Understanding market structure through the price auction process and the concept of value

One trading book that I've been reading lately is called "Mind over Markets" by Dalton. It's a book on market profiles and structure so as to gain a better understanding as to where price is likely to move to. It also explains the concept of what happens in a market auction and the concepts of other timeframe buyers and sellers. Now I'm not big on reading technical analysis books and trading off classical chart patterns and the like as I'm a guy that likes to trade based on logic, probabilities and more importantly by trying to understand the fundamental workings of the market (Perhaps this comes from my engineering training!). For me this book and the theory behind it really hits the spot in that regard. The logic behind how price auctions and searches for value make incredible sense to me and has helped me to better understand what drives price and where price might be headed next. Some of the important points I've learnt from the book are:

1. Price is either at value or it is not at value
2. The longer price stays at a certain level implies that price is at value
3. Which way is the market trying to go? and
4. Is it doing a good job in it's attempt to go that way?

Co-incidentally, I'm also studying a postgraduate diploma in applied finance and the current unit I'm studying, "Techniques in Financial Analysis" had a couple of pages devoted to defining the concepts of value and the various financial valuation methods such as book value, fair value, intrinsic value, fire-sale value, replacement value etc etc as well as the distinction between price and value. The distinction between price and value was made incredibly clear through the following statement:

"Price is the amount actually realised in a transaction. Value is the estimate of what that price ought to be. Unlike value, price is observable and objective, eg. share price on the stock exchange". However, while price does provide evidence of value, it is merely a record of an event where the value perceptions of one buyer and one seller overlapped. It does not necessarily represent what all the other market participants believe to be the value of an asset."


So how can we apply any of this theory to practical trading? Well for one, starting to think in terms of whether the market is at value or not will help you to get a better read of the current market price action and be more confident in identifying where price is likely to go rather than where it has been . For instance only a week or so ago, the SPX was sitting near 1000. However as price failed to auction lower (sellers couldn't over come the buyers) then the market was likely to search for value at a higher level. Currently the way that price has behaved and the quick rejection of the 1000 level for the SPX would indicate that value for this market is higher and not at 1000. Also by thinking in terms of value, I've found that I'm much more pro-active (looking forward) rather than reactive (looking backwards) to the markets and I'm better at identifying the developing market structure to provide clues as to to where the market wants to go. This helps a lot, especially given the speed of market movement nowadays. I guess the difficulty in estimating what is value for the market and trying to identify market structure is that value changes so quickly from week to week. A few weeks ago, everybody was valuing the market lower and now it's valuing the market higher. Such is the uncertainty surrounding the market which I think is a characteristic of a secular bear market. I'll explain more about this in another post.