Friday, September 18, 2009

Using a Broad Market View to Trade False Breakouts and Non-Confirmations

As noted in the recent tweet (follow the intraday indicator, news, and market updates free of charge), the lows that we made in the ES futures (90,000 contract Market Delta chart) were not confirmed by either the Russell 2000 or NASDAQ 100 futures. Moreover, we didn't see new daily lows in the XLB, XLI, XLP, XLY, or XLK sectors.

As a rule, I find that more non-confirmations--the greater the number of indexes and sectors not following ES to a new high or low--the more likely it is that we will see a reversal, creating a false breakout move.

Once we got buying off the lows and moved back into the day's range, a trade for a move to at least VWAP had sound risk/reward.

It's a nice illustration of how volume flow information within a single index, such as ES, is helpful, but does not replace a broader market view that takes in a variety of indexes and sectors.