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DAY TIMEFRAME MARKET CONFIDENCE

Market confidence versus personal confidence—We very often get into trouble
when our personal market confidence level differs from that of the market; these are
also the days that our emotional decision making is more likely to become impaired.
Keep in mind that the direction that price is moving does not necessarily coincide with
the market’s level of confidence.

Patience—You often hear the advice that patience is required to become a successful
trader; to that I answer a definite maybe. On those days that the market is exhibiting a
high level of confidence you want to execute immediately. When market confidence is
low, patience is required to let the market develop and identify an inventory imbalance.

Inventory imbalances—High confidence days may lead to inventory imbalances;

however, they are seldom corrected within the same day. Low confidence days may
offer several opportunities as short-term inventories constantly swing from too long to
too short.

Judging Confidence

Opportunities that involve longer timeframes versus the shorter timeframes: Is

the market opening in or out of yesterday’s range:

Opening outside of yesterday’s range will certainly garner more attention and
excitement than opening within yesterday’s range. This is far more likely to galvanize a
directional opinion than opening within yesterday’s range.

a. If the market opens outside of yesterday’s range and doesn’t trade back into the
range, conviction is likely to be high in the direction of the breakout. This is
being written on the afternoon of October 14, 2010; the morning opening offers
us the perfect example.
b. If the market is driven back within the previous day’s range the day timeframe
confidence is more likely to be high that prices are too high.

Let’s contrast these two scenarios with two examples:

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1. Market opens outside range, fails in its attempt to fill gap, and moves higher:

S&P 500 December 2010

Morning of October 14, 2010

1. Market opens out of balance to the upside.

2. Responsive sellers attempt to sell into higher prices.
3. Initiating buyers are strong, they are willing to buy above yesterday’s high;
gap is not filled. Day timeframe conviction is high if buyers are willing to pay
10, for example, for something they could have bought for 7 yesterday. The
issue is not if they will be proven right or wrong over time, or that you agree or
disagree with their decision, but rather that their conviction is high today.
4. For several periods the market one timeframes higher; one-timeframing is
another sign of, at least, short timeframe confidence.
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2. Market opens outside of balance and finds price accepted back within the
previous day’s range:

S&P 500 December 2010

Morning of October 7, 2010

1. Market opens outside of balance.

2. Responsive sellers take advantage of advertised opportunity to sell price
above value; initiating buyers are absent on this occasion.
3. Near the previous day’s low, responsive buyers step in. It is importance to be
able to contrast the level of confidence in this example versus our prior
example. In our prior example initiating buyers were one-timeframing higher;
in this example the responsive buyers were only able to rally the market for
the second and third periods.
4. Sellers reentered on the rally and drove prices out of balance to the
downside. What I want you to feel, at this point, is the difference in confidence
between the first and second examples. The lower confidence in the second
example led to an afternoon rally, unchanged value for the day, and higher
price. Had you been able to reflect on the lower confidence in our second
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example your own emotions might have been tempered, which would have
reduced your downside expectations, allowing you to have exited a short and
possibly opened your mind to a long trade.

Opportunities that revolve more around day timeframe traders:

Markets that open within balance (within the previous day’s range) are far less likely to
initially involve the longer timeframes. At the lowest extreme the market would be
dominated by the day timeframe traders; it is rare that this timeframe can dominate for
the entire day making it important for us to learn to recognize when subtle or maybe not
so subtle shifts in control begin to appear.

Note: For educational purpose we have made this black and white; however, that
is rarely the case. Once you grasp the references and concepts they will be
transportable.

a. The Opening: Day timeframe traders focus on the opening to determine

direction or lack of direction. See Mind over Markets as an introduction and
the Field of Vision video for more in depth discussion of openings. Back and
forth through the opening multiple times signifies low confidence; it is not the
time to initiate a trade. A direct march away from the opening signifies a
higher level of short-term confidence. If a market has advanced, for
example, and then pulls back to the opening without going back through it
the chances are good that the market will perform another short-term rally.
If price is allowed back through the opening confidence is weak.
b. The previous day’s extremes: Markets in Profile discusses the behavior of
the various timeframes as does the Field of Vision video; the expected
behavior of the day timeframe is to trade within a predefined range
exceeding the previous day’s extreme mainly to trigger stops. If there is
price acceptance beyond the previous day’s range it is usually an indication
of the entry of, at least, the next longer timeframe—change is occurring.
c. Unchanged: Day and short-term traders focus intently on unchanged price
from the previous day; if the market is falling, for example, and price can’t
get below unchanged the odds of a rally are high.
d. Halfway back: I lost my best trading friend last year, he was a short-term
hedge fund trader known as the king of “half back”; the first 30 minute
period has a center of that range, which is referred to as “half back” or half
way back. If he wanted to buy and the market rallied prior to him getting his
position on he was an automatic buyer at half way back. As the range for
the day extends there will always be a center of the daily range; that center
or half back continues to be a short-term reference throughout the trading
day.
e. Overnight high and low: These are, like the previous day’s high and lows,
very visual and visual day and short-term references.
As this is being written the following example serves to help our appreciation of a
previous day’s low as a day timeframe reference.
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S&P 500 December 2010

Morning of October 14,
2010

1. The market’s opening; our initial reference.

2. The first auction was up
3. The next auction came back through the opening—a sign that we were
not at the highest confidence level. At the highest confidence level the
opening would have been the low of the day.
4. The auction stopped at one tick above the previous session low;
mechanical trading off this reference indicates that day timeframe
traders are dominating the market. Longer timeframes could care less
about a single tick; again, review Markets in Profile, and for more in
depth analysis the Field of Vision video, for a clearer understanding of
this discussion. It is important to understand the thought process of the
different timeframes.
5. The day timeframe traders immediately rallied the market once the low
held; you will not have much time to make up your mind at these lows.
6. The rally off the lows began to stall at the original opening price.

Without understanding the process described above you are much more likely to get
entrapped by price, emotionally selling into the early break. This process only works if
you truly understand it and remain fluid; if the prior session low isn’t taken out very
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quickly you must exit immediately; the counter auction can be very sudden as day
timeframe shorts cover and day timeframe traders buy; this is their game, not yours.

Early morning highs and lows: Early morning highs and lows are also natural
references when the day timeframe is dominating the market.

Observations
We have tried to give you an idea of what to look for; it will only be yours after a period
of observation and trade execution. Trading experience is accumulated slowly and over
time. Without knowing what to look for it is difficult to begin the path toward expert
trading. We hope these concepts provide you with fundamental observations that will
help you move toward this goal.