Profiting from the Auction Process

Ch2 - Timeframes

There is a buyer for every seller in all markets but who is holding the inventory matters.  In the housing market there was initially a close balance between the long time frame buyer and seller.  As markets heated up, imbalance developed between builders (sellers) who couldn't meet demand.  Price began to auction higher.  With prices rising (advertising opportunity) more and more local builders entered to the market, building for contract / speculation.  Finally inexperienced individual investors were buying 2nd / 3rd houses w/ no money down hoping to flip them in 6 months.  Once the imbalance of demand shifted, the market became oversupplied w/ inventory being held by the shortest of timeframes.

Unlike housing market w/ slow moving inventories, securities markets enable extremely fast build up and liquidation of inventories which makes it difficult to assess market conditions.

Lack of continued large transactions / volume on breaks of values are likely to return to value and be characteristic of balanced markets

Ch4 - Auction and indicators

Art auction - auctioneer starts at some price, if he hears no bids, he drops until bids enter.  Then as bidders enter, the auction quickly increases beyond in the initial bid price.  Finally bidders drop out as price gets too high.  This is a 1 way auction and different than a continuous 2 way auction but similar ideas apply.

Normally as price goes higher demand / volume / speed of transactions will dwindle.  However there are times when higher prices have the opposite effect.  It serves to increase demand rather than shutting it off.  This type of action tells you the auction is far from complete.

Intitial balance (IB) is first 2 30min periods.  Range extension beyond this helps gauge buyer / seller strength.  Auction outside the IB gives clues on the day type.

Ch 5 - Long term auctions

Auctions that occur near bracket extremes provide significant information about the odds of the bracket holding. For example, if an auction that pushes toward the upper extreme occurs on heavy volume, the odds are high that the bracket will not be able to contain the upward movement. Conversely, if low volume accompanies an auction at a bracket’s upper extreme, then it is likely that higher prices are effectively cutting off activity; higher prices are not being accepted as “fair,” the bracket’s extremes are affirmed, and more balancing activity can be expected.

 Markets communicate their need to balance via declining volume, thus the same information that reveals the likelihood of bracket containment is also helpful for identifying when a new bracket is beginning to form. One auction isn’t enough to make this determination

 Once the market leaves a balance area, price often moves rapidly (at least initially) in a nonlinear fashion, liquidity shrinks and opportunity is lost

Ch 6 - Intermediate Auctions

Price has to auction too high before the market realizes it’s too high, and too low before the market realizes it’s too low. In effect, what happens is that price auctions higher until there is a lone bidder; when higher prices cut off activity, then the auction has gone too far.

Trends end in either of two ways or a combination of the two. 

• The first, less-frequent type of ending occurs when volume—which is in the direction of the trend—simply dries up, as if the participants that were driving the directional move are “all in” and there is no one left to participate. The transition is relatively quiet and calm; the market just sits there, lulling market participants into a state of complacency and stasis (several day highs or low at or near the exact same price).
• The creation of “excess” is the second and most common end to a trend. Excess occurs when a market makes a dramatic price high or low on low volume and opposing buyers or sellers react quickly and aggressively by auctioning price in the opposite direction. This type of trend end is often stormy and sudden
• An excess high or low occurs on light or low volume. Most of the investing world, however, thinks the opposite is true. For example, many investors believe that capitulation at the end of a downward auction—when all the sellers finally sell—occurs on heavy volume. But this would go against all the principles we’ve talked about. For example, a market may experience a period of healthy volume as the stragglers (Gladwell’s “late majority” or “laggards”) get rid of their inventory, but the final prices, manifest in the excess spike, are not made on heavy volume. The volume most people incorrectly ascribe to capitulation is actually a result of the action in the other direction, when buyers show up in force and the price spike down is quickly rejected. Confusion occurs due to the fact that after the excess high or low is in place, there is often a dramatic pickup in volume as part of the counterauction.

When an auction attempt fails to establish value in one direction, and price re-enters a previously accepted value range, the odds are good that the market will auction down and explore the opposite end of the accepted range

Ch. 7

Good Short term Trades - 

• break of 2 day balance, monitor closely for continuation once breakout occurs
• Fade bracket extremes when price hangs out at one extreme defined by multiple days of overlapping value.  Opposite of breakout trade.
• occurs on decreasing volume into range extreme
• New highs, then overlapping volume.  Once bids cease to dominate, market will explore in opposite direction
• Bracket breakout - longer term (weeks to months of price bracket) that breaks and then rejects previous range extremes

Following a balance / neutral day trade with any directional auction the following day.

P or b type profiles that extend need HVN as continuation.  In addition they need the following day to be followed w/ extremes pushing away from the P or b bulge, otherwise they can easily retrace

Trend => balance => go with break of balance in either direction

P( or b) shape at Daily balance( or low) usually leads to trend the other way esp when close is near the opposite end of value (ie: if P shape and near /below value area low)

Ch. 8

b shape profile breaking from previous balance.  Look to sell near the upper side of hvn (prob around VAH) for continued move lower.  Example shows that occur, but if buyer steps in and creates a P on that day.  The following day look to buy lower side of hvn (prob around VAL)

• Open Drive - driving against intermediate trend and inside previous days range is unlikely to elongate the profile because it won't attract as much attention.  However, open drive w/ intermediate trend and out of balance will attract attention and likely to elongate. The following day, you expect market to open outside of value in the direction of the drive or at least build value outside previous days value.  
• When you see development contradict  the above, risk of reversal increases.  If not maintain position and let the market work for you
• Open Test Drive - market lacks the initial confidence immediately following the opening bell. It will test a known reference point before rallying. Often large institutional orders will wait for 15mins before executing.  
• Open rejection reverse - rejects previous days range but finds strong opposing force back into it and one time frames back.
• Open auction - no conviction (low confidence opening) on either sides w/ trading above and below open randomly. If inside previous day's value area a non-convictional day is more likely.  
• if opening outside of yesterday's range odds are good of a move in either direction.
• if market enters previous value area and builds, odds are good the market will continue to the opposite side of the days range (or value area)
• no reason to trade in first 5 periods of an open auction.
• low confidence opening (OAIR) after a balance-ish type previous day.  market re-enters value and trades to value low and previous low of day
• 
  
  
  

Earnings Growth Gap

CAT Gap example, stock price was never justified by its earnings.  Good stocks don't become cheap.