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Is today likely to be a trending day or a range bound day? Are we likely to see volatile price action or slow meandering? Are we likely to test recent highs or lows? All of these are important questions for short-term traders as they begin their days. Because most stocks show a significant, positive correlation with the movement of the stock indices, handicapping the odds of the index moving in a particular way can provide a useful edge. Here are a few items on my radar during the opening minutes of trading. Hopefully I'll be able to illustrate some of them during tomorrow's Morning With the Doc session:
- Trading volume in the first few five-minute segments of the session - Volume correlates very highly with volatility, and volume tells us if large, institutional participants are in the market. Low volume compared with recent norms tells us that we have a market dominated primarily by locals and we can expect lower volatility and range bound trade. The volatile, trending moves tend to occur when we sustain above average volume.
- The distribution of the NYSE TICK ($TICK) and the Dow TICK ($TIKI) - Recall that the TICK measures are constant updates on the number of stocks trading at their offer price minus those trading at their bids. These provide us with the shortest-term sentiment information possible. As with volume, I am looking at how the TICK measures are distributed relative to recent norms. If we see both TICK measures skewed in a positive direction relative to recent sessions, the odds of sustained upward movement are greatly increased. Similarly, a sustained negative skew to the TICK measures tends to occur during downward trending days. It's where we see little skew and/or a mixed skew between the two measures that we tend to get range bound action.
- The behavior of global markets - I keep my eye not only on European stocks, but also on gold, oil, bonds, and the dollar. If these markets are moving significantly and breaking out to new levels, we're more likely to see a repricing of equities. Quiet global macro markets provide little incentive for large traders to reprice equities, and that's when we see range bound drifting markets.
- Recent trading ranges and support/resistance - Think in Market Profile terms. We want to identify the market's value range, and we want to identify how the market trades as we test the upper and lower boundaries of that range. The first range that is important to me is the pre-opening Globex range. I also want to look at the range from 7:30 AM CT to the open if we've had an economic report prior to the open. Ditto the 7:30 AM - 9:00 AM CT range if we get numbers early in the trading session. We also want to be aware of the previous day's range and how the market trades as we test prior days' highs and lows. If we cannot generate increased volume and participation as the market tests range extremes, we're much more likely to fall back into that range.
- Distribution of volume, especially of trades by large traders - This is the data I gather from the Market Delta program. I'm looking at the proportion of volume in my instrument (usually the ES futures) that is occurring at the bid price vs. the offer. I also place volume filters on the data so that I only observe the distribution of large trades at the bid vs. offer. This tells me if large locals and large institutions are primarily buyers or sellers. I always want to be trading in the direction of the whales. Always.
So there you have it. Every single trade I place is an idea derived from some combination of the above information. No, I don't look at chart patterns, oscillator readings, Fib levels, or wave patterns. If you utilize such methods and have found success, perhaps some of the above pieces of information will help your batting average. If those methods are not making you money, perhaps you'll want to weight the above factors more highly. The idea is to see *how* the market is trading and *who* is participating in the market. Within the opening minutes of trading, you can hold your finger to the market air and figure out which way the wind is blowing. That, in itself, can confer a meaningful edge.
Brett N. Steenbarger, Ph.D.
www.brettsteenbarger.com |
