -6 | -2 | -18 | -8 |
| 9/26/2005 | 7:40 | -6 | 4 | -16 | -4 |
| 9/26/2005 | 7:41 | -2 | 2 | -12 | 2 |
| 9/26/2005 | 7:42 | -2 | -2 | -12 | -6 |
| 9/26/2005 | 7:43 | 2 | 12 | -2 | 10 |
| 9/26/2005 | 7:44 | 6 | 16 | -18 | -18 |
| 9/26/2005 | 7:45 | -14 | 2 | -14 | -6 |
| 9/26/2005 | 7:46 | -2 | 8 | -22 | 2 |
| 9/26/2005 | 7:47 | 6 | 6 | -12 | -12 |
| 9/26/2005 | 7:48 | -18 | 4 | -18 | -6 |
| 9/26/2005 | 7:49 | -2 | 14 | -12 | 6 |
| 9/26/2005 | 7:50 | -6 | -2 | -22 | -8 |
| 9/26/2005 | 7:51 | -14 | -2 | -14 | -10 |
| 9/26/2005 | 7:52 | -16 | -4 | -16 | -6 |
| 9/26/2005 | 7:53 | 8 | 12 | 2 | 12 |
| 9/26/2005 | 7:54 | 6 | 14 | -14 | 14 |
| 9/26/2005 | 7:55 | 6 | 10 | -2 | 2 |
| 9/26/2005 | 7:56 | -8 | 4 | -22 | -14 |
| 9/26/2005 | 7:57 | -20 | -2 | -22 | -16 |
| 9/26/2005 | 7:58 | -14 | 6 | -16 | -10 |
| 9/26/2005 | 7:59 | -2 | 12 | -6 | -2 |
Why is this important? The Dow stocks are among the most actively
traded (and hence liquid) in the NYSE universe. They commonly are included
in baskets of large capitalization issues that form the basis of institutional
program trading. According to H.L
Camp, program trading now comprises over 50% of total NYSE volume.
Moreover, arbitrage between S&P futures and component stocks (which include
Dow issues) is a meaningful portion of total program trading. When baskets
of stocks are sold, Dow issues fall in unison, creating a Dow TICK reading of
-18 or less. When baskets are purchased, we see strong Dow TICK readings
of +18 or more. The key is seeing the issues uptick or downtick at exactly
the same time. That’s how you know the TICK readings are almost certainly
related to program trading.
If baskets of stocks were being purchased, we should have seen
significantly positive readings in the early minutes of Monday’s trade.
Instead, we saw traders selling the stocks, even as the futures were trading at
seemingly strong levels relative to Friday’s close. As I’ve indicated in
previous articles, there are few market psychology indicators more important for
the active trader than the tendency of issues to trade at their bid vs. offer
prices. The large capitalization issues traded persistently at bid during
Monday’s early trade, showing that traders were more aggressive on the sell side
than the buy side. That piece of information helped traders anticipate
Monday’s retreat back into Friday’s value area.
Brett
Free Online Seminar
On a related note, I will be participating in an online seminar for the
Chicago Board of Trade this Wednesday at 3:30 PM Central Time (just after the
NYSE close). The seminar is free of charge; registration
is on the Board site. Among other topics, I will be discussing market
micropsychology and ways of assessing the short-term sentiment of market
participants. Hope to see you there!
Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of The
Psychology of Trading (Wiley, 2003). As
Director of Trader Development for Kingstree Trading, LLC in Chicago, he has
mentored numerous professional traders and coordinated a training program for
traders. An active trader of the stock indexes, Brett utilizes
statistically-based pattern recognition for intraday trading. Brett does not
offer commercial services to traders, but maintains an archive of articles and a
trading blog at www.brettsteenbarger.com.