Almost all traders are looking for the same thing; they want information to help them predict the future. They then place trades based on this prediction. There are two primary schools of “predictors” – the fundamental predictors and the technical predictors. Below is a picture taken at a recent institutional investment conference in New York City of a technical analyst and a fundamental analyst discussing the present state of the US stock market.
Auction Markets represent the market place where market participants can freely trade in the most efficacious manner possible; the primary purpose of markets is to facilitate trade. The price movement of a market reflects the net consensus regarding the VALUE of whatever is being traded among those in that market place. In the case of the stock market the consensus for the past nine plus years is that stocks have been undervalued, so buyers have dominated the market. You can argue this shouldn’t be so, but it IS so. It is totally objective information based on the reality of what is, not what could, should or might be. “Why”, from a trading/investment perspective is totally irrelevant. But “why” sells. It is the basis for all the mind numbing food fights between the analysts on CNBC and all TV financial talk shows, as well as in the financial print media.
“Why” is noise and it isn’t tradeable. It is a distraction. If you are a trader or an investor you must find something based in the reality of the present to help you make trade/investment decisions.
In a market there are several types of traders/investors from a knowledge perspective. “knowledge” in this instance refers to presently valid information about that market. For the sake of this example let’s put Goldman Sachs and similar institutional investors on one end of this scale, and Tom in his boxer shorts in his home office in Savannah on the other. Between the Goldmans and the Toms in his boxer shorts of the world there is a sliding scale of those with bits and pieces of information of various degrees of veracity. Some know more than others but no one knows it all. And most importantly, EVERYONE at some time or another gets it wrong.
Being wrong is fine and normal. You just don’t want to be wrong for long. And you most certainly do not want to get “stuck on stupid”. If you trade or invest being right isn’t nearly as important as not being wrong for long. Both fundamental analysts and technical analysts are vested in their perspective. They are never wrong; the market is wrong – different, manipulated, irrational, etc., etc. There are numerous examples of Fundamental analysts and technical analysts that have been stuck on stupid regarding the stock market for years.
The beauty of having a methodology based entirely on what the (Auction) market itself says is that it frees one from the noise and the irrationally derived conclusions of those who are actually exogenous to the market itself. A market, by definition, reflects the net consensus actions of the market participants – from Tom in his boxers to the Goldmans of the world.
The driving force of market movement and development is Trade Facilitation. Markets move higher or lower based on the degree of trade facilitation. Period. The attribution of “Why” always comes into perfect view – in hindsight.
Below is the daily profile view of the four primary US stock indices. All four are trading below their respective HVNs, and initial but important signal that VALUE may be migrating lower. Note that the YM is in a particularly tight monthly range, so far. It is extremely likely we will see range expansion in the Dow/YM before the month of August is over.
Below is the bar chart view of the indices. The highlighted levels in the ES, NQ and YM represent the high of Thursday’s wide range conviction day. A close above those levels by ALL three of those indices signals one or more of them are likely to make new highs.
The TF has been leading the market down. The persistent weakness in the TF is a real concern for any bullish case for the market in the intermediate to long term.
Below is a chart of the S&P 500 cash index. Below the chart is Breadth (NYSE Advancing – Declining issues), the 3-day moving average of advancing NYSE issues and the red line is a 10-day moving average of NYSE advancing issues. I have used this simple configuration of basic stock market internal information almost as long as I have been trading. I have long cautioned it is a “blunt” instrument and cannot be rote traded. It is, importantly, information derived directly from the market and market participants.
Market internals (specifically information derived from advance/decline data) has to be viewed in light of whether or not the market is in a bull trend or a bear trend. Actually, how market internals behave can help one come to the correct conclusion regarding which phase the stock market is presently trading. So far there is nothing in the relationship between the stock market(s) and market internals in the context of this example that suggests the stock market has changed trends from bullish to bearish.
However, the present position of price and breadth is the most recent “test” of the primary trend. A typical bull trend pattern will occur if the S&P (and one or more of the other indices) spikes to a lower low accompanied by less downside momentum as measure by net Breadth, and then reverses higher. This scenario carries the assumption that Thursday marked a momentum peak to the downside in Breadth. If, however, on Monday or Tuesday the market again trades sharply lower AND Breadth closes below the low registered on Thursday it is an initial signal of a change in trend, and resets the pattern.
None of this trumps Market Structure as defined through Auction Market Principles. That is why I have cautioned for years to be very careful of putting too much stock in the persistent and frequent divergences between price and Breadth. It can be very useful and at times powerful information used in the right context, but getting the context right is imperative. It will be fun to see how the present pattern plays out!