Today's market has been such a textbook example of a sentiment-based trading pattern that I had to post it. We had a narrow trading range early in the morning. Then, with the housing news, we had a downside breakout in the NYSE TICK (Point A) and a price breakout from the two-day range mentioned in the Weblog. The fact that the break in equities was accompanied by a strong move down in the dollar and a rally in bonds told us that the news was truly new and that markets were being repriced.
We then proceeded to see follow through selling on the breakout, as volume was hitting bids aggressively (Point B). The downward shift in the NYSE TICK, with sentiment well below the 20-day average TICK level, told us that large traders were leaning to the sell side.
After an attempted rally, we saw program selling hit the Russell stocks, sending the TICK to a new low for the day (Point C). At this point, however, many indices (ES, NQ) and sectors (financials, energy, semiconductors) were *not* making lows for the day. This was our classic pattern of inefficiency: negative sentiment could no longer drag the entire market lower.
This emboldened the bulls, leading to an upside breakout in the TICK (Point D). From that point forward, we saw higher lows in the TICK, telling us that selling sentiment was drying up. We also saw a nice expansion in very positive TICK values. With that shift in the distribution of sentiment (TICK), we saw the markets recapture their morning losses.
Once again, notice how an understanding of the day's action requires an integration of multiple pieces of information, including the prior range, the breakout levels, the divergences at the TICK lows, the TICK breakout, and the changes in TICK highs/lows. Observe how such an integration requires far more cognitive complexity than the usual simplistic advice to buy or sell particular oscillator readings or chart patterns. I will have more to say about this cognitive complexity in my next post.