Monday, December 29, 2008

Recognizing Reversal Patterns in the Stock Market

The S&P 500 Index (ES futures contract; top chart) staged a nice turnaround in afternoon trading. An important clue to the turnaround was that we returned to prior days' support and then subsequent selloffs in NYSE TICK (bottom chart, blue arrows) could not generate lower price lows. With sellers unable to push the market lower, we saw a flurry of buying in TICK late in the afternoon, enabling ES to retrace its day's losses. Recognizing these patterns as they emerge is a key element of trading success; turnarounds often occur when buyers/sellers cannot move markets higher/lower, emboldening fresh sellers/buyers to enter the market.