Wednesday, September 09, 2009

Thoughts About Trend Days, Transitions, and Reversals

As I've stressed in past posts, one of the cardinal tasks of the intraday stock index trader is to identify, as early as possible in the trading day, when we're facing a trend day versus a range day. What makes this task especially challenging is that range days can turn into trend days (breakout trades) and trend days can morph into range ones (reversal trades).

One of the tells we often see when trend days revert to ranges is the old transition pattern. Note how we made a momentum high (solid upside volume) in the ES futures before 11 AM CT, then saw an extended dip, followed by a marginal new price high around 12 Noon CT. That second price high saw lower volume, lower volume lifting offers, and was not confirmed by the NQ futures and by the XLE and XLB sectors.

Off that weaker high, sellers were emboldened and we retraced a good portion of the day's gain before bouncing late in the session and closing inside the morning range.

That transition sequence is one that shows up across multiple timeframes.

I see that Henry Carstens has been tweeting his trend indicator, not only for the S&P 500 Index, but also for nine S&P 500 sectors. Interestingly, when the market was topping out today, only 4 of the 9 sectors were showing trend readings greater than 60%. That suggested that the rally may not have been as vigorous as it initially appeared. It will be tracking the sector trend readings as well as the overall reading for the index to see if the indicator provides an edge in distinguishing reversal days from trending ones.