Meaning of Too Long, Too Short, Above Water, Below Water ??

[duhhhh 10]

Hello brothers

Im readin "Markets in Profile" nowadays

and I see a lot "too long" "too short"

Im familiar with terms relevant with trading.

but I cant understand these terms when explained in MP

 

Can somebody help me to understand these terms?

Thanks

[ant 10]

Hey duhhhh,

 

I'll try to address your question...

 

Too long or too short refers to inventory imbalances - a very important concept in trading. If an inventory imbalance exists, the market usually has to correct that imbalance before the market can continue moving higher or lower. The inventory correction usually occurs through a short squeeze, if imbalance is to short side, or a long liquidation, if imbalance is to the long side. As they say, sometimes the "market has to break before it can rally" and "sometimes the market has to rally before it can break." Also, think about inventory imbalances in different timeframes. An inventory imbalance that occurs on a long timeframe (see the May 5th high in the S&P chart on page 78 of Market in Profile) will take time to correct (the example on pg 78 took 14 days to correct) versus an inventory imbalance that occurs in the day timeframe (you may want to re-read pages 155-157 in the book). This is important because it helps set your expectations as to when the market may revert back to the trend. Without detecting the inventory imbalance, a short squeeze or long liquidation may fool traders to think that a new trend is beginning in the opposite direction, where the reality may be that once the imbalance is corrected the market will continue moving in its previous direction. Detecting inventory imbalances is an excellent skill to have as a trader and MP could help and so can regular bar charts. Things to look for are similar highs (i.e., markets that keep trading to a high or low but can't seem to break through) or looking for a b-shaped or P-shaped profile. There are other ways that these imbalances can manifest themselves, but they are a bit more trickier, such as what Dalton calls Stealth Short-Covering, which isn't covered in the book. One last thing, to help understand the concept of being too long or too short, think about how the S&P pit works with respect to the locals trading with institutions. Locals tend to get too short or too long many times. Obviously, this would be an imbalance on a very short timeframe. Hope this helps.

 

Regards,

Antonio

[Chouca 10]

Detecting inventory imbalances is an excellent skill to have as a trader and MP could help and so can regular bar charts. Things to look for are similar highs (i.e., markets that keep trading to a high or low but can't seem to break through) or looking for a b-shaped or P-shaped profile. There are other ways that these imbalances can manifest themselves, but they are a bit more trickier, such as what Dalton calls Stealth Short-Covering, which isn't covered in the book.

 

The b and p profile is quiet easy to spot. I will try to find out what the Stealth Short-Covering means.

 

Is the cumulative delta another way to see these imbalances and in that case how does it show?

[ant 10]

The b and p profile is quiet easy to spot. I will try to find out what the Stealth Short-Covering means.

 

Remember to put the b and p- profile in context. For stealth short-covering, think in terms of the market being down, then you get a little rally, then the market tries to take the market down again but doesn't take out the previous low, rallies again, tries to take it down and can't get much lower, etc. Smart money is probably getting long and the momentum traders are getting trapped. The momentum traders keep trying to take the market lower because that is what was recently working. Momentum traders will continue to do something that has been working until it stops working. Eventually, the traders that tried to keep taking the market down will get squeezed. That's the idea.

 

Is the cumulative delta another way to see these imbalances and in that case how does it show?

 

I don't use the Cumulative Delta much, but I believe that a high or low cumulative delta could indicate a strong (legitimate) up or downtrend and not nessarily indicate that a short squeeze or liquidation is coming. To determine whether the market is getting too short or too long, I look at the profile shape, direction, and volume. Keep in mind that just because you have an inventory imbalance doesn't mean it has to be corrected right away or even on that day. Part of it depends in which timeframe the imbalance occurs. Also, I believe that a cumulative delta, the way it is mostly used, probably only has short-term significance so it probably isn't very useful for monitoring longer-term conditions. I'm no expert so I could be wrong about this. Think about a b-shaped or P-shaped profile, especially the wide part, do you think that the cumulative delta would be high (or low depending on direction) in that case? Think about the cumulative delta when a market keeps testing a high/low and can't get through it. What would the cumulative delta look like in that case? Although, I didn't cover stealth short-covering or stealth liquidation, the cumulative delta would not ring a bell in that case either. So in short, I don't use the cumulative delta for monitoring for imbalances. I think you need more than that, but that's just based on my opinion and how I trade.

[Chouca 10]

Think about the cumulative delta when a market keeps testing a high/low and can't get through it. What would the cumulative delta look like in that case? Although, I didn't cover stealth short-covering or stealth liquidation, the cumulative delta would not ring a bell in that case either.

 

I will think out loud - have mercy...

 

Let's say a the markets tries to test the high with no success creating the P-profile.

The reason it cannot go higher is that the other time frame participants is always assuring plenty of supply at the level that becomes resistance. If there always is supply the buyers will hit the ask and the CD will go up, but price will not?! :hmmmm:

[ant 10]

Chouca,

 

When a market is too long and can't get through a high, for example, you can usually feel the anxiety of the traders that are long. Every time the market reaches the high, some traders sell (take profits) - everyone that wants to be long has already bought. There just isn't enough buyers out there to lift the market at those prices. Eventually the market will go up one time too many and long traders will go for the exit causing long liquidation. Prior to that, the market chops around the high so the cumulative delta would not be extreme, I think. So it's not so much the other timeframe creating supply but the anxiety of nervous traders (weak hands). Once the imbalance is corrected the market heads back up. And remember that long liquidation strengthens a market because it gets rid of the weak hands (potential sellers), just like short covering weakens a market.

[Chouca 10]

 

Prior to that, the market chops around the high so the cumulative delta would not be extreme, I think.

 

Thanks ant,

 

I just believe that in order to the resistance to be "established" at a certain level, and stop price from going higher, the buyers do market orders but there is always enough supply to "eat that" buying up and price cannot go higher.

 

I have not studied CD from this aspect, I will switch to the trading laboratry and see what it might look like in the charts.

[Chouca 10]

Had to jump right to the charts... A mini study shows that as an example the high 29:th of June 14:13 - 14:27 of the ESU0 (1min) showed the price stop at 1044 at 14:13 trying again a number of times dipping down to 1041.5 14:21, up again to test 1044 last try 14:27.

 

The CumDelta was 6000 LOWER on the last summit attempt 14:27, telling a story of market orders at the bid during this periode, and then ES went down.

 

Have to learn how to post charts to get it easier to follow...