The idea is that, in one view, I can see:
1) Are we overbought or oversold? (RSI, Detrended Oscillator; Price vs. moving averages)
2) Have we seen dominant buying or selling pressure? (Volume at offer/bid; moving average of volume at offer/bid)
3) How much price change are we seeing in response to buying and selling pressure?
The yellow arrows point to occasions in which we are getting short-term selling pressure and oversold levels with very modest downside price change. These are occasions in which there is meaningful selling pressure, but it's unable to move price meaningfully lower. These sellers are eventually trapped and help fuel the next leg higher in the uptrend.
The proportion of volume traded at offer vs. bid correlates with actual price change around +.46 over the past 10 months. That is a significant correlation, but note that the amount of variance in price change accounted for by buyers lifting offers vs. hitting bids is only a little over 20% (.46 squared). It's when we get decent buying and selling pressure that cannot move price significantly that we see reversal opportunities set up. Many of the best short-term trading opportunities come from occasions in which buyers or sellers become trapped and must run for exits. We can identify those occasions and anticipate the unwinds.
Reading the psychology of the markets is just as important as being aware of your own psychology.
Further Reading:
Posts
