Why I Track Liquidity and Market Price

December 28, 2006

I track liquidity, but it has nothing to do with economic fundamentals. I track newly created liquidity as it is flowing into markets, which is the primary action of liquidity. Liquidity is created. It flows into and between markets, and when on those rare occasions it is destroyed, it disappears via the market. These flows are directly and fairly immediately reflected in changes in market pricing.

Economic activity is a second derivative of liquidity. The first impact is market action, because liquidity, by the very nature of the mechanism, must flow through markets before it reaches the level of “fundamental” economic activity. Liquidity analysis cannot predict or measure which specific industries or companies will benefit. We have to follow the charts for that.

If you want to say that liquidity analysis is “fundamental” in nature, that’s fine, but when it comes to those things that most people consider “fundamentals” like measurements of national and corporate balance sheet and income statement trends, my position would be that it’s an utter waste of time from the perspective of short term or intermediate swing trading. The only way to trade successfully is by tape reading and technical analysis. I’d go even a step further. The only aspect of technical analysis that you need is price pattern analysis, a broad term which includes cyclical analysis. Volume analysis just wastes time and confuses the issue.

Analyzing company fundamentals is an absolute waste of time from my perspective. In the end, to have any hope of consistent long term success as a trader, all decisions must be essentially based on price action. It is the sine qua non, both necessary, and in itself sufficient, for successful trading.

This entry was posted on December 28, 2006 at 8:07 am and is filed under Today's Markets. You can follow any responses to this entry through the RSS 2.0 feed.

8 Responses to Why I Track Liquidity and Market Price

Chris Graves on December 28, 2006 at 12:54 pm

I don’t know much about price pattern/cyclical analysis, but I read and appreciate your analysis on the trading forum. I also read your Fed liquidity analysis daily, and have learned to watch the Fed’s actions every morning. It usually tells what direction the day will go.

I want to suggest, though, that volume analysis is essential to interpreting market action. Reading charts is an exercise in following money flows. I watch a stock’s volume action to tell if the institutional money is moving into or out of a stock. It’s the same exercise on a market index. Days when volume increases and/or is above average are far more significant than days when volume falls. Chart reading is all about following the big money, and the volume action is where you get it.
Lee Adler on December 28, 2006 at 2:10 pm

I have no doubt that some folks find volume analysis useful.I have problems with it though. Most of the most successful traders I know rely on price pattern analysis, with particular attention to considering multiple time frames. They pay little or no attention to volume, which is heretical to many traders.

Volume coming into a stock can mean any number of things, which is why I find it confusing. Today, with the majority of volume being program arbitrage related, rather than direction related, I think most people would do better to spend more time on price pattern recognition and less on volume analysis.
Lee Adler on December 28, 2006 at 2:56 pm

If there are any tech people out there who can figure out why the sidebar links only work on the main page in Firefox, and not in an item page like this one, please let me know!

Thanks!
Daniel Rubio on December 28, 2006 at 3:53 pm

(On the sidebar links)
Move the tag ” ” after the sidebar content. Right now, the container is closed prior to the sidebar which makes it float( no links). Just place the closure below, or move your templates around.

(On Liquidity)
I recently subscribed to your money and liquidity package, and also enjoy reading your thorough analysis on the subject, which I have found is closely linked to some of the market’s movements.
Lee Adler on December 28, 2006 at 4:19 pm

Thanks Daniel! I’ll see if I can follow that suggestion.
Chris Graves on December 28, 2006 at 9:24 pm

Could you or anyone else recommend good books or training for price pattern analysis?

Thanks.
Lee Adler on December 28, 2006 at 9:33 pm

I would first recommend the two trading forums at Capitalstool.com

http://www.capitalstool.com/forums/index.php?showforum=7 in the evening and weekends, and

http://www.capitalstool.com/forums/index.php?s=849591ec338cdf6c542f810da12f3afa&act=SF&f=3
during trading days

and engage in a discussion with those folks. There are some very good ones there, in particular, wndysrf, K Wave Rider, and many others.

As for books, I would naturally recommend Hurst,and Edwards and Magee. There may be others more current, but I am not up on them. There’s no substitute for just doing the charting religiously with a good charting program. Over time, experience should improve anyone’s recognition skills.

As I always emphasize, it’s critical to look at multiple time frames, and understand the big picture context. Keep in mind that shorter term charts are little more than a tiny freeze frame in the big picture. Knowing where long term support and resistance is, is critical.
Chris Graves on January 3, 2007 at 9:20 am

Bought the Hurst book and will check out Capital Stool – Thank You.