Price Drivers

[suby 10]

Given that this is the technical analysis section of TL and arguably the most visited section of the entire forum, I thought it would only make sense to start a thread pertaining to Price Drivers, specifically in regards to stocks.

 

It doesn't take a genius to realize that everything is correlated to each other in one way or another; however, the real question lies in lead lag relationship. Lead lag relationships is essentially the key to all the dineros.

 

Given how this is going to be directed towards stocks, I look forward in hearing back your opinions and analysis.

 

I will kick start the thread by displaying some thought in regards to the Nasdaq.

 

For anyone who trades the NQ... Apple is the key indicator as well as the 9 other largest weightings in the composite. If one was to analyze NQ's chart and AAPLs chart one would ponder why the NQ never followed... However, the answer lyes in the fact that the flow of funds went from AAPL to other large weightings in the Nasdaq which in turn balanced the index and prevented the index from diving when apple dove.

 

I'd argue that the Nasdaq is considerable easier to trade to do its vulnerability to apple and other 9 leading weightings which in turn kind of makes the NQ a great place for any beginner to start trading indexes.

 

I look forward to hearing back from the community on your intelligent responses and analysis pertaining to Price Drivers

 

Suby

[Colonel B 10]

  suby said:

 

I'd argue that the Nasdaq is considerable easier to trade to do its vulnerability to apple and other 9 leading weightings which in turn kind of makes the NQ a great place for any beginner to start trading indexes.

 

I look forward to hearing back from the community on your intelligent responses and analysis pertaining to Price Drivers

 

Suby

 

I would argue that it was the simplest but not the easiest. I think the Treasuries are easier. You couple what you have here and tie it in with the ES and then tie that into the Treasuries. Of course its a bit more complicated but not in principle. You are just doing what you are doing but just 4 times as much. However the payoff is 30 bucks a tick. So the payoff isn't 4 times as much however the amount you lose in inefficiency you gain in flexibility. Instead of looking and only limiting yourself to trading 1 market you now have access to 4-5 markets. I have no less then 4 DOMs open at any given time. I have access and the ability to trade all 4 however in reality I only trade 1 or 2.

 

It will be interesting to see a good discussion on correlated markets.

[SIUYA 11]

  suby said:

a thread pertaining to Price Drivers, specifically in regards to stocks.

 

It doesn't take a genius to realize that everything is correlated to each other in one way or another; however, the real question lies in lead lag relationship. Lead lag relationships is essentially the key to all the dineros.

 

 

one of the key decisions stock portfolio managers have to contend with is regards sector rotation. This is a major price driver of individual stocks - regardless of other ideas of value people might have over them.

When and which stocks to rotate into and out of when reweighing and rebalancing. They often tie this in with their views on the cycles of the economy, or their 'risk on' risk off' views () It relates to different sectors AS WELL AS the individual stocks in each sector.

 

Their rationale is very different to ours as a trader in that they usually have to be fully invested, and hence if may hold many stocks in a sector, even if they dont like it.

How you profit from this is something I would suggest ColB has the right idea - monitor the correlations between the macro trading instruments. As for individual stocks - well you could do the same thing, or simply trade them on an individual basis - remember these managers track against a bench mark - they might not be too interested in much else.

[tupapa 10]

Only two: Supply and Demand.

 

Personally I never look at correlations.

[suby 10]

  tupapa said:

Only two: Supply and Demand.

 

Personally I never look at correlations.

 

Tupapa,

 

Why do you never look at correlations?

 

Could you please provide an example of how you look at Supply and Demand when you are analyzing a trade in a stock/futures/currency ?

[suby 10]

  Colonel B said:

I would argue that it was the simplest but not the easiest. I think the Treasuries are easier. You couple what you have here and tie it in with the ES and then tie that into the Treasuries. Of course its a bit more complicated but not in principle. You are just doing what you are doing but just 4 times as much. However the payoff is 30 bucks a tick. So the payoff isn't 4 times as much however the amount you lose in inefficiency you gain in flexibility. Instead of looking and only limiting yourself to trading 1 market you now have access to 4-5 markets. I have no less then 4 DOMs open at any given time. I have access and the ability to trade all 4 however in reality I only trade 1 or 2.

 

It will be interesting to see a good discussion on correlated markets.

 

Colonel,

 

I'd argue that your the resident correlation trader on TL which is a great thing. Interesting to hear that you don't think that the NQ is the easiest to trade... but even more interesting to hear your opinion on how the ES and Treasuries effect the NQ.

 

For the record I don't trade only the NQ, I trade everything thing; however, after realizing how everything is correlated in order to be succesful in this game its important for one to be systematic.

 

A large portion of my models are based on volatility correlation to indices but I take it your line of thinking for one to trade the nasdaq would follow NQ <->ES <-> Treasuries. Would you argue that the begining of a move that would filter through into the NQ would essential start in the Treasuries?

 

In today's markets how fast do participants essentially react to moves in one market that would create a domino effect in the other?

[suby 10]

  SIUYA said:

one of the key decisions stock portfolio managers have to contend with is regards sector rotation. This is a major price driver of individual stocks - regardless of other ideas of value people might have over them.

When and which stocks to rotate into and out of when reweighing and rebalancing. They often tie this in with their views on the cycles of the economy, or their 'risk on' risk off' views () It relates to different sectors AS WELL AS the individual stocks in each sector.

 

Their rationale is very different to ours as a trader in that they usually have to be fully invested, and hence if may hold many stocks in a sector, even if they dont like it.

How you profit from this is something I would suggest ColB has the right idea - monitor the correlations between the macro trading instruments. As for individual stocks - well you could do the same thing, or simply trade them on an individual basis - remember these managers track against a bench mark - they might not be too interested in much else.

 

Siuya,

 

Funny you should mention sector rotation because that is essentially what started this line of thinking....

 

When one trades in the index universe of the Nasdaq and the S&P, things really don't move all that much in the short term due to everything more or less being correlated to their corresponding sectors and the overall indices. Ofcourse there is flow of funds from the portfolio managers in and out of one set of stock into others, as well as flow of funds from the retailers who still buy and hold.

 

I totally agree with colonel on his thought process with macro correlations. The model goes something like this. Monitor the leading macro correlations, i.e. currencies, bonds, and indices.

 

Determine which leading macro correlations effect different stocks and sectors.

 

Then trade in accordance to these moves while portfolio managers are still scratching their heads thinking what to do.

 

The question is.... what moves what in all honesty

[tupapa 10]

  suby said:

Tupapa,

 

Why do you never look at correlations?

 

Could you please provide an example of how you look at Supply and Demand when you are analyzing a trade in a stock/futures/currency ?

 

 

Sure, there are many on the Whyckoff forum. If you are really interested in understanding the dynamics of supply and demand, what an auction market is and what it is set to accomplish, I suggest you start with the introduction, and slowly work you way through the forum.

 

The Wyckoff Forum - Traders Laboratory

 

This will take you time, and you will probably have to read and study parts of the course several times, but in turn, you will understand what markets are all about. After this, you can't start to trade, relying solely on your own judgement, as opposed to obeying the Stochastics or MACDs orders.

[MightyMouse 12]

  Colonel B said:

I would argue that it was the simplest but not the easiest. I think the Treasuries are easier. You couple what you have here and tie it in with the ES and then tie that into the Treasuries. Of course its a bit more complicated but not in principle. You are just doing what you are doing but just 4 times as much. However the payoff is 30 bucks a tick. So the payoff isn't 4 times as much however the amount you lose in inefficiency you gain in flexibility. Instead of looking and only limiting yourself to trading 1 market you now have access to 4-5 markets. I have no less then 4 DOMs open at any given time. I have access and the ability to trade all 4 however in reality I only trade 1 or 2.

 

It will be interesting to see a good discussion on correlated markets.

 

I don't know of any simple or easy markets. Anything is easy or simple when it works out in your favor. So maybe you are confusing easy or simple with lucky.

 

Sure, the game is different when there is less leverage involved. But, the game is never easy or simple. I am positive it doesn't become hard and complex only when I enter a trade.

[SIUYA 11]

  suby said:

The question is.... what moves what in all honesty

 

well, given most fund managers who benchmark dont outperform their own benchmark after fees - they probably dont know either - but I am sure they have their ideas.

 

There is supposedly an interesting market phenomena (I only know this through discussions but have not seen papers on it, but figure they exist) based on what happens to stocks when they move from being in the universe of small mid cap stock managers into the domain of and the benchmarks of the larger cap managers. Usually the stocks become less volatile, more liquid - but was this because of the nature of the stock itself and its underlying value, or that it suddenly came onto the radar of a whole new set of managers and benchmarks?

 

Years ago I had a simple theory that it was not so much that there are more/new buyers for something - sometimes it was simply the lack of real sellers, and then the resulting 'panic' by those wanting to buy it (reverse it for sells) - basically it was a vacuum effect more than a price driver......just an idea that works for the short term.

The long term really should be driven by fundamentals - think about the internet bubble as a great example - the price drivers there was sheer greed and panic of the next big thing, the new economy - the mass hysteria was driving the price, until over the long term, value became the ultimate price driver......but i guess in keeping with short term trading then the focus should be on that for this discussion.

[suby 10]

  tupapa said:

Sure, there are many on the Whyckoff forum. If you are really interested in understanding the dynamics of supply and demand, what an auction market is and what it is set to accomplish, I suggest you start with the introduction, and slowly work you way through the forum.

 

The Wyckoff Forum - Traders Laboratory

 

This will take you time, and you will probably have to read and study parts of the course several times, but in turn, you will understand what markets are all about. After this, you can't start to trade, relying solely on your own judgement, as opposed to obeying the Stochastics or MACDs orders.

 

Thanks for this,

 

I just wanted to clarify...

 

After this you can or can't start to trade on your own judgement as opposed to using indicators?

[suby 10]

  SIUYA said:

 

Years ago I had a simple theory that it was not so much that there are more/new buyers for something - sometimes it was simply the lack of real sellers, and then the resulting 'panic' by those wanting to buy it (reverse it for sells) - basically it was a vacuum effect more than a price driver......just an idea that works for the short term.

The long term really should be driven by fundamentals - think about the internet bubble as a great example - the price drivers there was sheer greed and panic of the next big thing, the new economy - the mass hysteria was driving the price, until over the long term, value became the ultimate price driver......but i guess in keeping with short term trading then the focus should be on that for this discussion.

 

^^ This right there to really be honest with you. I feel redundant with my words but essentially price drivers are based on fundamental factors. Without fundamental factors prices wouldn't move.

 

Take something like homebuilders... Ultimately someone could start their analysis by analyzing home sales from realtors (both new and used) then determine how much of that is from the new, then look into the amount of lumber needed in the lumber futures, and essentially build signals from that process.

 

Yes that is more of a long term approach; however, to really break this down, one must understand how ETF rebalance each and every day. I know for a fact that ETF rebalancing gives a lot of information to a trader going into the close or one who is even looking to make a swing trade that will last a few days in the equity markets but theres a lot more moving parts than just seeing which ETF is buying more or selling more of the isolated sector/stock at hand. This is essentially what the goal is to tackle with this thread. To determine the exact order of things for a the short term trader to develop a framework and make trades intra and interday

[tupapa 10]

  suby said:

Thanks for this,

 

I just wanted to clarify...

 

After this you can or can't start to trade on your own judgement as opposed to using indicators?

 

Yes you can absolutely, there is so much freedom in trading using your own judgement....

 

Just take your time with it, study the material carefully and feel free to share any questions or thoughts with the rest of the forum.

 

It is all free, just remember that before you can trade, you need to understand what an auction is all about. You wouldn't expect a medical student to perform heart surgery before he's gone through organic chemistry 1 and 2, and anatomy, etc...

 

And you certainly wouldn't want him to perform surgery on you by following a mathematical equation, "If the blood pressure in artery 1 is higher than the average of arteries 35 and 38, perform incision...."

[SIUYA 11]

  suby said:

^^ This right there to really be honest with you. I feel redundant with my words but essentially price drivers are based on fundamental factors. Without fundamental factors prices wouldn't move.

 

 

what about things like gold.....no underlying value, no yield, just the perceived store of wealth -that was a poor store between 1970-2000

what about the internet bubble.....some stocks went up because they had .com in their name and nothing else.

what about any bubble, or crash.....most often this is separate from any fundamental factor. (Read Soros and his theory of reflexivity - maybe not the best or easiest read but its topical)

 

yes - over the long term fundamentals may finally determine the price, but there is so much more in the short term....and in the short term - i dont think there is any one thing driving an instrument all the time ---- in other words short term drivers will change.

Sometimes its the risk on risk off, sometimes the USD is the major influence, other times its the fed, other times its investors search for yield, or growth or value.......other times its simply the euphoria or fear of the market.

The reality - who knows.....

(I know of one direct example whereby i and other market makers pushed a large cap stock down about 3.5% in the last 15 mins of trading - purely because a holder of call options needed to sell a large parcel of options just prior to the ex dividend day...he did not have the cash to be able to exercise and buy the stock. All we were doing is hedging......but there was one thing for sure - every broker i knew had a different 'reason' for why the move occured - profit warning, pairs trade, rouge sell order, rights issues etc; etc;.....they were all wrong )

[Colonel B 10]

  suby said:

 

I Would you argue that the beginning of a move that would filter through into the NQ would essential start in the Treasuries?

It very well can. But here is the thing. Its not a situation where the treasuries lead the NQ every time or the NQ leads the treasuries. There are times where they don't move in sync.

Let me throw out a few examples. Say the treasuries are really weak for the day or overnight. Could be for any number of reasons. This could signal a strong open for the NQ. Now on the other had I have seen it where the FED comes out with something and both go up at the same time. In both of these situations I don't fade.

 

But here it the useful information. When the NQ makes higher highs the treasuries should make lower lows. If the NQ makes higher highs or new highs and the either of the treasuries doesn't then that could be a tell on what is going to happen next. This happens in the ES and NQ as well. The NQ and the ES should move in sync. So if the ES makes new lows the NQ should as well. If it one does and the other doesn't then that is a huge clue. Its easier to see these things happen in real time ironically.

  suby said:

In today's markets how fast do participants essentially react to moves in one market that would create a domino effect in the other?

That is a good question. There is no set time. It all depends on the tempo of the day. If its a faster tempo then it should be faster. If its a day like yesterday (Friday before a holiday) then it could be as long as 30 minutes to an hour.

[Colonel B 10]

  MightyMouse said:

I don't know of any simple or easy markets. Anything is easy or simple when it works out in your favor. So maybe you are confusing easy or simple with lucky.

 

Sure, the game is different when there is less leverage involved. But, the game is never easy or simple. I am positive it doesn't become hard and complex only when I enter a trade.

 

Well I meant easy and simple in the context of the post that I was referencing. I agree that trading in general isn't simple or easy.

 

I know there are markets that hold structure better then others thus giving the appearance of easier. An example of this is the treasuries vs the ES. The ES commonly and frequently will go past its stop out just to go in the intended direction after it throws some traders out. This action could be as little as 1-2 ticks. The reason for this is fact that the ES has more short term traders and less paper. When you have mostly retail traders all trying to do the same thing in the same spot it causes chop. You have less of that in the treasuries. Retail avoids the treasuries for many reasons.

 

If you are using sound market principals then this makes certain markets easier to trade ahead of time. Not trading in itself. I also agree that trading the treasuries is easier because of the larger tick and less leverage.

[Colonel B 10]

  suby said:

^^ This right there to really be honest with you. I feel redundant with my words but essentially price drivers are based on fundamental factors. Without fundamental factors prices wouldn't move.

 

This is essentially what the goal is to tackle with this thread. To determine the exact order of things for a the short term trader to develop a framework and make trades intra and interday

 

You are right...

 

  SIUYA said:

what about things like gold.....no underlying value, no yield, just the perceived store of wealth -that was a poor store between 1970-2000

what about the internet bubble.....some stocks went up because they had .com in their name and nothing else.

what about any bubble, or crash.....most often this is separate from any fundamental factor. (Read Soros and his theory of reflexivity - maybe not the best or easiest read but its topical)

 

yes - over the long term fundamentals may finally determine the price, but there is so much more in the short term....and in the short term - I don't think there is any one thing driving an instrument all the time ---- in other words short term drivers will change.

Sometimes its the risk on risk off, sometimes the USD is the major influence, other times its the fed, other times its investors search for yield, or growth or value.......other times its simply the euphoria or fear of the market.

The reality - who knows.....

(I know of one direct example whereby i and other market makers pushed a large cap stock down about 3.5% in the last 15 mins of trading - purely because a holder of call options needed to sell a large parcel of options just prior to the ex dividend day...he did not have the cash to be able to exercise and buy the stock. All we were doing is hedging......but there was one thing for sure - every broker i knew had a different 'reason' for why the move occured - profit warning, pairs trade, rouge sell order, rights issues etc; etc;.....they were all wrong )

 

You are right too...

 

Fundamentals do drive markets just not the ones you think. First off we are traders and traders move markets. Not the supply of lumber.

 

Think about it. Traders move markets not the lumber itself. Its better and easier to follow traders then it is to follow the supply of something. Unless you are following the supply of traders.

 

This seems simple but it is not. But there are things that you can consider no matter what. The first thing is that each and every buyer is a seller and every seller is a buyer. This is a fundamental that is constant as a trader. No matter what any other indicator or corollary is doing every buyer is a seller and ever seller is a buyer. So really the only fundamental you need to follow is the traders themselves. The corollaries help to tell you where traders may or may not be wrong. Knowing how the market really works and how traders trade and how traders feel and think is more valuable then any lead on some news or something like that. Why? Because understanding where traders may or may not be wrong is longer term then news.

 

Reading pages and pages of how an auction works is silly. The fact is that its not an auction in the traditional sense. Its a 2 directional auction at the least. In a regular auction the auction is over once the item is sold to the highest bidder. Its not that way in the futures or stock market. In fact this is realized as soon as someone understands that buyers are sellers and sellers are buyers.