The measure of a market from day to day is whether it closes near its highs or near its lows. In a bull market, intraday weakness is viewed as opportunity to add to positions. This creates a floor under stocks and enables the market to close well of its lows. Conversely, in a bear market, bounces are viewed as opportunities to lighten up on holdings or establish short positions. This leads us to close nearer to the day's lows than highs.
Where we close in relationship to the day's highs and lows tells us very simply whether buyers or sellers were viewing those prices as significantly different from fair value.
All of which brings us to the Dow Jones Industrial Average (DIA) and its trading pattern over the last 20 sessions. For 18 of those sessions, we have closed closer to the day's highs than lows. Specifically, in DIA, we've averaged a close $.26 (26 Dow points) away from the day's highs but $.66 (66 Dow points) off the day's lows.
Monday was an excellent case in point. We saw significant selling in the broad market during the day, with the NYSE TICK hitting very negative numbers repeatedly in the afternoon. By the close of trading, however, the Dow was sitting well off its day's lows and with a gain on the session.
I referred to this action as a "stealth correction" in my recent Weblog entry. Even as we see selling among small caps, traders continue to bargain hunt among large caps on weakness. Indeed, over the past 20 sessions, all but one Dow stock has displayed money flow above its 200-day moving average. Until institutions no longer view value in these stocks--as revealed by money flows and how we trade relative to daily highs and lows--it is difficult to hold short positions for anything more than an intraday trade.