I follow the S&P 500 index, NASDAQ 100 index, 30-year U.S Treasury bonds, Euro FX (EUR / USD), gold, light sweet crude oil (WTI) and Euro dollars, plus ETFs representing U.S. intermediate-term interest rates (SHY), the semiconductor equity sector (SMH), regional bank equity sector (RKH), retail equity sector (RTH), basic materials equity sector (IYM), oil services equity sector (OIH), Hong Kong equities (EWH) and copper (JJC).
In this article, I will focus on trading the S&P 500.
(A) July 16, 2010 Trading Screen
Poker is about strong and weak hands (cards). Trading is about strong and weak markets. Poker involves competition, risk, probability, surprises and bluffing. Trading involves counterparties, risk, probability, surprises and bluffing.
In trading, each trade necessarily involves two counterparties: A buyer and a seller. Imagine a poker game down to two players. You can be the player who buys or sells the S&P. You can play the buyer or seller but not both. Do you think the S&P will go up or down next? Said another way, in terms of poker, do you think the long or short side of the S&P is holding the strongest hand?
"The Mad Genius of Poker"
I recommend a book: Caro's Book Of Poker Tells: The Psychology And Body Language Of Poker by Mike Caro, published by Cardoza Publishing. A feature of poker is that, just as a strong hand can beat a weak hand, so too can a weak hand beat a strong hand. You can win at poker by bluffing an opponent into thinking you have stronger cards.
A successful bluff can make an opponent capitulate, making the factual strength of your cards moot because your opponent's capitulation makes your cards effectively stronger. When, in fact, you do hold strong cards, you can also bluff your opponent into thinking you hold weaker cards. This may trick your opponent into increasing his / her bet and, thus, the size of your winnings.
So, how do you know if your opponent holds a strong or weak hand? One way to know is to cheat - to see your opponent's cards plus the remaining cards in the deck. (I will explore that idea toward the end of this article.) But, suppose your opponent, through body language tells you what cards he or she is holding?
In his book, Mike Caro makes the point that you must understand human psychology in a competitive setting. You must then understand how psychology translates into physical actions - body language. Then, you must also understand how to control your own physical actions. Just as you are looking for an opponent's physical "tells", an opponent is looking for your physical "tells".
No, poker does not relate literally to trading, but the similarities are strong enough to be instructive.
What Does My Trading Screen Tell You?
In my next article, "What 'Helmet Kill' Can Teach Traders", I will go over my trading screen in detail. In this article, I will simply introduce you to my screen. Each chart on my screen is carefully chosen and placed to show each day's intermarket relationships and provide clues ("tells").
At the start of each trading day, suppose you could look at my screen and "tell" whether the S&P will move up (buyers strong) or down (sellers strong). Suppose the other charts (see below) did the telling. Patience: It will all make sense.
In his book, Mike Caro uses photographs of people to demonstrate poker tells. I will use my trading diary entries and intermarket analysis to demonstrate trading tells. I write a detailed diary entry each trading day and keep an archive of my entries.
Using my archived entries to demonstrate the concept of trading tells, I will take you on a tour of the period from July 1 to July 16, 2010. I will look at market action in terms of what the S&P ultimately did each day. I will show you how the ultimate direction of the S&P each day was largely determined by markets (tells) related to the S&P or by sectors comprising the S&P. Trading tells evolve. You must stay alert to how intermarket relationships persist or change.
Thursday, July 1, 2010
#1 Tell: The New York Stock Exchange opening bell has just sounded. Regular NYSE trading hours have begun. EWH, the ETF representing Hong Kong equities (Hang Seng), is weak. EWH can act as a surrogate for Chinese equities and the Chinese economy in general. Trading in EWH presents U.S-based traders with a liquid way to participate in and follow Chinese equities. Yes, Hong Kong presents only one window on the near-term direction of the broad Chinese equity market, but it is a good window, an easily tradable window.China is an engine of the world economy. China has an appetite for basic materials. "Watch China; see the world." Chinese fiscal and regulatory policies and statements have world significance, just as U.S. and European Union fiscal and regulatory policies and statements do.
Today, July 1, 2010, EWH is red. EWH is under selling pressure. The current relationship between EWH and the S&P 500 is direct. Weak EWH implies the S&P will come under selling pressure. Weak EWH = weak S&P.
#2 Tell: JJC, an ETF representing copper, breaks on the NYSE opening bell. Copper is basic to the world economy. The price of copper can act as a proxy for the dominant near-term bias of traders toward the strength or weakness of world equities. The price of copper can "tell" (be a leading indicator of) the near-term direction of the S&P. Weak JJC implies the S&P will come under selling pressure. Weak JJC = weak S&P.
U.S. Stock Market Action: The S&P edged higher in front of the NYSE 9:30 opening bell. Just after the NYSE open, the S&P churned sharply. On the day, the S&P closes low. EWH and JJC correctly "told" traders that the S&P would come under selling pressure today.
In terms of a poker game down to two players, the long side of the S&P held a weak hand. The short side of the S&P held a strong hand. Granted, the trading day was pretty much a wash for S&P day traders (see the 11-day chart shown below), but you were warned - "told" - to be cautious.
Note: I say again: Intermarket relationships (trading tells) can persist or, sometimes, suddenly change. You need to stay alert as to which markets are acting as valid tells (direct or inverse) in terms of the S&P.
(B) July 01: S&P 500 September 2010 Futures (11-Day Chart)
Friday, July 2, 2010
#1 Tell: Euro dollars, representing U.S. short-term interest rates, rally. As the price of Euro dollars rises, U.S. short-term interest rates, which move inversely with price, fall. The current trend in Euro dollars is a reflection of the interest rate policy of the U.S. Federal Reserve.The current trend may be a literal reflection of that interest rate policy or a collective reflection of traders' anticipation of a pending change in policy. Generally, strong Euro dollars are supportive of the S&P. Strong Euro dollars = strong S&P.
#2 Tell: EWH, the ETF representing Hong Kong equities, rallies. Strong EWH = strong S&P.
#3 Tell: JJC, the ETF representing copper, rallies. Strong copper = strong S&P.
#4 Tell: SHY, the intermediate-term interest rate ETF, which can move inversely with Euro dollars, is weak. SHY and the S&P can move inversely. Weak SHY = strong S&P.
#5 Tell: The S&P is in a bear (-) stair. The price shows a series of consecutively lower daily highs.
U.S. Stock Market Action: The predicted rally in the S&P happens but only after a significant delay. During the 1:00 p.m. ET period, cautious S&P buyers step forward. A fast S&P rally ensues, but buyers remain cautious and sell (take a quick profit) at the 11-day descending, 20-period moving average. S&P sellers still dominate, but S&P buyers are assembling.
(C) July 02: S&P 500 September 2010 Futures (11-Day Chart)
Monday, July 5, 2010
The New York Stock Exchange is closed today for the July 4 holiday. Globex S&P futures are open.Tuesday, July 6, 2010
#1 Tell: Euro dollars, representing short-term interest rates, rally. Strong Euro dollars = strong S&P.#2 Tell: EWH rallies sharply. Strong EWH = strong S&P.
#3 Tell: JJC rallies sharply. Strong copper = strong S&P.
U.S. Stock Market Action: Equity buyers are impatient. The S&P rallies sharply. The S&P bear (-) stair fails. SMH, the ETF representing the semiconductor equity sector, RKH, the ETF representing the regional bank equity sector, RTH, the ETF representing the retail equity sector, IYM, the ETF representing the basic materials equity sector, and OIH, the ETF representing the oil services equity sector, open higher on the New York Stock Exchange 9:30 opening bell.
The S&P tests resistance at its 11-day bear (-) sell line. Now, during the 10:30 a.m. ET period, S&P sellers counter-attack, sellers turn aggressive; they ambush S&P buyers. S&P buyers retreat stubbornly. Buyers "win by a nose". The S&P closes above its preceding close.
(D) July 06: S&P 500 September 2010 Futures (11-Day Chart)
Wednesday, July 7, 2010
#1 Tell: Euro dollars futures are in a bull (+) stair. Strong Euro dollars = strong S&P.#2 Tell: EWH and JJC rally sharply. Strong EWH + strong copper = strong S&P.
#3 Tell: 30-year bonds, which can move inversely with the S&P, are weak. Weak bonds = strong S&P.
U.S. Stock Market Action: Equity buyers are impatient. The S&P, along with SMH, RKH, RTH, IYM and OIH, rally sharply. The S&P, SMH, RKH, RTH, IYM and OIH close high.
(E) July 07: S&P 500 September 2010 Futures (11-Day Chart)
Thursday, July 8, 2010
#1 Tell: Euro dollars futures push higher. Strong Euro dollars = strong S&P.#2 Tell: EWH and JJC break early but manage a high close. Strong EWH + strong copper = strong S&P.
#3 Tell: 30-year bonds, which can move inversely with the S&P, churn sharply; then close low. Weak bonds = strong S&P.
#4 Tell: Euro FX (EUR/USD) is strong. Euro FX can move directly with the S&P. Strong Euro FX = strong S&P.
#5 Tell: Crude oil, which can act as a proxy for the world economy, is strong. Crude oil can move directly with the S&P. Strong crude oil = strong S&P.
U.S. Stock Market Action: The S&P largely churns on the day but manages a high close. Equity buyers are indecisive. Strong Euro dollars are a wild card. Is the strength in Euro dollars a negative for equities? Are traders rushing to cash? Is the strength in Euro dollars a positive for equities? Will equities rally on the "coat tails" of lower U.S. short-term interest rates?
(F) July 08: S&P 500 September 2010 Futures (11-Day Chart)
Friday, July 9, 2010
#1 Tell: Euro dollars futures push higher. Strong Euro dollars = strong S&P.#2 Tell: EWH and JJC push higher. Strong EWH + strong copper = strong S&P.
#3 Tell: Crude oil pushes higher. Strong crude oil = strong S&P.
#4 Tell: SHY and 30-year bonds push lower. Weak SHY + weak bonds = strong S&P.
U.S. Stock Market Action: The S&P pushes higher.
(G) July 09: S&P 500 September 2010 Futures (11-Day Chart)
Monday, July 12, 2010
#1 Tell: Each trading day can develop its own set of circumstances and intermarket relationships - its own set of tells. SMH, the ETF representing the semiconductor equity sector and which can lead the NASDAQ 100, which can lead the S&P 500, is strong on the day. Strong SMH = strong S&P.#2 Tell: SHY and 30-year bonds push lower. Weak SHY + weak bonds = strong S&P.
U.S. Stock Market Action: Strong SMH dominates the S&P. The S&P pushes higher.
(H) July 12: S&P 500 September 2010 Futures (6-Month Chart)
Tuesday, July 13, 2010
#1 Tell: RKH, the ETF representing the regional bank equity sector and which can lead the S&P 500, is strong on the day. Strong RKH = strong S&P.
#2 Tell: SHY and 30-year U.S. Treasury bonds break sharply. Money flows out of debt. The implication is that money will flow into equity. Weak SHY + weak bonds = strong S&P.
#3 Tell: Crude oil is strong. Gold is strong. The S&P 500, crude oil and gold have been moving as a group. Strong crude oil + strong gold = strong S&P.
U.S. Stock Market Action: Strong RKH dominates the S&P. The S&P pushes higher. The rally in the S&P shows parabolic strength: Today's S&P buyers are significantly more aggressive than Monday's S&P buyers. Money flows into equity.
(I) July 13: S&P 500 September 2010 Futures (11-Day Chart)
Wednesday, July 14, 2010
Relationships can persist or suddenly change. Given the opportunity, dominant traders will use a day's circumstances to exaggerate a price. As a trading day starts, given a strong set of circumstances (tells) (buyers strong), buyers will use a day's strength to force sellers to panic and capitulate. Given a weak set of circumstances (sellers strong), sellers will use a day's weakness to force buyers to panic and capitulate.This behavior can exaggerate a price to the point where the close will only be sustainable if the following trading day's circumstances at least match the current day's circumstances. If the following trading day's circumstances are unable to match or best the preceding day's circumstances, the price may reverse, and so on.
Think in terms of elasticity. If on a given day, sufficient force is applied (a day's set of circumstances), a price can be pushed / stretched in a dominant direction. If that force is removed (by the following day's circumstances), the price can be pushed / snapped back in the opposing direction; the opposing direction will dominate, and so on.
Dominant traders make money by exaggerating. Dominant traders make money by stretching and snapping back - by exaggeration - by inducing volatility. Consistently successful day traders are the ones who cause / flow with each trading day's dominant direction. Said another way, traders game each day. They "play" each day. They play hard. Day trading is a shark tank.
#1 Tell: SHY, the intermediate-term interest rate ETF, rallies sharply. The rally is abrupt. SHY reverses its July 13 sell-off. As seen on its 6-month chart, SHY has found support along its May 2010 highs. This SHY rally pulls 30-year U.S. Treasury bonds sharply higher. Bonds reverse their July 13 sell-off. This SHY / bond strength "tells" that money is flowing into debt. The implication is that money will flow out of equity. Strong SHY + strong bonds = weak S&P.
U.S. Stock Market Action: The S&P 500 generally churns on the day. When the NYSE closing bell sounds, the S&P 500 is generally in line with its July 13 highs.
(J) July 14: S&P 500 September 2010 Futures (11-Day Chart)
Thursday, July 15, 2010
#1 Tell: SHY and bonds extend their rally. Strong SHY + strong bonds = weak S&P.#2 Tell: EWH breaks. Weak Hong Kong = weak S&P.
U.S. Stock Market Action: The S&P 500 generally churns on the day. When the NYSE closing bell sounds, the S&P is generally in line with its July 13 and July 14 highs.
(K) July 15: S&P 500 September 2010 Futures (11-Day Chart)
Friday, July 16, 2010
#1 Tell: SHY and bonds push higher. Strong SHY + strong bonds = weak S&P.#2 Tell: The S&P, crude oil and gold have been moving as a group. Gold breaks sharply. This gold weakness tells that the S&P is vulnerable. Weak gold = weak S&P 500.
#3 Tell: EWH and JJC break. Weak Hong Kong + weak copper = weak S&P 500.
U.S. Stock Market Action: The S&P 500 breaks on the NYSE opening bell and pushes lower into the 4:00 closing bell. In a delayed reaction to strong SHY / bonds, S&P sellers turn aggressive as S&P buyers capitulate. On the day, S&P sellers hold the strong cards.
(L) July 16: S&P 500 September 2010 Futures (11-Day Chart)
What Poker Tells Can Teach Traders
Deep-pocket traders have the time and resources to watch the major markets closely around the clock and around the world. Many years ago, a particular science fiction movie used the advertising tag line: "In space, no one can hear you scream."
If a market ever moves in a direction you do not expect, whether that market moves further than you expected or reverses when you do not expect it to, and you complain to yourself or to anyone who will listen that you were somehow "cheated", you are "screaming in space".
Your listener, whether that be yourself or a friend or an otherwise stranger, will not bring the past back to you. The markets will press, lurch, roll past you. Your counterparties will have your money.
Day trading, like poker, is a hard world. Your money is welcome, but you are otherwise irrelevant. Strong traders (players) more or less dominate. A conveyor of expectations and illusions rapidly replaces weak traders (players). Winners (read: your counterparties) will sweep away your chips.
You will only regain relevance when you produce new chips. Poker is at least more "honest" in this regard. No one, arguably, enters a poker game expecting everyone will win. Yet, many people day trade expecting that winning is easy.
New poker players tend to recognize risk and, in general, work to prepare. They tend to focus on the task, on the skill and accept that the money is on the other side of the skill. New day traders tend to try to work around the risk and, in general, fail to prepare. They want to leapfrog to the money.
Poker is seen as an exercise in probability and skill. Day trading is seen as a "sure thing". Gambling is a good word in poker: The word is respected. Gambling is a bad word in day trading: The word is not respected. If you are looking to make your way as a day trader, you should at least have one book on poker in your day trading library.
Between July 1 and July 16, 2010 the concept of poker tells had a lot to teach day traders about the S&P 500. If you follow multiple markets (use intermarket analysis) to help you day trade the S&P, you may now feel confirmed in the amount of time you invest each trading day. If you only watch the S&P, you may now be surprised by how other markets can give you "tells" on how the S&P may move on a given day.
How S&P Traders "Cheat"
Considering the money at stake, it is tempting to cheat at poker. Considering the billions of dollars at stake, it is tempting to cheat at day trading the S&P.
You do not cheat, but some of your counterparties might "cheat". I surround the word "cheat" with quotation marks because cheating can be a gray area. You should be aware of these gray areas in which some traders try to read a day's tells. "Cheaters" are some of the sharks in the day trading shark tank.
First, a little background. An exchange (example: New York Stock Exchange) is a member-based forum for trading securities listed on that exchange. Trades are typically cleared by the exchange. An exchange normally designates a time period for trading.
An electronic communications network (ECN) is a subscriber-based forum for trading securities. An ECN is normally open 24 hours a day. Trading is theoretically limited only by the presence of at least two counterparties willing to execute a trade.
Dark pools are basically any two, usually large institutional counterparties, connected by a communications network willing to execute a trade. Exchanges are formal.
Trading on an exchange is essentially public. Trading on an ECN is less public. ECNs are less formal. Dark pools are the least formal. Trading through a dark pool, as the word "dark" implies, is the least public. If you want to move a large position and do not want the world / "the crowd" to know, a dark pool has its attraction.
Front running means knowing where a security will likely move next, up or down, based on yet-to-be-publicly-released-news or on pending order flow, and placing an order in front of "the crowd".
Insider trading means hearing news first and being first to act on the news. Pump-and-dump means dominating the long side of a security, taking a large position in and "talking up" the security; then, usually on or about the fifth trading day of the play, selling aggressively (taking a profit) and walking away.
Poop-and-scoop means dominating the short side of a security, taking a large position in and "talking down" the security; then, covering (buying) aggressively (taking a profit) and walking away.
High-frequency trading means reading the order flow on an exchange; then, front running the order flow (placing orders on a massive scale in micro time frames) to benefit from the order flow.
Anomaly arbitrage means identifying the onset of abrupt and unusual buying or selling patterns (often indicative of large traders averaging in or out of a position); then, front running those patterns.
Statistical arbitrage means identifying an exaggerated price; then, front running a reversion to that price's statistical mean. A variation on statistical arbitrage is causing the exaggeration in addition to benefiting from the reversion.
The previous paragraphs represent an incomplete list of the ways traders can read (front run) a market move. My purpose is to illustrate ways hardball traders can gain an edge.
Learn to read a market on skill alone. The tells I presented from July 1 to July 16 show that is possible. In an irony, not improving your skill is a form of cheating yourself.
Train Harder; Trade Better
- Invest in gaining access to market-moving news. You must work to know the news that may drive a market before most of your potential counterparties know. Use a premium news service or a premium charting service. This is about being better prepared.
- Invest in mastering the skill necessary to consistently and rapidly deduce how a market(s) may move.
*Reprinted (and modified) with permission from Richard L. Muehlberg, the author of 17 articles published in Futures magazine. www.DayTradingWithLinesInTheSky.com. richardmue@yahoo.com.
| ARTICLES IN THIS 19-PART SERIES: |
| Intermarket Day Trading with eSignal LRCs |
| (Part 1 of 19: How Price Moves) |
| (Part 2 of 19: Spyder on a Mirror…The S&P 500 versus Bonds) |
| (Part 3 of 19: What "Poker Tells" Can Teach Traders) |
| (Part 4 of 19: What "Helmet Kill" Can Teach Traders) |
| (Part 5 of 19: Good Day Trading Is Good Trend Trading) |
| (Part 6 of 19: Fractal Charting and Multiple Levels of Observation) |
| (Part 7 of 19: Hot-Money Tactics and LRC 1-Day Charts) |
| (Part 8 of 19: Hot-Money Tactics and LRC 3-Day Charts) |
| (Part 9 of 19: Hot-Money Tactics and LRC 11-Day Charts) |
| (Part 10 of 19: Hot-Money Tactics and LRC 6-Month Charts) |
| (Part 11 of 19: The Swing Trader's Mantra and "The Rule of 5") |
| (Part 12 of 19: Timing...Timing…Wait 'til 3:45 p.m. to Buy a Down Day) |
| (Part 13 of 19: Not-So-Secrets of Catching a Falling Knife) |
| (Part 14 of 19: Bull and Bear Traps...Seeing What Isn't There) |
| (Part 15 of 19: The Extraordinary Power of Simple Moving Averages) |
| (Part 16 of 19: Consensual Limits and Standard Increments) |
| (Part 17 of 19: Restricted Trading for Impulsive Traders) |
| (Part 18 of 19: Beta Booster...Trend-Swing-Day Trader!) |
| (Part 19 of 19: Rich Traders Are Reality Tested) |
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