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.


cpptrader said...

Dr. Steenbarger, I've been reading your site for a few months now. Thanks for the posts and innovative ideas. I have a question: what software do you do for these analyses? Is it excel (if excel do you write your own vba?), a platform like Trade Station, or a proprietary system? I am particularly curious also about your software for intraday calculations - like the one mentioned in this post. I haven't seen this asked on my prior visits - so I apologize in advance if this has been asked before. Thanks.

Brett Steenbarger, Ph.D. said...

Thanks for the note. Almost all of my analyses are done in Excel with the database functions. My platform (RealTick) links nicely to Excel for both live data (via DDE) and historical. I also maintain an intraday database that goes back many years.