Trading “Tough” Days – Pay Attention to Tendency and Price Action

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Trading “Tough” Days – Pay Attention to Tendency and Price Action

Not every day is going to be easy to trade–some days are, some days aren’t. Depending on trading style, a tough day for one trader may be a glorious for another, but the fact remains every trader faces tough market conditions.

Since I don’t start trading the EUR/USD until well into the European session, nearer to the US open, I can already see what the day is like. If it appears to be tough conditions for the strategies I use–which are typically trend following strategies–I’ll either stay away or will be very patient with entries and exits.

On November 5 the EUR/USD showed a tendency to move sharply and then consolidate in complex formations, then move sharply, and so on. By realizing the tendency of the day, and being patient for opportunities, even a trending strategy could be employed. Patience is key though, because getting impatient and expecting a big move while complex consolidations are occurring can mean a lot of false signals and thus losing trades.

Picking out Tendency

Each day has a slightly different tendency. Some days we see sharp moves, followed by sharp pullbacks, or slow choppy trends followed by sharp or slow pullbacks, or no real trends at all.

By paying close attention to how the market is moving overall, we are better able to pick the times when our strategy should be applied.

Figure 1 shows some of the European session (bright yellow) and the start of the US session (pale yellow), and highlights this overall tendency.

Figure 1. EUR/USD 1 Minute Chart

Looking closely there are several additional tendencies which pop out, aside from the sharp moves followed by a complex consolidation.

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Each of the consolidations has multiple false breaks out before the eventual move. The overall trend is down, so we want to be especially cautious about upside breakouts, because on this time frame, those breaks higher are likely to be false.

The next tendency is that in the small price swings just before the break lower, the price starts making lower highs, indicating a buildup in selling pressure.

The following chart highlights how these tendencies could be used to pick a high probability trade.

Figure 2. Short Trade Based on Tendencies

While the tendency of the day is used to help isolate entry and exit points, we can’t abandon other methods for determining strength.

Incorporate Price Action Analysis

Following the first consolidation the drop is very steep and long. After the second consolidation, the drop is steep, but is much shorter than the last drop. This indicates the trend is still down, but that it is weakening. We still watch to see if the market follows the same tendency, but is now possible that a break higher could also occur.

Figure 3 shows the third consolidation and the break higher that followed it.

Figure 3. Same Tendency, Opposite Direction

This consolidation has similar tendencies to the prior ones, except in the opposite direction. On the third consolidation there is a break lower followed by higher lows–the opposite of the other consolidations. Combined with the possibility of a reversal based on the weakening downtrend, we want to look for a long position.

The EUR/USD makes a new high and once again a new low which is the area we want to enter long (marked on chart). As per the daily tendency a very sharp move ensues and we look for an exit as soon as the price starts to consolidate.

A forth consolidation is also marked, but at no point do we get the higher lows which should occur in order for us to take a long trade. This consolidation did not align with the tendency of the day.

On a day when many traders could have easily lost money trading within the consolidation, and completely missing the big moves because they were frustrated with the choppy price action, by paying attention to daily tendency and overall price action you could have grabbed two profitable trades and stayed out of the losers–not bad a for a tough day. It is important to stick to the strategies you have laid out for yourself, but it’s also important to pay attention to the price action and tendencies of the day so you can pick which times are best to employ that strategy.

Price Action – Seriously

DionysusToast

Legendary member

Could you be more specific:

kimo’sabby

Experienced member

This could be true. Your posts on this thread are so void of information, it is hard to know what how to interpret them.

Personally – I think it more likely that you mistyped. You can’t even spell tit right. Your ‘i’ is clearly upside down and the word “kinell” is not in Oxfords English.

You are now free and clear to deliver to me the coup de grace by providing a trading insight of your own that is so earth shattering that it will change T2W forever. The floor is yours, the crowd awaits with baited breath for an ounce of your wisdom. This is your chance to finally shine and show that you, above all others, are one of the much vaunted 5% that actually has a trading account.

I bow down, sir and await the wisdom of ages.

Let us cast off these petty insults and squabbles between us and both give all that we can give to the T2W community.

Your turn fella.

brewski1984

Senior member

If everyone put in half as much effort helping me learn to trade as they have trying to get Howard cohoda to realise that 99 small wins won’t counter the inevitable 1 huge loss, I’d be a billionaire by now.

I wouldnt but I had to exaggerate a little to prove my point!

DionysusToast

Legendary member

If everyone put in half as much effort helping me learn to trade as they have trying to get Howard cohoda to realise that 99 small wins won’t counter the inevitable 1 huge loss, I’d be a billionaire by now.

I wouldnt but I had to exaggerate a little to prove my point!

I agree – and that is why people can put in real offers for help right here in this thread.

After all – if you aren’t part of the solution.

Or as GWB put it – “If you aren’t with us. “

Active member

gamma

Experienced member

DionysusToast

Legendary member

It’s because he’s a scam artist. Has been right from the start. It just took different people a different amount of time to realise that.

If Howard wasn’t selling what he preaches, it would be fine. Spanish89 employed similar trading techniques but he wasnt selling training. No harm, no foul.That was a lot of fun.

In the threads, HC uses some fairly simple debating techniques that leave all issues unresolved. What this does is perpetuate discussions as people try to explain things in different ways that HC then claims to not understand because they didn’t explain properly. This makes Howard look smart to people that don’t know about the techniques employed.

Some people think he’s just deluded and doesn’t really understand the issues. The fact is he does understand but uses techniques that are employed to obfuscate the issue. Politicians do the same thing.

Debating with Howard doesn’t work, so why not have pepole offer useful information in return for scraping the nasty ring of scum off the bathtub that is T2W?

kimo’sabby

Experienced member

It’s because he’s a scam artist. Has been right from the start. It just took different people a different amount of time to realise that.

If Howard wasn’t selling what he preaches, it would be fine. Spanish89 employed similar trading techniques but he wasnt selling training. No harm, no foul.That was a lot of fun.

In the threads, HC uses some fairly simple debating techniques that leave all issues unresolved. What this does is perpetuate discussions as people try to explain things in different ways that HC then claims to not understand because they didn’t explain properly. This makes Howard look smart to people that don’t know about the techniques employed.

Some people think he’s just deluded and doesn’t really understand the issues. The fact is he does understand but uses techniques that are employed to obfuscate the issue. Politicians do the same thing.

Debating with Howard doesn’t work, so why not have pepole offer useful information in return for scraping the nasty ring of scum off the bathtub that is T2W?

Wot other markets do you fade? Or is fading the ES an exclusive endeavour?

DionysusToast

Legendary member

Kimo – it sort of depends what you are fading. By ‘faders market’ I mean that most of the time the ES is rangebound and it has a tendency to reverse in the area of yesterdays high/low, overnight high/low, todays high/low, the open and yesterdays close. There are of course 1-2 days a fortnight when it just runs in one direction and fading is a painful experience.

Thinner instruments like CL & DAX will be rangebound intra-day and then break out with a move 10 times the size of the range. You will not find the CL & DAX bound as well as the ES is.

I am sure you know all this though.

kimo’sabby

Experienced member

Kimo – it sort of depends what you are fading. By ‘faders market’ I mean that most of the time the ES is rangebound and it has a tendency to reverse in the area of yesterdays high/low, overnight high/low, todays high/low, the open and yesterdays close. There are of course 1-2 days a fortnight when it just runs in one direction and fading is a painful experience.

Thinner instruments like CL & DAX will be rangebound intra-day and then break out with a move 10 times the size of the range. You will not find the CL & DAX bound as well as the ES is.

I am sure you know all this though.

I didn’t know it all in the way that you have just explained it to me. thanks, i’ll re-read at a later date.

Fading the ES ranges. mmm. sounds easy.

DionysusToast

Legendary member

I didn’t know it all in the way that you have just explained it to me. thanks, i’ll re-read at a later date.

Fading the ES ranges. mmm. sounds easy.

Well – it sure isn’t easy. As we all know, it’s very easy to make hindsight observations based on past price behaviour but it’s a lot harder to make money real time based on the same observations.

For a start – you quite often have overnight high and yesterdays high a couple of points apart. Do you fade the first one you hit? If you do fade it and get stopped, do you fade the higher one after you just got stopped out? That’s a tough trade to take.

It is much better to get a bounce off the level, then have the market push through the level 1 or 2 times. You’ll miss the once that put in a ‘v’ shaped reversal of course but those pushes through don’t happen by accident. Lots of times the ES will move back to the opposite end of the range. A bounce off yesterdays high will traverse back to yesterdays low for instance.

Still, it’s certainly handy to know these things. When I look at the DAX and CL, I marvel at how random they look compared to the ES. I am sure people that look at DAX/CL every day see order there. I certaily don’t. If you see order in a market and have some expectations of how things can play out, then you can start looking for ways to trade it but it wont be as simple as fade every level.

BTW – don’t pay much attention to the past 2 weeks action when looking at this as it’s been so narrow. In narrow times, levels will appear more reliable – so you need to go back to volatile times too.

A Guide to Sentiment, Positioning Analysis, and Trend Analysis of the US Stock Market.

An introduction to my Market Monitor for analyzing and making actionable trade decisions in the most complicated and liquid market in the world.

Intro

When I started as a trader, I started as a small cap trader. I followed the theories of Jesse Stine and Pradeep Bonde. Stine called his setup, the “SuperStock” setup and Pradeep Bonde(Stockbee) called his an Episodic Pivot. I still trade these, but I have added a bunch of my own wrinkles. They are no longer my primary thing anymore. I now trade the indexes primarily, via Futures. My consistency and profitability have skyrocketed. I did well as a small cap trader, but as my account grew I became more and more nervous about having capital tied up in low liquidity names overnight. There is so much gap risk in small caps. Holding through earnings is a scary thing as well.

A lot of people that trade individual stocks, take a bottom-up approach. I can see the idea behind this, but I personally found that in practice that approach does not work as well as a top-down approach. I know some of this comes down to personal preference, but for me having a strong understanding of how the market is behaving is incredibly powerful for both individual stock traders and index traders.

The data I am going to present in this document is data from my daily market monitor. This is the information I track on a daily basis. I have another market monitor, which is much larger in scope, where I track longer-term data. I track a lot of Macro data in that one. I typically update that one once a month.

At some point, I may explain the longer-term market monitor as well. But that will be an even longer blog post. With both of these market monitors, I have devised a point system that attributes a final score based on the readings on all of these metrics. I assign weights to the various metrics. The most useful metrics get a bigger weight score. I then add all the scores together and get a total score. This is all done automatically in spreadsheets. I am not sharing those spreadsheets at this time, I might include them in the book when/if I ever finish the book.

You may think this score is some magical thing that allows me to automatically trade the market with extreme accuracy. It isn’t, in fact, I don’t pay much attention to the score. It is just something I built to try to get a better feel for the data. It is similar to the TV show, “Whose Line is it Anyway” if you have ever seen that. The score truly doesn’t matter that much. I take in all of this info, process it, and make discretionary decisions based upon the data.

Breadth

One thing that I started to do from the very beginning, is to develop my own Market Monitor. I started with the Market Monitor concept from Stockbee and greatly expanded upon it. My Market Monitor is a massive part of the reason I am a successful trader. It is pivotal to every trade I do. In terms of Index trading, it is a critical piece. I combine this market monitor with order flow, and small amounts of TA(mostly Fibs) to trade ES.

It is a system that works well for me. I honestly have not been highly interested in sharing this, because it does work so well. But, I believe in helping people. Many are struggling with things that do not work, paying outrageous amounts of money for paid courses where they teach you how to draw trendlines, and being led down the wrong path consistently and getting burned. I feel it is my duty to help them out. I am offering this for free, just like everything else I have done in this blog because I think it is the right thing to do. I make money trading, and I enjoy writing. I have not monetized this blog other than a few affiliate links from time to time.

The Stockbee Market Monitor is based entirely upon Market Breadth. It is still my favorite way to monitor market breadth. A breadth thrust signal on there is probably the best way to use Breadth, although Breadth Divergences at highs and extreme overbought and oversold breadth are useful as well. The breadth thrusts are 300+ stocks up more than 4% on the day. In 2020 we have had 4 of them. You can see the returns from the first two have been phenomenal. From the third, they have been great so far. We just had our fourth this Friday, June 28.

Other things of use in that Breadth Monitor are the 5-day ratios. Extreme overbought and oversold is what I use them for. Stockbee in general likes to use them as strong 5-day breadth is good and bad 5-day breadth is bad. More often than not, when his spreadsheet colors them green, it is a short term sell signal, red a short term buy signal. I personally have taken his sheet and changed how the color highlighting works in certain areas. This is in part personal preference, and in part, due to some backtesting I did on the data.

I highly recommend reading the blog posts Stockbee has done where he explains his Breadth Monitor. From there go back and look at major inflection points and see what the numbers were doing. Start “forward testing” it by observing it every day. One big thing about my Market Monitor is that I have had a bunch of different metrics on it over the years. I backtest some of them and forward test some of them. If I find through forward testing that they have little value, I remove them. I try to streamline it as much as I can, but there is nothing that beats looking at the best data every day and getting an in-depth feel for how the market flows. That is the true key IMO.

The number of stocks up 50% in a month is a pretty solid short to medium term top indicator. Very often we see a pullback when this gets above 20. When it gets really low it can also be a buy signal, but the best signal is above 20 is a time to get cautious.

T2108 is an indicator that is in the Worden Brothers platform Telechart. It is similar to something like MMFI in TradingView or SPXA50R in Stockcharts. In general, I look at the extremes here. Extreme overbought for a long period of time can be a sell signal, Extreme oversold(usually takes less time than overbought) is a buy signal. Breadth divergences are something to watch here as well, which can be a top signal.

Similar to T2108 I like to look at the comparable 50 day moving average breadth charts on SentimentTrader.com for SPY, QQQ, and IWM. The way I look at the data is similar to T2108. Extreme OB/OS, Breadth Thrusts, Breadth Divergences.

As far as the breadth Oscillators, I personally am a fan of the Nasdaq Mcclellan Summation Index. Nasdaq is a leader in many ways due to its heavy tech weighting. I like to watch for extremes OB/OS as well as the “NASI Buy/Sell Signal”. The NASI Buy/Sell signal often lags way too much for my liking, but it can be nice confirmation if already in a trade to stay in.

There is a myriad of sources online for how to use breadth and a million different measurements for Breadth out there. I am not going to start from ground zero and try to teach you everything there is to know about breadth, I simply am telling you the nuances of how I use it. It is a powerful tool, but only one part of my Market Monitor. It is not the MOST powerful tool either.

Commitment of Traders

The COT Reports for Equity Indexes do not cover as large of a subset of the market as the COT for the many of the commodities markets. Nevertheless, it still gives solid signals. It is an underused resource.

There are a lot of places to learn COT in-depth, and a lot of ways to view the data. My personal favorite place to view the data is Freecotdata.com. If you want to learn more about COT, his interviews are a great resource. The owner of this site adjusts the COT data for OI and the percentile rank over the previous 5 years. This is a great perspective, and different from how many people are viewing the reports. He lumps all of the speculators into one category, along with dealers. In general, amongst the speculator’s group, you will find a percentage of them are the people that can consistently make money in the market. The group as a whole is primarily made up of trend followers. The longer a trend goes on, the more involved in that trend they tend to get.

A lot of people call Dealers “Smart Money”. While it is true that the Dealers are often heavily long at lows and heavily short at highs, the dealers are not in the market to make money, they are largely hedging. It is a great signal when either Dealers or Speculators get heavily long or short an extended trend. You will notice that in general, the two categories move inversely to each other. Dealers are Market Makers, brokers, etc. hedging and trying to stay market neutral to offset the risk from speculators. So extremes are an important thing to watch for in the COT.

COTBase.com is my preferred way to look at the “classic” or “legacy” version of the COT report. There two types of reports put out every week by the CFTC. The legacy and the newer disaggregated report. They both present the SAME data, it is just the newer report that breaks the data down into more categories. I like to look at both reports every week.

Another element of the COT reports to watch is the weekly changes. A large one week change in OI can be a big deal in the short term. Freecotdata.com is a good resource for this, but COTBase.com is also an excellent source. If you watch his weekly videos, he will show you the biggest one-week changes in OI and the major extremes. The videos are a good way to learn more about COT as well.

A third and also great resource for COT data is Tradingster.com. This gives the full disaggregated report, versus the combined version that Freecotdata provides, plus Tradinster is usually updated immediately. Freecotdata is usually not updated until the following week after the report releases.

As with anything, I am not here to try to teach you every single detail about COT. I suggest you do as I did, read books, read blogs, watch videos. I already linked some resources, there are several books written exclusively about COT. Google is a great resource. I am just showing you the nuances that I look at, not the basics of how to read and use them.

For Equity Indexes, I, of course, look a the index COTs but I also pay attention to the VIX, US Dollar Index, Gold, Bonds, etc. I want to see what the markets that have a strong positive or negative correlation to the stock market are telling me. Risk-off and risk-on asset analysis. Obviously, Gold COT is not as critical as the Equity Index COTs for my purposes, but there are sometimes some clues in these ancillary COT reports. In August 2020 gold speculators hit a record short interest level. This formed a major bottom in Gold and preceded one of the larger drops in Equity Indexes in many years by several months. Was it a warning sign, or a canary in the coal mine indicator? Perhaps, but correlation and causation are always hard to determine. The Gold correlation with the Stock indices is not as strong historically as many think either. But was it good to know that was occurring as an index trader? Yes of course. Plus, it made for a great place to get long Gold as a side trade. As noted from a previous post, I love trading major long term COT extremes in markets.

Basic TA on the Daily and Weekly Charts

I am not the biggest fan of TA. It has some use, but way too many rely way too much on TA. I can’t tell you how many people have told me that I don’t need to look at all this data, that this is going to give me analysis paralysis, and all I need to do is read the charts. All the information is contained in the charts they say. That would make sense if the ways these same people are analyzing the charts actually had a backtested quantifiable edge. The reality is, none of these people have backtested these candlestick patterns to see if for instance a “bullish engulfing” candlestick actually has any predictive power.

I mostly like to use charts to determine two things. At a basic level, based on historical norms, are we extended to the upside or downside on a short, medium, long term perspective. Yes, this is to some extent subjective. Yes, I just got done talking down to people who do a subjective analysis of charts. But…If you go back to a previous post of mine, where I talked about my favorite trading follows, I talked about how I love to do backtesting and read others backtests. This gives me at least an idea of the real nature and tendencies of the market.

A lot of people like to do visual backtesting of charts. I admit I do it too, at least when I first begin to analyze a set of data. There are issues with this. First, the human mind is designed to find patterns, even when patterns do not exist. You might think you see certain things, but the reality might be different when you do actual, structured, backtests of the data. Try not to fall for this trap.

Back to TA. Having seen 1000’s of backtests, many of them price action-based, I get a feel for what is a move that might fade and one that might continue for a bit longer. I have spent a ton of time looking at the price action tendencies during different market environments. Unfortunately, some of this has to be done in a rudimentary way, some of it can be automated. But in general, ES has a few different “modes”. The default mode is a slow grind higher. This is what produces a market that for the entirety of its existence, usually pushes new ATHs most years, and usually does not go more than a few years without a new ATH. This is a huge edge, that few take advantage of. Yes, when the bear markets come, the fall is vicious. But if you maintain net long exposure 80% or more of the time in this market you will come out ahead. The beauty of Futures is you can add a lot of leverage to that equation. Leverage is very much a double-edged sword. I would not recommend trading Futures or doing so with very small size until you have a firm grasp of the dangers and pitfalls of leverage, as well as a firm understanding of the information I am presenting in this blog post. It is learning when the corrections are becoming high probability and either going flat, or net short that you can really destroy the average market returns.

So for the default slow grind mode higher, I have found two TA tools that help me the most. Keltner Channels and Linear Regression Channels. Once you identify the trend is likely shifting to slow grind after a correction, then you can start to fit a linear regression to the resulting angle of the trend and use that for trading. You can hedge your longs near the top of the channel, or go with small size net short positions. Touches of the bottom channel are usually strong buys, as long all of the other data I am presenting here is showing the uptrend is still likely intact.

For Keltner Channels, middle bands and lower bands can be good buys. This is where order flow can come into play to confirm these levels. The “middle” Keltner channel is just a moving average. In my case the 20period mA. I am in general not a huge fan of using moving averages extensively in market analysis. But, it is a majorly watched average, and in an uptrend, the market will spend most of its time above it. It has to, there is no other way for an uptrend to exist. so touches and moves below can be buying opportunities. I would never, ever, buy a moving average blindly without the other data I am using and presenting here. I find when a market is “extended” from the 20 daily ma, that is a better signal than when it is touching it. Simple mean reversion.

For those that are interested, these are my Tradingview settings for Keltner Channels. They are based on the Adam Grimes recommended settings. Whenever possible, use ohlc4((open+high+low+close)/4) with indicators. It gives a better overall picture than just using the close.

I also am a fan of using Fibs. I used to be one of the many who think they are ridiculous. But after seeing countless examples with my own eyes of live and historical exact Fib bounces I am a believer. I could go through the process of posting hundreds of examples, but I am going to leave that process to you. Again, there are a ton of resources to learn Fibs. I am not going to try to teach you every single nuance of Fibs. Just know that I find them useful. Since you are a human, and like pretty pictures, here are two exact fib touches on lower time frames from trading earlier this week.

As I stated before, order flow can be great when watching these levels. I think much of the reasons these work in the modern era has less to do with this “magical” Golden ratio everyone talks about and more to do with the massive dominance of algorithmic trading. There is no doubt in my mind, there are swarms of algos operating on Fibs. Order flow works wonders in conjunction with these and having watched order flow at these levels many times, you start to see various patterns that repeat over and over again and ultimately give you the confidence to get into trades with them.

The funny thing about the Golden ratio is there is absolutely not a magical thing. People believe that this ratio repeats over and over again throughout nature and that is why it works. The reality is, fractals of the golden ratio do repeat in nature very often, but more often than not they are not the Golden ratio. There are a ton of ratios in nature. There is a silver ratio, bronze ratio, and countless others.

Long story short..The Golden Ratio works in trading, because a lot of people believed enough in it to build algos, and enough human traders believe in it to make it a self-fulfilling prophecy. I personally, would never trade on a Fib or any TA level blindly. I always want to see confirmation in order flow. Without watching order flow, you might get in one of those situations where your limit order gets absolutely blasted through when a market moves through one of these levels like they do not exist.

The other market environments besides the slow grind environments, primarily encompass the high volatility moves found in corrections and bear markets. Many of the same things work, but you have to account for the high volatility. Pay close attention to the GEX during this time. I explain the GEX later on. Study past price action during corrections. It is helpful to know that the stock market averages 2–3, 5–8% corrections every year. Every time, the world is ending if you pay attention to what people are talking about on social media.

The data that I track will be changing rapidly during these corrections. It is important to monitor it very closely, especially the DIX. During the slow grind periods, I do not watch it especially close every single day unless I think we are getting closer to a correction. Everything is relative, you have to maintain an open mind and be flexible.

SPY Max Pain 9 Expiration Average

On a day to day basis the various put/call ratios that exist, can give good short term signals. I do pay attention to them. A really high or low one day P/C ratio can cause some short term highs/lows to form. It is important to note that certain events can skew this data in the short term. Major economic releases, fed announcements, opex, etc. But, it is useful to pay attention to the day to day ebb and flow of this data.

However, I have found the overall OI of each contract gives a better picture of the long term picture. On actual OPEX days, there is a strong tendency for the market to seek gaps in the OI to move to at the close. I have observed this many times. My assumption is this is market makers trying to get as neutral as possible, which results in the market moving towards these levels. Some think it is market manipulation. That is possible as well. I don’t claim to know the exact reasons why it happens, I just know it happens.

The weekly options expirations are not that critical to watch, but the monthly Opex every third Friday, and especially the triple/quad witching dates are critical days to be watchful. Volatility is very common on these days. Futures contract rollovers can cause some volatility as well, and they will have a big effect on Delta when watching order flow. Delta becomes less useful/reliable during a rollover period.

How do you get this OI data? I prefer Opricot.com for SPY and SPX options. For ES Options expiration data, CME is the place to go.

So for short term trading, this is useful, but what about the long term? What I do is take the max pain levels for the next 9 Option Expirations for SPY from Opricot, average them out, and compare them to the SPY close. This gives a good view of the longer-term picture of the options OI. I subtract the SPY Close from the average max pain level. Negative numbers mean the average max pain level is below the close, positive the opposite obviously. Big numbers negative or positive, can mean we might see some mean reversion. This is what I watch for the long term.

Why do I use SPY? The SPY options chain has by far the most daily dollar volume transacted versus the other two options chains, index and futures. You could get really wild with this and track all the other two chains as well as the other indexes options OI. But the S&P 500 is the biggest dog by far. It is easier and more convenient just to track it.

Insider Ratio

It is no secret the insider buybacks have been a fairly significant boost to the stock market over the last few years. There is contention amongst many for sure about this, but there is decent evidence on the side of buybacks having a big effect. So monitoring this data, at least for now, I think is important. So I do.

There are “buyback blackout” periods as well. This is during the earnings season. There is some evidence that companies have found ways around this blackout period. There is also, IMO, no real correlation to blackout periods causing market declines. This could be due to the aforementioned ways the companies have found to continue buying back stock during the blackout, as well as the earnings reports causing organic buying during this period.

I get the Insider Ratio from Helene Meisler on Twitter, who posts it weekly. She is a great follow. See my previous post for other great follows.

The usage of this data point is straight forward. Above the bearish line and below the bullish line.

Weekly Fund Flows

Backtests on this data are mixed, but nevertheless, we have seen a massive outflow from equities at the time of me writing this. That is why I track this weekly when it comes out. It comes out on Wednesdays. Sentimentrader also has this data. Sentimentrader has all the data out there in one convenient spot, but all of the data on his website is available in the public domain for the most part except for the Smart Money/Dumb Money indicator.

The last time we had outflows this strong this near to ATHs was the Summer of 2020. The last time it happened, the result was a massive bull run. I don’t necessarily think we get a repeat of that now, but it is difficult to look at this is a bearish manner. I think this is really a result of people that have been watching the plethora of documentaries about the 2008 financial crisis and it is currently affecting their judgment. Everyone wants to be the next guy to land the next “Big Short”. While there are some very concerning macro developments in the long term, my current view is many people are a bit early to race for the exits.

Market on Close Orders 5 DMA

There are some that say the traders trading at the end of the day are more likely to be in the “smart money” crowd. My personal view is that is a bit of an outdated idea, but maybe there is still some relevance to it.

What I do, is track the daily MOC ratio as well as the 5-day moving average. In general, more buy imbalances than sell imbalances in an uptrend is normal, same for a downtrend. When you see a divergence, this when you might be noticing a shift in the market and where it can be useful. Incredibly large one-day ratios can also be notable.

I have often seen a capitulatory type of selling at lows on the MOC. If this capitulatory selling is followed the next day or a few days later by a breadth thrust and a large MOC buy ratio, that can confirm a low. Tops are similar, but tops form much differently than bottoms. In general, it takes longer and takes a longer period of people being excessively bullish.

The market on close orders can be found at Market Chameleon.

ES Long Term Order Flow Delta

In Sierra Charts I have built a long term chartbook that plots a longer-term view of ES, and the overall trend in Delta. Cumulative Delta, as well as Delta at Price, can be used to help pinpoint potential areas of a major high/low forming. A divergence on CVD on a long term view can be a very useful thing. If the price is going down, but CVD is beginning to turn up after an extended period of going down, which can potentially help to form a bottom.

Delta at price on higher time frames is great for seeing exact levels of longer-term absorption, and where aggressive traders are getting trapped. These levels can be critical levels that can act as major support/resistance levels.

I also like to look at the Delta from a consolidated tape perspective. I look at the large orders, medium, and small orders on a longer-term perspective. I also look at these metrics from a short term perspective. But is the long term perspective that can give you some clues. The consolidated tape is something that is not available with every data provider. I highly recommend getting a data source that has both the full market depth and a true reconstructed/consolidated tape. A truly consolidated tape has the ability to combine market orders by trade ID. This is a super useful feature.

Also, I try to every so often check NQ. NQ is the big one, but YM is also to some extent useful to track. RTY is the least useful to track. Also, in Sierra Charts you can track Delta of SPY and QQQ. I find them useful to look at every so often. DIA less so, and IWM is less important to watch IMO. Overall, ES is the most important to watch, with NQ, SPY, and QQQ being useful to look at on occasion.

ES Inventory Balance

This is an observation that I made, and another way I have tried to look at Order Flow in an outside the box way. I have found and been able to pick several exact lows using this. The premise of this is that markets tend to move towards high liquidity. So what I look for, is large static orders that sit in the order book for a long period of time. In general, I am looking for bids when trying to find a low and asks when trying to find a high. If I feel a market is topping in the short to medium term, I look for these levels as potential targets. I have found, that very often, these levels end up being within 10 points of the lows. Usually, the market will not trade much more than 10 points past that level. Very often, they do ultimately get filled.

Trying to explain this in words is incredibly difficult because this is a very subjective thing that I do. But, basically, I look for these large static levels and plug into a spreadsheet daily. I then calculate a ratio of to see which side has more total quantity of these walls. That can be a useful metric as well. If this positively correlates with the next metric, that can be a very powerful signal. The next metric is the total book depth. So if there are more large bid walls, and the total depth is heavier on the sell side, that is a decent sign that we might be heading lower.

These large walls that I plug into my spreadsheet, are often well over 1K contracts in size. They are very often found in gaps. Gaps have a strong tendency to eventually fill in markets. So if you find a large order that stays, and is in a gap, there is a decent chance that could be a very important level.

On this recent correction, I was looking at that level as potentially the deepest we would retrace. I held a short from near the highs, closed at 2800 and tried a long as I began to see some evidence we would hold that level. Trim and Trail gave me a profit on the bounce, but ultimately the market explored lower prices. I was still looking at order flow for long entries, and no longer looking for shorts actively. It is a tough game to try to catch lows, but if you use sound risk management and have a solid understanding of the market dynamics it can happen. You have to be prepared to trail stops and let them take you out. If you get good entries on short term oversold with good order flow confirmation at those lows, you can do it in a somewhat safe manner. BUT…The safer way is to wait for the lows to be confirmed with a Breadth Thrust. If the breadth thrust is confirmed with dark pool buying, before or during the breath thrust, you can then look to buy pullbacks.

ES Ask-Bid Ratio

This is a study in Sierra Charts that monitors the total book depth. I have three charts with this on it. Each monitors different depth levels. Close, medium, and total. In general, more bids than asks is a good thing. I often see all three depth levels have more asks than bids at major highs, and inverse for lows. If the overall depth is showing more bids, but the close depth level is more asks, then there is a decent chance there is some spoofing going on near price to try to get some bids filled. There is a lot of nuance to using market depth, and it would be hard to explain all of that nuance. With order flow, you have to get in there and look at it. A lot of it cannot be explained.

In my next blog post, I intend to put together an exhaustive list of all the free or inexpensive resources to learn order flow. Order flow can complement ANY strategy that you use. In general, order flow gives short term signals, but I have shown some ways you can look at the bigger picture. Another way to use order flow is to look at the short term signals. When a lot of short term signals stack up in a row, it can change the higher time frame trend. It oftentimes takes MANY, HEAVY absorption events often at sequentially lower/higher prices to stop a strong higher time frame trend. These absorption events will force a short term pullback(rotation) often, but many times you will see price continue higher/lower after a small pullback. If absorption events continue to pile up, you can eventually have a trend change.

Gold and Bonds Inventory and Ask-Bid Ratios

This section I can keep really short. It is essentially the same thing as the ES Order Flow Analysis from above. It is just monitoring the same things for the risk off assets. Enough said.

CNN Fear and Greed Index

This is a contrarian signal. Sentimentrader.com has a model similar to this that is better in many ways that I actually prefer to use. This indicator is based on primarily positioning of traders versus anecdotal evidence like a small sample size survey. I like AAII and other surveys, but someone can be positioned one way, and vote differently on a survey. Positioning data is more accurate in many regards, plus it covers a wider swath of the market. AAII is a limited sample size.

Just like COT, one day large moves can matter here. But primarily I am looking at extremes. It is important to note, that in equity indexes, the way tops and bottoms form is completely different. Bottoms tend to form very quickly and are marked by rapid declines in sentiment to extreme bearish levels. Typically, extreme bearish levels do not have to be reached for long periods of time to form a bottom. Tops are formed after weeks/months of a bullish extreme in sentiment. This is as of now. In a longer term bear market/recession this will be reversed to some extent. Bear markets are highly volatile, so local tops and bottoms both form faster, but it obviously takes longer for bottoms to form and more extreme and drawn-out sentiment readings. This is part of the adaptability part of trading.

Citi Panic/Euphoria Model

This can be used very similarly to CNN FnG. I personally find Citi Panic Euphoria to be even more reliable. Euphoric readings on this are a big warning sign. It doesn’t give extreme readings nearly as often as CNN FnG so an extreme reading here matters a lot.

Where do I get this weekly reading from? Helene Meisler of course.

AAII Bull Ratio

Similar in many ways to the previous two. There are many backtests out there for this data. OddStats, Sentimenttrader, Troy Bombardia, and many others have published a ton of them. CNN FnG has a lot of published backtests out in the wild as well. I’d take the time to find them for you but frankly, if you do not know how to use Google you will have a hard time in this world.

Same thing here. Extremes and big one week changes. I include this one as a standalone metric because it is so popular and widely watched. However, the next Sentiment Survey metric is better as it aggregates multiple sources. Better sample size. As a result, I do not give this a ton of weighting, the next one gets more weighting.

SentimenTrader AIM Model

This aggregates many different surveys. AAII, Investor’s Intelligence, and many others. Better sample size, in general, equals better data. The data is used in the same way as AAII, but I give it more weight.

Monthly Fund Manager Survey Z-Score and Hedge Fund Exposure

This is a positioning metric that I find really helpful. It is more akin to COT than the sentiment gauges. As such, the data is used in basically the same way. I get this data from Urban Carmel’s blog.

Many are under the impression that fund manager’s are smart money. The reality is backtesting shows that when these guys are heavy cash and light on equities exposure the forward intermediate-term returns for the stock market are above average. The inverse is true as well.

Another source for similar data is called “Hedge Fund Exposure”. I get this from Sentimentrader.com and Hedge Fund Research is the group that compiles it.

Small Sidetrack before we get back to the rest

Sidetracking a bit, but this one of the things that get people trapped over and over again. They try to follow the smart money by mimicking the positions of these guys.

Here is my rant on retail traders trying to counter trade retail traders:

I see this same thing all the time. Retail traders constantly talking down about retail traders and trying to counter-trade…retail traders. I am a retail trader…100%. I personally try to figure out what the smart money is doing. What dumb money is doing, I pay less attention to. They are all over the place. Smart money is more consistent. Another thing…Institutions are not necessarily always smart money. They get caught offsides all the time. That is actually when the BIGGEST edges can form. When Institutions get caught on the wrong side. Smart money is a dynamic group of actors. Not every top and bottom is formed with the same group of people. I have sometimes been on the smart money side, sometimes not. That is how everyone in markets is, unless they have a really reliable source of inside info, or have a market completely cornered.

This and the ultra-contrarians who want to fade EVERY SINGLE big move. Contrarian isn’t bad necessarily, I am a contrarian in many ways, but you have to really be smart about it and really be great with risk management if you are trying to time major bottoms/tops.

Another thing is the PERMABear and PERMABull mentality. These are all traits that are not going to allow success. Adaptability is critical.

Sentimentrader.com Smart Money/Dumb Money Indicator

I am saving the best two for last. If I was to rank all of these in order of my top 5 most reliable metrics on here, I would go with:

  1. DIX
  2. SM/DM
  3. Order Flow
  4. COT
  5. Fund Manager Survey Z-Score

The SM/DM indicator is only available to subscribers of Sentimentrader.com. You can usually find people posting this for free on Twitter. It is a proprietary indicator, but what I can gather is it combines many of the things I have previously mentioned. It essentially is combined 100’s of different sources of positioning and sentiment data to formulate the numbers for Smart Money and Dumb Money. I personally track the actions of Smart Money much more closely and give them more weight. Dumb Money is…less reliable. Why do I say this? You might have guessed it…backtests. Yes, Jason Goepfert of Sentimentrader has shown backtests, and you can even run your own backtests if you are a subscriber that shows that Smart Money is just more reliable. Dumb Money is not irrelevant, but just should be given less weight.

This data should be used the same as the previous sentiment metrics. In a bull market, it typically takes SM being bearish for an extended period of time and only takes them being bullish for a short period of time. If we do get an extended bear market, which is a growing possibility, then you will want to look at this in a different manner.

It is important to note, that during the financial crisis and for a few years afterward, this was giving tons of false signals. It is hard to say what caused this, but I think it has a lot to do with the unprecedented moves by the Federal Reserve to support the markets with absurdly low interest rates combined with Quantitative Easing. Jason Goepfert acknowledged this and made a post that explained he had made some major changes to how the data is calculated. Since he did that, the data has been really reliable. That is why this is my number 2 most valuable data point.

SqueezeMetrics DIX and GEX

The DIX is my favorite and most reliable indicator by far. The DIX is dark pool buying/selling. I highly recommend reading the documentation and white paper. The backtest results of the DIX greater than 45% are incredible, and possibly the best backtest you will see anywhere.

From the white paper:

Very high relative percentages (≥45%) of dollar-weighted short volume are associated with mean 60-market-day returns of 5.3%, as compared to a mean of 2.8% across the whole dataset.

Squeezemetrics says the DIX is not necessarily super predictive for long/medium-term sell signals, but I track a 10 day moving average of the DIX. A month or more of heavy DIX selling is usually a bit of a warning sign. The market can continue higher, but risk: reward is not as favorable IMO. Extended periods of dark pool selling combined with Smart Money being below the bearish extreme level…is not a good sign usually for an uptrend.

GEX is different. GEX is not necessarily something that in and of itself causes tops/bottoms. GEX really just acts as a braking mechanism or accelerator. High GEX causes the market to strongly mean revert and overall daily ranges/realized volatility will be much lower. Low GEX is essentially the opposite. High GEX is very often seen at local/medium-term tops and low GEX at lows. This, IMO, is more correlation than causation. DIX and SM are more likely the be what formed a major bottom or top.

I would highly encourage you to read the linked documentation above. But here is how I understand GEX. As volatility dies down, which is common in uptrends in equities and a majority of markets, people try to leverage up more and more to account for the lower volatility. To do this, they buy deep OTM options. Which provides Gamma Exposure on the long side. OFTEN times Dealers(market makers) are on the other side of these trades. So they are inherently vulnerable to large price swings. They have to hedge to offset this, anytime the market moves they have to buy/sell underlying to get back to delta-neutral.

Putting it all together and the scoring system

As I stated before, I do give all of these metrics a score and weight, which does give me a total score. I have not perfected this at all, and as I said I don’t pay a tremendous amount of attention to the total score. But, what I have found is tracking all of this data every day, while a bit boring, can give you a great sense of how all of this ties together. It can greatly increase your awareness of the market, and over time you get a feel for what the market might be doing. There is no shortcut that will instantly make you understand or be able to use this in an actionable way. Many say this kind of analysis is too complicated, and that you should keep things as simple as possible. I tried that. This, IMO, works better. Why disregard useful data, for simplicity’s sake? Why not use a useful tool if it is available to you?

I do get the logic behind K.I.S.S. and where I can I do try to do that. I have added and subtracted many things from my Market Monitor over the years. If something has little value and is either a distraction or takes my view away from the big picture, I remove it. In general, when looking at a new metric, I backtest or find backtests of it first. Then I track it for at least a month, if not a lot longer before I add it full-time to my market metrics. There is absolutely no substitute, IMO, for watching this data every single day live as it is being printed. It has changed the game for me, and I fully believe it can change the game for you.

Opening up the Discord again…

I started a Discord server a year ago or so. I ended up closing it, for several reasons. One, I am not a paid Furu. I offer my knowledge for free. I ended up getting bombarded with questions. This is hard for me to understand as I have found answers to almost every question I have ever had on my own. I have avoided asking a ton of questions of others for the most part. Finding the answers to things on your own is how I accumulated the knowledge that I have. Finding your own answers is the only way in some cases to really understand a subject.

Also, I am naturally an introvert. I spent most of my trading career not talking to any other traders. I prefer it that way. But, a number of people have asked me to open it up, so I will open it up. I will ignore dumb questions. If that offends you, I don’t care. If you cause problems, I will ban you. If I get annoyed by enough people I will close it down again. That is easy to do when you are not paying me. I have no obligation to keep the room open. There are plenty of paid rooms you can join that will answer your questions with generic, largely useless and many times inaccurate information. If you want to throw your money away like that, you are welcome to do so. If you want a free room that has quality discourse, then respect the rules.

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