Trader's Daily Notebook: Remember, Always Know Your Timeframe!

 | Aug 31, 2017 | 7:00 AM EDT
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Every new beginning comes from some other beginning's end. -- Lucius Annaeus Seneca

After nearly 10 years of daily contributions to Real Money, it's time for me to move on to new adventures. It's been a privilege to share my ideas and daily trade plans on these pages, and I want to thank everyone at The Street and Real Money for what has been an educational and memorable journey. I've enjoyed learning from both my fellow contributors as well as an endless number of readers that have taken time out of their trading days to reach out and share their own views.

If you're ever in the Utah Mountains and want to ski some powder, or if you simply want to chat about stocks, feel free to reach out on email or twitter -- and @ByrneRWS.

What a Long Strange Trip It's Been -- Grateful Dead

When I started contributing to Real Money back in 2007 and 2008, light crude oil futures were surging higher, on their way toward a blow-off top. High frequency trading (HFT) and algorithmic trading was nowhere near a top. In fact, it was just beginning to explode, thanks to John Thain's introduction of the Hybrid execution system on the NYSE. And the E-Mini S&P 500 futures (Es), a daily focus for us in Trader's Daily Notebook, were in the process of forming a massive top beneath 1400.

Thanks to the recent 3% decline in the Es, we've all noticed the increased chatter regarding market tops and how to spot them. Spoiler Alert: You can't. At least, not consistently.

Most traders probably don't remember that the Es spent more than six months rotating between approximately 1380 (topping out at 1400) and 1225, before finally breaking down in early January 2008. That's a swing of more than 10%! Given how today's financial media reacts to a 2% to 3% pullback over a couple of weeks, can you imagine how folks would react if the Es started rotating between 2480 and 2230, matching the percentage swings we saw in 2007?

During the six-month period when the Es was rotating between 1380 and 1225, the regular session's average true range (ATR) routinely registered readings of between 25 handles and 30 handles. On a percentage basis, we're talking about consistent 2% daily swings. Currently, we're seeing regular session ATRs in the range of 15 handles to 19 handles, or roughly 0.7% daily swings. We'd need the current regular session ATR reading to begin averaging nearly 50 handles to match the volatility we saw prior to the 2008 break of 1225.

It's been a pretty strange trip from those October 2007 highs to the March 2009 lows, and all the way up to nearly 2490. We traded our way through a vicious bear market that appeared to have no bottom, until it did. And we've traded our way through a bull market which, at least up until now, appears to have no top.

But like previous market cycles, this one will also find a top. And after some period of time that no commentator on TV can accurately predict, a bear trend will take hold of the market, and prices will begin to trend lower.

And for those that think dividend yields, valuations and inflation rates are the secret sauce when it comes to predicting market tops and broad market declines -- they're not.

Ben Carlson had a great post on his A Wealth of Common Sense blog back in early May. He noted that in looking back to World War II, "the stock market has experienced bear markets with high valuations, low valuations, high bond yields and low bond yields, high dividend yields and low dividend yields, high inflations and low inflation."

For example, when the S&P 500 peaked in November 1980, Carlson notes that inflation was at 12.6% and the P/E ratio was at 9.5. The market proceeded to drop 27%. Check out Ben's blog if you want to dig into the nitty gritty.

When it comes to trading, as someone that views everything as an auction, I look at things a bit differently. In my view, as long as there's an imbalance between supply and demand, just as there's been since the broad averages bottomed in 2009, markets will trend (in the current case, they trend higher). Once that imbalance finds balance, as the Es did in 2007 when it rotated between 1380 and 1225, price will rotate within an established area of balance.

In time, balance will break, markets will become imbalanced once again, and price will trend -- either higher or lower. And as we all know, shorter timeframe imbalance can exist within higher timeframe balance. So, know your timeframe!

It's not a simple concept to put into practice, but it's logical and something I believe we can all wrap our brains around.

As short and intermediate timeframe participants, our job is to remain unemotional, objective and quick to recognize when we're wrong. In all likelihood, we won't sell the high, and we won't buy the next major market low. What we can do, however, is analyze what price is trying to do (auction higher or lower), determine how good a job it's doing at accomplishing its objective (is value migrating in the direction of price), and most important, manage our trade risk while operating within our chosen timeframe.

Any trading or volume profile related questions can be posted in the comments section below, emailed to me at or posted to my twitter feed @ByrneRWS.

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