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150 MARKETS IN PROFILE

First 2 hours
of trading on
July 6 106-09
July 5 106-08
292 D 106-07
12819 D 106-06
2059 A 8824 D 106-05
7270 A 5126 D 106-04
8374 A 7277 D 106-03
8754 A Boxed area 3673 D 106-02
6054 A represents the 604 D 106-01
6239 ABC value area 2930 CD 106-00
17992 ABC 9142 CD 105-31
13190 BC 3789 BCD 105-30
2440 BC 10648 ABC 105-29
7458 C 14804 ABC 105-28
7379 C 16209 ABC 105-27
2399 C 14234 AB 105-26
Boxed area 6666 CD 4144 AB 105-25
represents the 9060 CDMN 166 A 105-24
value area 12182 CDKMN 105-23
23439 DIKLMN 105-22
22261 DHIKLM 105-21
22236 DFHIJKLM 105-20
25726 DEFGHIJ 105-19
35722 DEFGHIJ 105-18
19777 DEFGIJ 105-17
12922 DEFG 105-16
3488 DE 105-15
662 D 105-14
WINdoTRADEr® 105-13
105-12

FIGURE 8.4 U.S. Treasury bonds with volume, July 6, 2006.

Source: Copyright ľ 2006 WINdoTRADEr
R . All rights reserved worldwide.

www.windotrader.com.

day trade occurred when price could not find acceptance back within the
heavy volume range from the 5th. This could also have been an excellent
entry position for short-term traders, which is of course a longer timeframe
than a day trade.
As we discussed at the end of Chapter 7, there can be a moat between
your intellectual analysis and your emotions. You have seen price decline
consistently all day, with the market losing over $1,100 in just two days, and
you are expected to feel comfortable buying it now? Earlier, we said the
brain usually accepts new information at face value, and only gives up this
belief after substantial analysis. Truly great opportunities, by definition,
only present themselves for a brief period of time. In day trading, there
is rarely sufficient time for substantial on-the-spot analysis; the best trades
are often those that make you feel the most uncomfortable.
Recall that the original estimate for the employment report due out on
the 7th was for approximately 175,000 new jobs. Following the ADP re-
port, several analyses increased their estimate to 200,000. On Friday, when
the actual report was released, U.S. employers added just 121,000 nonfarm
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Day Trading Is for Everyone 151

jobs. The number excluding government jobs was 90,000, versus ADP’s
prediction of 386,000. The market rallied. All 56 economists missed the
inflation numbers by a wide margin, and most of the estimates for the em-
ployment report were far too high. Next to these types of pell-mell pre-
dictions, market generated-information is an oasis of sanity and objective
clarity.
To nurture and maintain that objective clarity, it’s vital to keep track of
the Big Picture; the following list is meant to get you thinking about your
own system for holistic analysis, accounting for all the subtleties that can
cloud clear thinking. We’ll discuss the ramifications of each in the following
sections.

Ĺ Top down—preparation analysis. What is currently driving the market?

Ĺ Fundamentals
Ĺ Economics
Ĺ Stock-specific
Ĺ Lack of conviction
Ĺ Flight-to-safety
Ĺ Market condition
Ĺ Trending—early/late
Ĺ Too long
Ĺ Too short
Ĺ Bracketing—where within the bracket
Ĺ Inventory imbalances
Ĺ Bottom up—preparation analysis
Ĺ Intermediate-term bracket
Ĺ Define high and low
Ĺ Price location within the bracket
Ĺ Upper quadrant
Ĺ Upper middle
Ĺ Lower middle
Ĺ Lower quadrant
Ĺ Volume analysis, inventory balanced, imbalanced
Ĺ Short-term trading ranges within intermediate-term bracket
Ĺ Identify highs and lows
Ĺ Excess
Ĺ Inventory position
Ĺ Volume analysis
Ĺ Yesterday’s trade
Ĺ Value area placement
Ĺ Volume analysis
Ĺ Shape
Ĺ Current day
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152 MARKETS IN PROFILE

Ĺ Opening
Ĺ Developing value area
Ĺ Volume analysis
Ĺ Overall confidence
Ĺ News announcements
Ĺ Projected profile shape
Ĺ Possible destinations

TOP DOWN

In the financial business, the term top down is generally thought of as the
Big Picture, a snapshot of broad economic conditions. To us, however, top
down refers to an understanding of the key driving forces that are influ-
encing a market—they may be economic factors, but they can be other
factors as well. The goal of our top-down approach is to identify these fac-
tors because understanding their nature and influence can help us more
accurately place all other information into its appropriate context. (There
it is again: context, context, context.)
Once you’ve correctly identified the top down, it’s paramount to re-
main flexible, as conditions constantly change. For example, you may rec-
ognize that there is a long-term reassessment of PE ratios underway that is
either contracting or expanding PE’s on a long-term basis. And while that
might be extremely important for positioning long-term portfolios, imme-
diate market activity might be influenced more directly by stock-specific
earnings. Identifying the reality of what is most influencing the market
right now is essential if you want to effectively trade the market in any
timeframe, especially if you’re trading the day timeframe.

LACK OF CONVICTION

There will be times when the market is directionless. This phase is com-
monly accompanied by widely gyrating daily price swings, as illustrated by
Figure 8.5.
Although directionless markets offer few opportunities for trend and
intermediate-term traders, they are often fertile ground for day traders be-
cause of their volatility. When markets lack conviction, participants often
attach themselves to short-term themes such as yearend rallies or what is
occurring as we are writing this book—speculating on whether the Fed
pauses in its practice of periodic rate hikes.
Conversely, when markets have intermediate- to longer-term convic-
tion, participants (and therefore the market) will roll right over these
short-term themes if they are counter to the directional auction, and will
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Day Trading Is for Everyone 153

Directionless
market

Constant Wide Swings

High Volatilty

FIGURE 8.5 Directionless market: Daily bar chart.

Source: Copyright ľ 2006 CQG, Inc. All rights reserved worldwide. www.cqg.com.

accelerate if they are facing the same direction. That’s why making an ac-
curate assessment of the market’s directional conviction is essential to
being able to weight the significance—to the market and therefore your
wallet—of shorter-term themes and events.

FLIGHT TO SAFETY

Flights to safety can occur when there are natural disasters, terrorist at-
tacks, wars, political imbroglios, large-scale bankruptcies, or meltdowns
chapter08 JWBK129-Dalton metrics January 13, 2007 18:23 Char Count= 0

154 MARKETS IN PROFILE

such as occurred with Long-Term Capital Management and the Asian crisis
some years back. Once a flight-to-quality rally is underway, the process for
analyzing markets that we have been describing may, in fact, work against
you for short-term trading. When markets are being driven by fear and emo-
tion, price and volume simply don’t matter. For example, as we are writing
this section, the short-term yield in the Treasury market (six-month bills
yielding 20 more basis points than three-month bills) only makes sense if
you understand that these securities aren’t being purchased for yield, but
rather for safety because of concerns regarding the international political
climate—instability in Iraq, Iran, Israel, Lebanon, and so on. It is imperative
to perform this kind of analysis, for when the flight-to-safety trades are ul-
timately unwound, asymmetric opportunities abound because the market
has usually rallied far above value. Once this unwinding begins, the mar-
ket is likely to return quickly to, and potentially pass through those areas
where price movements weren’t supported by healthy volume.
During a flight-to-safety rally, previous balance areas and brackets are
good visual reference points. Market participants are continually drawn to
recent areas of acceptance (value), and once these areas are taken out, the
market moves to test the next balance area.

INVENTORY IMBALANCES

From time to time, markets get too short in all timeframes. Hedge funds
have contributed to a more realistic employment of investment or trading
ideas in that they simultaneously hold both long and short positions, but
this doesn’t mean that they always get it right. And when hedge fund man-
agers get too short, they too may have to buy to cover, which could add
to market volatility and create opportunities for those who are correctly
reading the market in the present tense.
On the surface, you might wonder why a chapter on day trading would
spend so much time discussing information that is beyond the scope of
the day timeframe. The reason is that if markets become extremely active
during the day, longer-timeframe information may trump day-timeframe in-
formation and take control of the market. On a day that exhibits a nar-
row price range, for example, it is unlikely that there will be much interest
from the longer timeframes. The market may trade in a fairly orderly man-
ner, auctioning back and forth, continually searching for new short-term
information. However, on a day in which the trading range continually in-
creases, longer timeframes may be drawn in, and their participation can
quickly dominate the activity of shorter-term traders. During situations like
this, day traders who have not familiarized themselves with longer-term
context are in a precarious position; unaware that the longer timeframe has