Reading the Markets

August 26, 2008

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Here’s an excerpt from an interesting note from Brett Steenbarger, at Trader Feed, discussing what to ask to get a feel for how the overall market’s acting throughout the day, in order to trade more effectively. – Ilene

Reading the Communications and Metacommunications of the Markets

Excerpt: "Think about reading a market like reading a person: you’ll listen for the communications of the market–what it’s doing–but also for the metacommunications: how it’s expressing itself. Let’s take yesterday’s market as an example.

* How did markets in Asia and then Europe open? How might a trader have picked up on overnight underperformance by U.S. stock index futures and weak performance by individual stocks in their pre-opening trade to anticipate weakness during the regular trading day?

* What news came out early in the morning trade? How did stocks respond to the housing news? How could the failure of stocks to rally on the news have helped a trader anticipate a retest of the prior day’s low price?

* How did sentiment unfold during the morning trade? How could traders note that institutional participants in the market were dominantly hitting bids across the universe of stocks (negative NYSE TICK) and hitting bids in the S&P 500 futures (negative Market Delta) to identify a weak trading day?..

* What were market indicators, such as the new highs/lows noted in my indicator review and the money flows noted in my recent post, noting about longer-term market strength? How might a look at such measures help a trader anticipate weakness from day to day?

It’s not about imposing your views of what markets *should* be doing; it’s about reading what they *are* doing by placing price action into a broader context and reading how that price action is evolving…