Monday, October 13, 2008

Locating and Trading Trending Days in the Stock Market

One of the noteworthy qualities of recent markets has been their herd-like qualities: as I noted in a post a while ago, we're getting an unusually large portion of days closing near their highs or lows. Today's historic rally was similar to last week's weak markets in that way: once a rally or selloff is under way, it takes on intraday momentum.

I've found several indicators to be especially helpful in identifying these trending days: 1) highly skewed advance-decline figures early in the day that don't reverse in the first hour of trading; 2) highly skewed volume concentrated in advancing or declining stocks that expands through the trading session; and 3) a distribution of NYSE TICK values that is skewed positively or negatively, creating a steady sloping cumulative line.

Note, for example, how we never registered an NYSE TICK value of -500 or lower until around 13:20 CT during Monday's uptrend day. Conversely, we registered many readings of +900 or higher prior to that time. One of the indicators I track during the day is simply the count of "significant" TICK readings (i.e., values more than 2 standard deviations from the mean) as the day unfolds. Trend days show an early skew of significant buying or selling values and maintain this skew through the day.

Similarly, early in Monday's session we registered 2500 more advancing stocks than decliners on the NYSE--and built on that ratio through much of the day. By definition, a trend day occurs when buying begets further buying and the reverse; it is the early presence of extreme values and the persistence of these values that alerts us to profitable intraday trade by buying dips or selling bounces.