Monday, April 06, 2009

When Breakouts Turn False: Catching Intraday Sentiment Shifts

The above chart is a bit busy; if you click on it, you'll see detail better. What I've done is overlay the NYSE TICK (blue bars; scale at left; zero line in yellow) on the ES futures (green/red candles; scale at right). Where you see the checkmark midday, you can see how there was an upside breakout in TICK, as buyers came into the market aggressively once we took out Friday's low.

As the Twitter post at 12:53 PM CT noted, once you see that the market cannot sustain a move below its prior range, you want to think about a rebound move into the range, with VWAP, the day's high price, and the prior day's pivot as logical initial targets to the upside.

It's not unusual to see influxes of buying or selling pressure in TICK herald a shift in sentiment that leads to an intraday swing move. Once we broke TICK to the upside, you can see that the distribution of subsequent TICK values shifted upward, reflecting the confidence of buyers once we could not sustain a break of the prior day's low.

These false breakout moves are excellent trading patterns, as they enable traders to benefit from shorts or longs who have to bail out of their positions. In a subsequent post, we'll take a look at these patterns through the lens of the Market Delta information; then we'll integrate the data from TICK with the volume data at bid/offer.


Brian said...

Great graph.

My question is where would there be an entry on the trade. In my replay, the tick hits its breakout high on that bar with the ES at around 822.5. If you buy there, you spend the next 45 minutes flat or slightly underwater which would exceed most daytraders time stops.

If you wait for a follow up strong tick, you are buying 825 and then sitting in the trade flat for 90 minutes.

I guess you could say buy the pullback to 820 but that's just me looking at the chart after the fact.

I bought 819 blind because I had it as a support level so the trade worked but I am curious how one would apply the indicators you show (TICK) to entry on the trade.

Thanks to anyone for their input on this!

procol said...

You make a very valid point Brian.

It's much easier to explain what has happened after the fact than to trade patterns real time. This accounts for the fact that I am not a billionaire.

Buying or selling during low volume periods (as this was) is quite likely to lead to long hold times. You just have to suck it up have patience. Or exit at some predetermined stop if the trade is not working at all.

In order to hold this for the 'big move' you'd have to have some reason to think that it is a smart (profitable) thing to do. The only way you could know that is with back testing (or a guy sitting next to you that says he's made a fortune doing it). So back test and see.

Brian said...

thx for your thoughts procol. I am not a "big move" trader. 95% of the time I take profits at 5 pts (and within an hour at most). That might be why I struggled with how this trade would work...its not within my normal range/timeframe

Brett Steenbarger, Ph.D. said...

Hi Brian,

I'm looking for entries on pullbacks in TICK that stay at higher prices than my reference point low. By that definition, there are many potential entries, but clearly there's a lot of noise to get thru.