Monday, May 07, 2007

Catching Short-Term Market Transitions

During the Sunday Webinar, I made reference to some of my bread-and-butter intraday setups, which involve a sequence of events in which heavy buying (selling) dries up over time, with lower NYSE TICK highs (higher TICK lows) and with volume declining as the rise (decline) loses momentum.

Above is a 3-minute chart of the ES futures vs. the NYSE TICK for the morning of 5/4/07. (Chart created in RealTick). Note that we hit a price high (black candles) a little before 10:30 AM ET on solidly positive NYSE TICK (pink lines), followed by a drop, and then by an effort to test the highs around 11:00 AM. Note the decline in volume on that test (bottom axis, black bars), and notice the much lower TICK readings on the test. Quite simply, large traders were not pushing the market higher, and we were not seeing buyers aggressively lift offers among NYSE stocks. This set the stage for subsequent selling: the buying had dried up.

Notice also how the market made a bottom around 12:30 PM, as price lows were accompanied by lower volume and higher TICK lows. This drying up of selling pressure then led to fresh buying and short covering, with a solid upside breakout in TICK. Once the selling pressure had dried up, it set the stage for bulls to romp.

These transitional patterns occur every day in the stock indexes. Like snowflakes, they have a similar structure, but no one market turnaround is identical to others. The key is noticing the dynamics among price, volume, and the sentiment of traders (TICK).

When you see one of these transitional patterns, such as selling drying up, within a larger pattern (bull trend, positive historical odds of a rise) in the same direction, that is where you're most apt to find home run trade ideas. I studied charts of stock indices and NYSE TICK every day for well over a year before I felt confident about my ability to read transitions in real time. The more you see different examples, the more sensitive you become to the nuances of the patterns. This is the real time cultivation of implicit learning, part of the skill development crucial to any trading career. By amplifying our screen experience, we can hasten our learning curves.

RELATED POSTS:

Tracking the Large Trader

The Structure of Market Reversals

When Do I Get Out of a Trade?

Webinar: Assessing Market Psychology

10 comments:

Curtis said...

Thanks for the webinar! I look forward to the future webinars. Thanks again. This is some of the best trading information I've found.
If there is a way to sign up for upcoming events to be notified then that would be useful.

The Dude said...

Most unfortunate you couldn't record the webinar, I would have woken up early otherwise. Ahh well, c'est la vie, but thanks for offering to summarize it.

Best,
Matt

Red Hue said...

The high this day was also right at the R2 pivot resistance...which gave a nice frame work for shorting that morning on the re-test...not to mention the concurrent weakness in the Russel index.

John - MarketPilot said...

Hi Dr. Brett,

First, Thanks for taking your time to share your great insights at the weekend voice conference. I found the material you presented to make getting up early well worth it.

We are also very much in synch on these set-ups. I think my trading style is more aggressive entries, but I use setups just like these. I missed the first turn in real time. I was “Hoping” that the perpetual up trend would keep going. So I managed my longs too loose and not only missed the turn by not maintaining focus, but gave back some unrealized profits because of it.

Working on a journal in blog format to see if that can help get me to think through all setups better.

Thanks again.

Trade Wise, Trade Well
John

Ziad said...

While I have learned to recognize these processes in real time, the real difficulty I find is in being able to tell whether it's a broad reversal, or a smaller top/bottom in the context of the larger intraday trend which is still in full force.

For instance, take a look at the sharp market decline on April 30th. Looking at it, it had a very similar transitional process taking place. At 2:41 EST we hit new lows after a sharp decline in the ES. We bounced a bit, and then made new lows at 2:50. However, these lows came on a higher TICK readings and more positive delta, indicating some buying had come in. Then we retested the lows at 2:58, but we did so on lower volume and yet higher TICK and couldnt make new lows. Finally, we thrusted higher and registered a very positive TICK reading. However, what we were witnessing this time was an intermediate bottom in the larger downtrend which then went on to move another 9 points to the downside. i.e. the best thing to do as to view the transitional structure as a temporary bottom and short the bounce. However, on May 4th it ended up being the major bottom and taking the reversal trade would have paid off.

So basically, my question is how do you personally differentiate between intermediate tops/bottoms (ideal for a continuation trade) vs. major tops/bottoms (ideal for a reversal trade) when the transitionsal structure seems to be identical for both?

Thanks,

Ziad

x said...

Hi Brett,
Thanks for sharing this insight, I always find it enlightening to read your posts on trading the TICK.

Do you usually monitor the 3 min time frame for ES & TICK?

In this example where the selling dried up with TICK making higher lows , would it be a good time to go long despite it occuring around lunch time? What's your experience on this?

Thanks,
Jordan

Brett Steenbarger, Ph.D. said...

Hi,

Thanks much for the comments on the Webinar. I hope to do future sessions and will explore other platforms for those that don't involve phone call-in.

Brett

Brett Steenbarger, Ph.D. said...

Hi Ziad,

I generally find that the length of time over which the transitional process occurs is correlated with the extent and duration of the subsequent market move. My own trading looks for short term reversals.

Brett

Brett Steenbarger, Ph.D. said...

Hi Jordan,

I don't mind trading midday hours as long as there is above average volume at those times. At the very least, I would exit short positions if I saw that structure.

Brett

Yi S said...

Hi Brett,

Love reading your site, learnt alot from it.

Am just wondering how you plotted the graph in this post? can't seem to be able to do so in excel.