Tuesday, June 30, 2009

Anatomy of a Stock Market Breakout

After trading in a narrow range overnight and early in the morning, consumer confidence data came in much weaker than expected. If you click on the Market Delta chart above, you'll see within the bars how large size began hitting bids as the ES market moved below 923. At the same time, we saw a strengthening dollar and weakening gold and oil, both recent bearish themes for stocks, as 10-year yields pulled back from the day's highs. The appearance of volume brought volatility and the simultaneous move among asset classes reflected the fact that the morning numbers were, indeed, a game changer. It's the breakouts accompanied by significant directional volume and correlated movements among related asset classes that are the most trustworthy.

1 comment:

OKL said...

Cut and paste from my notes; just sharing since you shared so much heh...

After the morning selloff:

Bear Case (Current), For a continuation:

1) Decline comparatively synchronized across markets (comparatively because this is subjective)

2) Relative volume strong on selloff

3) Has bearish momentum from a worse than expected economic report

4) Sectors are strongly negative, with leading sectors hovering around May lows, compared to ES at May highs earlier

5) Absence of +800 tick readings suggestive of buyers' absence

6) Strong rejection off the 20sma/925 level (recent range) might suggest a move to the other end

7) Declining volume at the lows is not unexpected if viewed in context of the morning selloff that might form a wedge/flag

(continuation patterns, in terms of TICK and Vol, has to be observed within the pattern)

Bull Case (To be confirmed), for a reversal:

- Leading sectors did not lead lower; XLF XLE NQ TF were actually lagging the move.

- XLF XLE NQ TF + Macro Markets holding the lows

- Declining relative volume on selloff (in terms of each push lower)

- $TICK readings are not excessively bearish; i.e. although there is clearly an absence of +800 readings, there is some covering

- Reversal in treasuries suggestive of something? No idea what here.

Be prepared for

1) Bull trap at VWAP/PP (pretty sure they're gonna defend it with their lives)

2) Bear trap at 904 - 908 (previous launchpad)

3) A volatile last 90mins (based on volume today)

***Disclaimer: Missed the morning selloff, currently long at 910 target vwap/pp***