Roller Coaster Day for Stocks

I'm seeing a new phenomena over the past few weeks. In the past, when the stock market opened, we would see buying at the open that would drive the market higher. Now, over the past several sessions, we are seeing selling at the open instead.

In this chart, prices chopped higher on thin volume in a melt-up overnight, but sold off at the market open. While the buying is thin, the selling is occurring on heavy volume, which is suggestive of fund selling of all kinds (hedge, pension, mutual funds, etc.). The volume has shifted from bullish to bearish, at least temporarily. The same thing has occurred several times in the past few weeks.

There appears to be a change in the wind, and I suspect that it is because the market is anticipating the end of the Fed's quantitative easing program in June. The nearly infinite liquidity that the Fed has provided will soon come to an end -- for the time being. Of course, anything could change by summer. I'll be anxiously awaiting the Fed's policy statement following its meeting at the end of April.

Gold Loses Steam

Note also in the daily chart, volume has been dropping for several days, and a divergence has formed (see lower panel). This looks like a top, at least temporarily. I may be a little premature on this because the price hasn't dropped below the EMA yet, but this was an interesting reaction following Bernanke's speech this morning. I will be watching for follow-through on Sunday evening into Monday.

Trading Volume Continues to Plunge

The continuing decrease in volume reported by the US’s largest electronic trading groups has triggered a fear among analysts that the fall in market activity might be more than a seasonal phenomenon.

Trading-focused groups such as ITG, Knight Capital and Charles Schwab enjoyed upbeat second quarters when the European debt crisis sparked extreme volatility. As fear has given way to unease with the global economy, however, trading volumes have fallen sharply.

“You’re starting to see some real pain,” said Christopher Allen, an analyst at Ticonderoga Securities. “September is not a material improvement over August. Aside from possibly the US election, I’m not sure what the catalyst is for trading.” A record-long streak of outflows from equity mutual funds – now 20 successive weeks beginning in May, according to the Investment Company Institute – and reluctance by even normally bold hedge fund managers to take big bets has suggested that there are more than seasonal factors at work.

Mr Allen’s figures, compiled last week, show that trades for the trading industry are down 8 per cent so far in September from August, when trading fell to a three-year low.

Trade... or Fade?

I use volume indicators to help me determine if I should follow the momentum and enter an existing trend, or if I should fade the market and trade in the opposing direction. Both volume and trend must be in harmony for me to take the trade.

Daily Stock Chart Shows More Selling Volume

The divergence has been confirmed, and selling is picking up steam on the daily chart also. Note the selling volume increasing on the Klinger Volume indicator. We are now struggling to find support at the 20-day Moving Average.

All Short-Term Traders Need to Know This

from Dr. Brett-
The one thing short-term traders should know is that size matters. It is of vital importance at all times to know whether the traders in size are leaning to the buy or sell side. Because volatility is intimately connected to volume, the presence or absence of large traders will determine the amount of movement in the market. The degree to which large traders are hitting bids or lifting offers will determine the market's tendency to sustain directional moves (i.e., trend).

(IMO, understanding--really understanding--those last two sentences will keep many traders out of bad trades and bad markets).

Let's take the opening period of Friday's trade as an example. I'm looking at the time period just before the NYSE open to the end of the first half hour of trade (9:25 AM - 10:00 AM ET) in the S&P 500 e-mini (ES) market. During that period, we had 13,954 trades that included 212,684 contracts.

Of these trades, 5148--almost 40%--were one-lots. Those one-lots accounted for about 2-1/2% of all market volume during the opening period.

Conversely, 431 trades--only about 3% of the total--were trades of 100 contracts or more. This group of large traders, however, accounted for 82,127 contracts traded, or nearly 40% of the total.

So there you have it. Give or take a bit, the smallest 40% of trades account for 3% of the volume, and the 3% of largest trades control 40% of the volume.

A number of excellent short-term trading guides can arise from these observations. For instance, we can compare the number of large trades occuring during a time period and compare it to the average number of large trades that occur during that time period, and we'll have a rough idea of the degree to which large players are dominant and volatility can be expected.

We can also parcel out the large trades that occur at the bid price (meaning a large seller is anxious to exit the market) vs. the large trades that occur at the offer (a large buyer is eager to get into the market) as a way of tracking the moment-to-moment sentiment of large traders.

Trade by trade analyses of market action that capture the sequencing of large trades at market tops and bottoms are also quite revealing, as they display how one-sided markets (those dominated by buyers or sellers) become two-sided when other timeframe participants perceive that the market has moved too far from value. That period on Friday from just before the open to the end of the first half-hour of trade neatly caught such a sequence.

There's value in looking at charts of markets that cover many days. That's viewing the market through a telescope. The short-term trader, however, can also benefit from observing the teeming life under the microscope. What moves the market in the short run is not what fundamentally moves the market over the long haul. Taking advantage of the data appropriate for your timeframe is all-important.

Tonight, I'll post a chart to the Trading Psychology Weblog that illustrates some of these ideas.

Difficult Trading Expected This Week!

Many traders have either finished their 2008 trading year or have simply gone on vacation. Volume is light and price action is very choppy. We should expect difficult trading conditions, with erratic price action for the balance of the year, but especially for the next few days before and after Christmas.

Grains Regain Footing in Anticipation of Lower USDA Forecasts

Grain futures have begun to show signs of price recovery recently, after moving higher two of the past three days and crossing above the Exponential Moving Average today. If prices hold above this level, it will be a bullish sign. The Klinger Volume indicator, as shown in the lower panel of this chart, still appears bearish, however. Note that at the far right side, today's Klinger remains red despite grains having moved higher overnight. I will be watching closely to see what happens during the main trading session today.

Volume remains light for all futures during the Christmas Holiday period. This is typical for December. I don't expect volume levels to recover until January. I am always cautious during December's weak volume period because there is more market noise and greater erratic volatility than usual.

Here is a good Bloomberg article explaining the more bullish sentiment.

Soybeans Regains Volatility Ceded to Wheat

For the past few days, wheat had become the most actively-traded of the grains. The overnight volume for wheat two nights ago was 60,000 contracts. However, soybeans are once again the most volatile grain product, having taken the lead back today from wheat. Wheat is still very active, but has once again fallen behind soybeans for the time being.

Best trading day in several months!

Today was the most profitable day in trading that I have had in several months. Normal volume appears to have returned to the financial markets. I even shorted the stock markets, since it seemed to be all the rage today. This was a day for celebration!

Grains activity gets back to normal!

It's about time! The past 3 trading sessions have been difficult, but expected following the rapid rises in prices earlier in the week last week. Note in the soybeans tick chart at right how smoothly the movement were that took place today. Soybeans, wheat, and corn are all showing heavy activity early in the trading session. I never thought I'd admit to being glad that the holiday season was over, but I'm glad activity levels are finally returning to normal. Movements are good and volume is high this morning. This makes for very good trading activity.

Wheat and corn are also very active. Wheat was headed to an early lock limit up, but has since backed off somewhat. See chart #2 above for wheat.

Corn is also up strongly this morning with excellent volume and strong buying activity. These are good days for traders. Corn is the strongest grain in holding higher prices this morning without any significant retracement. Corn is chart #3.