Bill Duryea founded the IOAMT with the goal of teaching traders how to read data, identify important information and act on that knowledge. The IOAMT maintains a historical database of market generated data to generate its proprietary statistical calculations from which its daily trading levels are derived.

Discretionary Trading requires understanding market behavior in order to discern the conditional probability of price development through the continuous distribution, i.e. the trading range.

Recognition of the types of market behavior driven by supply, selling pressure and demand buying interest, is acquired through observation. Observation reveals that market activity occurs in four stages. Peter Steidlmayer documented his observation of these four steps and described them as followed.

Step 1, a directional move, higher or lower

Step 2, a stopping point, a high or a low, a secondary reaction, a pull-back or a retracement

Step 3, development, consolidation around the stopping point.

Step 4, continuation of the directional move, and/or a reversal of the previous directional move

The auction process consists of these various stages of market development. In the contexts of the broad market condition, the stages of market development consist of the primary trend and the secondary reaction which make up the non-linear price movement common to all markets.

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For example:

On July 23rd 2009, the S&P 500 broke-out above resistance at its 956 June high. The break-out resulted in the slope of the 200 day price average turning up, indicating a change in the primary trend.

By January 14th 2010, the S&P recovered 50% of its 2009 bear market decline, trading up to its current 52 week high at 1150. The price development around the current 52 week high began on January 5th and continued until January 20th.

The pattern of market development is that of consolidation. The early January trade cluster consists of a ten day trading range between the high at 1150 and the low at 1126. Thus, the conditional probability of the next stage of market development was contingent upon the structural parameters of the consolidation range being violated. In other words, the next phase [Step 4], continuation of the directional move, and/or a reversal of the previous directional move could be determined by the response of the market participants to the price activity: at 1150, penetrations of resistance, initiated buying above the previous high and /or breach of support, initiated selling below 1126.

On January 21st consolidation phase came to an end. Price broke-down below 1126, initiating the start of a directional move: Step 1. The break-down marked the beginning of a correction, i.e. the secondary reaction, a common occurrence within the context of all primary trends. Secondary reaction within primary trend typically retraces 10% of the gain.

The correction witnessed the S&P 500 trade down to 1140: 100 plus points below the 52 week high.

Since posting the daily commentary on the IOAMT blog, I have commented on both the correction and the recovery. In this week’s review, I will summarize the recent up move following the February 16th break-out of the 5 day consolidation. In the context of the four stages of market activity, the 5 day consolidation, between 1053 and 1078 is representative of Step 3, development around the stopping point. The term development refers to the 5 day consolidation range.

The break-out above 1078 is representative of Step 4, reversal of the previous directional move and the resumption of the primary trend. The primary trend is defined by the slope of the 200 day price average, which ended its decline and turned up in July 2009.

During the decline off the January 52 week high as selling pressure drove price lower, liquidation off long positions occurred at various price levels throughout the range. The point at which supply overwhelmed demand was January 21st when the S&P broke-down below 1125, the lower parameters of the 11 day trade cluster that developed between January 4th and 2oth. The pace of the decline accelerated with price moving directionally lower, a of 25 points over a 2 day period.

The market generated data of the decline plots clusters of high density trade volume, separated by price areas between the clusters that were thinly traded. The clusters of high density trade volume represent supply over head. The conditional probability of price retracement to the area of previous supply favors encountering potential resistance, i.e. a pause followed by a pull-back.

The forces of supply/selling pressure and demand/buying interest are perpetually in conflict. A market cannot retrace a precious decline, unless buying interest has auctioned price up to previous resistance. The implication here is that non-linear price movements also contain buying interest below resistance. In other words, the correct interpretation of the market development is contingent upon both the response to the retracement up to previous resistance, as well as the pull-back to the price level where the initiated buying responsible for auctioning price back up the high is present in the order flow, price series.

The observed areas of overhead supply clusters that developed during the correction off the 52 week high have been listed in our Technical Reference Points, available on our blog www.ioamt.com/blog

The S&P March futures contract has statically completed it’s recovery off its most recent correction low at 1040. As of Friday’s close at 1138, 1st week of March has witnessed the S&P trade just 10 points below its January 52 week high. With the exception of the 52 week high at 1148, this week the S&P March futures traded at all the Technical Reference Points up to 1138 at Friday’s close.

In this week’s review, we will discuss the market behavior at the Technical Reference Points and the inference we held prior to price trading at them.

The purpose of this discussion, regarding this week’s market generated data is to develop a knowledge base of organizing examples which illustrate the stages of market development. The descriptive process facilitates the identification of the self-similar patterns of market development. The identification process begins with disrobing the daily session. The first phase of the process starts with stating the obvious. In other words, the discretionary trader must be able to look at the daily session and state: this is what happened today and here’s why. For example, the market may have traded higher, it may have traded lower, or it may have consolidated within the range of the previous session.

The descriptive process clarifies the changes that may have occurred or are likely to occur. In other words, support is now present at this price level, resistance is at this price level, continuation of the trend would requires this price series to develop and/or the development of a price series of an opposite nature would indicate a reversal of the trend.

Charts of trend days, of consolidation days and of trading range day’s are to be categorized so that comparison’s can be made with previous stages of market development in order to indentify the self-similar pattern of market behavior.

A robust body of evidence can be acquired readily and easily, thereby providing the basis for inferring the conditional probability of the market condition and the stage of market development in relation to the dominant bias.

Before the discretionary trader can recognize the patterns of market behavior, the pattern must be indentified. The method of annotating the market generated data makes it possible to quantify and differentiate the stages of market development. The quantifying process creates a body of evidence consisting of market generated examples of periods of consolidation and directional movement, trend.

Example of break-outs and break-downs, in both micro and macro time frames helps familiarize the discretionary trader with the conditional probabilities, i.e. the range of potential outcomes and the structural conditions associated with them, i.e. break-outs and break-downs.

Monday, March 1st

The first week of March began with the S&P maintaining structural support at 1104, the prior week’s close. The March 1st session traded up to re-test the previous 2 day high at 1112. The initial opening range probe [b-period high] up to 1112 the February 19th high, encountered micro resistance. The probe elicited a secondary reaction, i.e. a sell response, resulting in price auctioning down to 1108, [Monday’s C-period low]. The C-period pull-back encountered responsive buying at 1108. Demand continued to “bid” the S&P higher. During D-period price traded up to 1114. Following the D-period high, the intraday directional move “paused” and the price action consolidated. During the micro intraday consolidation phase, buying interest dominated the auction. The positive bias continued into the close and the S&P settled the session at the high, 1114.

Tuesday, March 2nd

At the open, the S&P traded above Monday’s rallying up to 1122 during D-period. Following the directional move at the open, the price action “paused” at the high. The trading range narrowed. During G-period price pulled-back to 1118. During J-period, buying interest returned, price auctioned back to the high, extending the range by 1 point. However, demand failed to continue to drive the market higher. Selling pressure auctioned back into the micro intraday consolidation range. During M-period, the S&P traded down to 1115, the previous day’s high, just modestly above Monday’s settlement at 1114.

Wednesday, March 3rd

Overnight support held at Tuesday’s low. Price traded above Tuesday’s settlement and went on to make a higher high, trading up to the 1125 technical reference point. The probes to the bottom of the early January trade cluster met with a sell response. Selling pressure ended in K-period, when price auctioned back down to 1115 and once again found support.

Thursday, March 4th

Overnight support held at 1115. Price traded above Wednesday’s settlement. However, buying interest was unable to auction price back up to re-test 1125. The probes to Wednesday’s J-period high met with a sell response. Selling pressure ended in C-period, when price auctioned back down to 1115 and once again found support. The price action “paused” at the low. The trading range narrowed. Buying interest returned late-in-the-day. During M-period, the market participants “bid’ price back up to the opening range high at 1123 and the S&P settled the session at/or near the daily high.

Friday, March 5th

The S&P broke-out above 1125, the upper limit of the 3 day consolation range. The directional move “paused” at 1134, the B-period high. The intraday consolidation phase lasted thru J-period. Late-in-the-day, price broke-out above the B-period high and traded up to the technical reference point at 1138 and closed the session at 1136.

This week, IAOMT will be hosting two FREE after hour’s workshops.

ON Tuesday: Trade the news

On Thursdays: the 4 stages of market actively.

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Technical Reference Points

Resistance

Potential up-side Trading Range the October 2008 high at 1167

January 14th high at 1148, the 52 week high

1138, March 5th high

Support

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