Today & now

Early today, during globex session, the ES traded up on razor thin volume. At the high the Globex delta was about 2k. Paper came in on the sell side on moderate volume. Housing data did not provide any new news.

Currently @ 11:01 PST. We have rotated down to the lower distribution and at the POC of 1278-79 area of the 30 day profile, a potential area of support. Any sign of responsive buying would provide an early clue. This area has been a relatively important s/r area. A break on high volume might take us to the next distribution below. Broad based weakness in the market. The fact that we have trended down from the current balance area is an important point that currently we are in intermediate /short term timeframe control. So the 78-79 area in my mind is an over-under level either for a continuation or reversal.

Which way is the elevator going?

I dont trade the initial balance (1st one hour) of the market. Mainly because my trade plan builds off the IB. I watch it intently for the bias and momentum of the paper that comes in. I laid out the comparison of the 3 day profile and the 30 day profile in my previous post and we looked at two possibilities at edges of the current paradox.

On Friday we went on to test the overnight high and was quickly rejected and the support of the 1291 area held. The market set it self up for a possible balance by the reject in the C period. D and E periods provided excellent trade points to ask the question - is the market doing a great job in the longer time frame trend or is the shorter time frame trend more likely. We had 30K delta ( barely) and the markets were divergent. Russell was well off the highs. The Trin was well of the lows. Nothing was on fire. I mean it just was not the day it was going to bust through the seams and break out.





J& K periods provided yet another opportunity for a reversion to the mean trade. I did manage to make a mistake in the middle of the distribution waiting for the trade, in spite of my plan not to trade the fat part. I got tired of waiting for the market to come down to the edges. I have named them the Amygdala trades or the fear of losing oppurtunity trades. Fortunately the market gave me an exit and I was able to snap out of the trade (at a smaller loss) and catch the edge. Overall the day was a great balance trade day.

The long time frame buyers I mentioned in my first post were noticeably quite!

Major League Market and the Market Paradox

I attended the tail end of a Dalton webinar which was excellent. (thanks to Brett's blog) for the listing. In that he brought out two things which I think was very important (I missed 70% of the webinar).

First, as any one of us start in trading, we play our first practice ( or real money if you prefer) game in the Major League Market (MLM). There are no pee wee leaques for trading, no high school or college programs. Certainly no minor leaques. We are hugely disadvantaged in the game. If I had accepted that fact many years ago, I would have just sat in front of the orderflow for years before I got myself a mouse to click.

So every day you walk away a winner (or a draw), you buy yourself a cigar (dont smoke it). Every week you walk a winner, treat yourself to the golf course. Every month you do so, take your family for a weekend trip. Because you have won against the system of the Ivy league graduates who are given all the training and resources in the world and a very very deep account. It is not neccessarily their money you've won, but you've played at the highest level. Every time you dont, prepare for game day (remember who you are up against). Wow ! this sounds like advice. Please remember, this blog is mainly note to self.

The second thing that is relevant to me as a daytrader is to always evaluate what kind of day it is and who is likely in control. It is from Dalton's books that I have begun to have an understanding of the significance of the day type and how to use it in trading. It is my understanding that knowing which time frames are likely in play during a days session is more important to the day trader than any other time frame trader. That simply does not mean volume of buy vs. sell but an overall picture of what is/is not affecting capital flow - macro news, currencies, commodities, bonds and a myriad of other things that affect the flow.

(I apologise for this late notice - but I am writing this blog strictly from a day time frame traders viewpoint. )

Elaborating on both the second point and my previous post on the current market paradox, we could ask - are we going to trend up (long time frame) or balance ( Short/intermediate time frame). If the market is not doing a great job at one than the other outcome is more probable, right!

Market and the Uncertainty principle

I have often wondered what is the closest phenomenon that compares to the market. I have failed to come up with an answer. It reminds me of the scene in one of the matrix trilogy where the collective mind is tapped into. In my opinion, Market behavior cannot be simplified to a process or a phenomenon driven by a collective mind. It is far far more complicated than that. The market is an uniquely unnatural phenomenon.

However, there a quality of the market that I often compare to something we learn in high school. Its the Heisenberg uncertainty principle in Quantum physics. The market is constantly efficient for one time frame and at the same time inefficient for other time frames. When we try to define price and value for one time frame, we make the price and value uncertain for other time frames. Although I think there are infinite numbers of time scales that factor in the market behavior, we over simply it ( for sanity's sake) to a finite group of participants.

In the prior half of building of the 30 day distribution ( as it unfolded) below, short/intermediate term time frame was in control and the value was shifting lower. It was uncertain when (not whether) longer time frame participants would see value. Now longer time frame has appeared and the value has shifted higher but the short term value is uncertain.

The 30 day profile has developed a spike in the top distribution indicating shift in balance range ( &therefore value) upwards, the 3 day profile however is showing increased Tick and TPO count below the 98 level. We may be in a longer term trend phase, yet the market is showing greater propensity to balance in the shorter term time frame. Cisco futures provides an excellent resource on the Meta profile. I am not a subscriber to his service but I see great value in it.




The 3 day profile below is drawn without Fridays (8/15/08) data and the tpo count of 85/130 indicates a higher probability of a short term balance then a break out. Keeping in our minds that we have increased TPO count and a spike in the highest end of the distribution of the 30 day profile ( indicative of a potential for upside breakout), one has to be ready for both outcomes. I think this is the traders paradox everyday - and the key to it is figuring out who is in greater control. Friday was one such day. and we'll look at it in the next post.