Thursday, July 13, 2006

One Way to Figure Out When the Trend Will End

Is the market going to continue to trend or will it reverse?

Take a basket of stocks that represents (i.e. is well-correlated with) the index you're trading.

Count the proportion of those stocks that are making fresh closing highs minus lows on a three-hour basis and update that figure every 15 minutes.

If more than half of the stocks are participating in a market move, the odds of continuation are improved.

That was a useful guide today. Even on the rallies, 5 or fewer of the 17 stocks in my basket could muster new three-hour highs. On the declines, we consistently saw 10 or more registering new lows.

The cumulative tally of new highs minus new lows might be viewed as a kind of trend measure itself.

Time frames for new highs/lows shorter than 3 hours might help very short-term traders catch turns in markets.

Food for thought.