Tuesday, April 07, 2009

Reading a Market Reversal

Just wanted to show a snapshot of my screen at the time I decided we were due for a move up in the ES futures. It's a Market Delta screen, with the five-minute footprint chart showing (within each bar) volume at the bid vs. volume at the offer. The green/red histogram columns at the bottom of the chart display the *net* volume at bid vs offer for each time period.

Notice how we see rising bottoms in the red histogram as the morning progresses. Price is moving lower, but on less net selling pressure. This same reduced selling pressure was evident in the NYSE TICK.

From the vertical histogram at the right side of the page, we can see how volume was bunched up between 814 and 815 in the ES contract, as I noted in my Twitter post. A breakout from that constricted range was bound to be significant, as traders leaning the wrong way would have to cover. In the case of an upside move, that suggested that we could move above the open and test the lower end of Monday's trading range as initial upside targets.

Combine the above observations with the fact that we had sectors, such as XLF, bucking the weakness from the open and you can see where a good reversal move came from. It's putting all these components into a coherent market picture that delivers the good trade.

(Note: The red line is something I'm playing with: VWAP calculated from the start of the prior day at 15:30 PM CT; I was toying with that as a minimum target region as well).