Tuesday, March 11, 2008

Stock Market Divergences and Other Pattern Recognition Themes for Tuesday

* Catching Divergences - I've recently been posting on the topic of market themes and divergence patterns. Today's trade provided a great example. Note the double bottom in the ES futures (top chart, blue arrow), as the index made a marginal new price low for the regular trading session. The NYSE TICK (bottom chart, blue arrow), however, showed distinctly less selling at the fresh price low. Indeed, that second low in ES was not confirmed by price lows in the Russell futures, the banking stocks ($BKX), or the Dow Industrials (DIA). Once the market rebounded from the divergence, the TICK began a positive shift in distribution (note the rising blue moving average line in the second chart), which helped keep traders on the right side of the market, participating in the major bear *pwnage. (Note: it's really the same pattern--just at a larger time scale--that I noted in the recent post on the bear market).

* Preparing for the Rally - Check out this great post from Charles Kirk, particularly the good questions to ask about the positions you're holding.

* Rally or Just Short Covering? - Trader Mike notes the Fed catalyst and asks the important question as to whether the initial short covering could attract the participation of bulls. The ability of the market to catch a second wind after the initial rally led to profit taking was a positive sign for bulls.

* Identifying Your Own Patterns - When you know your own patterns as a trader, you're more able to catch and modify them. Check out this excellent post from Ray Barros on "the power of questions" to identify our patterns.

* More Pattern Recognition - Check out the chart-based pattern recognition post on the Afraid to Trade blog that captured the day's action. And, for a different pattern that has worked exceedingly well, check out Kevin's post on the yen's relationship to the stock market.

* Questioning a Pattern - The Quantifiable Edges blog takes a historical look at divergence patterns in the new high/low data.

* An Online Newspaper - The Newsflashr site that I linked in a recent post was just featured in an article in the Boston Globe. Very useful service, IMO, for catching patterns in global news.