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170 MARKETS IN PROFILE

Trader Checklist
Top Down

✔ What is driving the market?

✔ Fundamentals (yes/no)
✔ Economics (yes/no)
✔ Stock specific(yes/no)
✔ Market has conviction. (yes/no)
✔ Flight to safety? (yes/no)
✔ Other contributing factors:
✔ What is the market condition?
✔ Trending (yes/no)
✔ Early—maturing—late
✔ Inventory too long? Too short?
✔ Bracketing? (yes/no)
✔ Lower center—lower
✔ Inventory too long? Too short?

Bottom Up

✔ Intermediate term bracket: High: Low:

✔ Current price location
✔ Lower
✔ Center:
✔ Upper
✔ Current price location:
✔ Inventory too long? Too short?
✔ Short term trading ranges within bracket
✔ High: Low:
✔ High: Low:
✔ High: Low:
✔ Inventory too long? Too short?
✔ Volume on up days:
✔ Volume on down days:
✔ Yesterday’s trade (describe the following)
✔ Attempted direction:
✔ Value area placement:
✔ Volume analysis:
✔ Shape:
✔ Directional expectations for tomorrow:
✔ Ideal trades you would like to execute based on intermediate term
bracket analysis:
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Day Trading Is for Everyone 171

✔ Ideal trades you would like to execute based on analysis of yester-

day’s trade:

Earlier in the book, we defined the two primary functions of the mar-
ket’s two-way auction process: (1) the efficient and fair allocation of bids
and offers; and (2) the constant search for information. As part of this on-
going process, the market often explores above the previous day’s highs
and lows, weekly highs and lows, monthly highs and lows, prior balance
areas highs and lows, long-term bracket highs and lows, and so on. The
permutations are too numerous to list and change constantly depending
on context and timeframe. Therefore, it’s important that you develop the
expertise that will enable you to identify these reference points, so that
when the market gets a response at one of these pivotal levels, you will be
prepared to judge its importance. You should begin each day with your
own list of reference points—they will be your roadmap to successful
trading.

THE MARKET IS OPEN

Once the market opens, the key question is this: In what direction is the
market attempting to auction, and how successful does the auction ap-
pear to be? It can be helpful to personify the concept, and think in terms
of how much “confidence” the auction appears to have. Years ago, Peter
Steidlmayer classified openings into four categories, which I still believe
are valid. We view these four types of openings as initial gauges of early
market conviction:

1. Open-Drive
2. Open-Test-Drive
3. Open-Rejection-Reverse
4. Open-Auction

Open-Drive
The strongest and most definitive type of open is the Open-Drive, in which
the market opens and auctions aggressively in one direction. In Mind over
Markets, the analogy we used was that of a race horse that explodes out of
the gate and never looks back. The Open-Drive results in the lowest odds
of opening prices being revisited, which provides you with an early market
reference point; if price returns to the opening, you know that something
has changed since the early morning, and chances are much higher that the
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172 MARKETS IN PROFILE

day will end with the market auctioning in the opposite direction. Figure
8.15 illustrates this type of opening.
Before we define the other three types of openings, let’s take a moment
to review that old familiar concept: context. Imagine yourself sitting in a
seminar. You’re being taught how to profit using market-generated infor-
mation, and I say, “Now we will define the four types of openings and how
to profit from them.” This kind of declaration is generally accompanied by
a wave of comfort radiating throughout the audience, as each participant
readies their pencil and paper to take careful notes on the four different
types of openings—notes that will be concrete and easily memorized. (Af-
ter all, isn’t that why you attended the seminar?) While these notes will
appear absolute to many, they are merely a starting point.
Ask.com defines cognition with a lot of descriptive words and phrases.
Among them are: “a very broad term, which is not easy to describe,” and
“mechanisms involved in such process in human beings as perception, at-
tention, learning, thought, concept formation, reading, problem solving,
and the development of such behavior.” True cognitive learning only be-
gins when you realize that you have to transcend the limitations of fixed
definitions in order to discover how markets really operate. Each opening
has to be placed within a much broader context. On several occasions, we
have used the phrase “immersed in the markets.” This is just another way
of saying that you have to be deeply, personally involved in the markets
before you can begin to discover just how much of your creative energy
is required before you can begin to travel down the path toward being an
expert trader.
Now, back to those “notes.”
The Open-Drive is the highest-confidence opening; the first example
(Figure 8.15) shows the Open-Drive followed by a sharp downward trend
that continued throughout the entire day, gapping lower on the following
day. Now let’s review the same Open-Drive in different contexts. Figure
8.16 shows the same day illustrated in Figure 8.15, but with more per-
spective provided; we’ve added the day prior, which was an inside day (its
entire range contained within the range of the previous day). As we have
stated, inside days are a form of balance, and when a market comes out of
balance it is likely to attract multiple timeframes, which adds to the result-
ing volatility. In this instance, the market had already turned down (not
shown), so the Open-Drive in question was also with the current trend.
Figure 8.17 also illustrates an Open-Drive. However, the circum-
stances are somewhat different. In Figure 8.16, the auction had already
turned down and the opening was with the intermediate-term trend; in
Figure 8.17, the long-term auction was still up (not shown) and so the
Open-Drive occurred against the intermediate-term trend, and within the
prior day’s range, which means that it is still within balance and unlikely to
chapter08 JWBK129-Dalton metrics January 13, 2007 18:23 Char Count= 0

B
B Arrow to the left
B represents the
B opening.
B
B
B
B
B
B
BC
BC
BC
BC
C
C
C
C
C
C
C
C
C
C
CG
CGH
CGHI
CDFGHI
CDFGIJK
CDFGIJK
DFK
DEFK
DEFK
DEFK
DEFK
DEK
EK
EK
EK
EKL
ELM
ELM
ELM
ELM
ELM
MN
N
N
N
N
N
N
N
N Arrow to right of the
N letter N represents
the close.

Market gaps
lower.
B
B
B

FIGURE 8.15 Open-Drive in the S&P 500, daily profile.

Source: Copyright ľ2006 CQG, Inc. All rights reserved worldwide. www.cqg.com.

173
chapter08 JWBK129-Dalton metrics January 13, 2007 18:23 Char Count= 0

C
C
BC
BC
BC
BC D
BC DE
BCN DE
BCN CDE
BCN CDEF
BCN CDEF
BCN CDEF
BCMN CDEF
BCMN CDEF
BCMN CEFG
CMN CEFG
CMN BCEFGL
CMN BCEFGL
CM BCFGLM
CM BGHLMN Inside day, market is
CDM BGHKMN in short-term balance
DM BGHJKMN
DM BGHIJKMN
DM BHIJKN
DM BIJKN
DM IJN
DM IJN
DLM IJN
DLM IJN B
DELM J B
DELM J B
DEJL B
DEHJKL B
DEHJKL B Open-Drive takes
DEHIJK B place out of balance
DEHIJK B
DEFHIJK B
DEFHIJ B
DEFGHIJ BC
DEFGHIJ BC
DEFGHIJ BC
DEFGHIJ BC
EFGHIJ C
EFGHI C
EFGHI C
FG C
FG C
FG C
FG C
FG C
FG C
FG C
F CG
F CGH
F CGHI
F CDFGHI
F CDFGIJK
F CDFGIJK
DFK
DEFK

FIGURE 8.16 Open-Drive with the intermediate-trend in the S&P 500, daily
profile.
Source: Copyright ľ2006 CQG, Inc. All rights reserved worldwide. www.cqg.com.

174