Monday, May 07, 2007

Catching Short-Term Market Transitions

During the Sunday Webinar, I made reference to some of my bread-and-butter intraday setups, which involve a sequence of events in which heavy buying (selling) dries up over time, with lower NYSE TICK highs (higher TICK lows) and with volume declining as the rise (decline) loses momentum.

Above is a 3-minute chart of the ES futures vs. the NYSE TICK for the morning of 5/4/07. (Chart created in RealTick). Note that we hit a price high (black candles) a little before 10:30 AM ET on solidly positive NYSE TICK (pink lines), followed by a drop, and then by an effort to test the highs around 11:00 AM. Note the decline in volume on that test (bottom axis, black bars), and notice the much lower TICK readings on the test. Quite simply, large traders were not pushing the market higher, and we were not seeing buyers aggressively lift offers among NYSE stocks. This set the stage for subsequent selling: the buying had dried up.

Notice also how the market made a bottom around 12:30 PM, as price lows were accompanied by lower volume and higher TICK lows. This drying up of selling pressure then led to fresh buying and short covering, with a solid upside breakout in TICK. Once the selling pressure had dried up, it set the stage for bulls to romp.

These transitional patterns occur every day in the stock indexes. Like snowflakes, they have a similar structure, but no one market turnaround is identical to others. The key is noticing the dynamics among price, volume, and the sentiment of traders (TICK).

When you see one of these transitional patterns, such as selling drying up, within a larger pattern (bull trend, positive historical odds of a rise) in the same direction, that is where you're most apt to find home run trade ideas. I studied charts of stock indices and NYSE TICK every day for well over a year before I felt confident about my ability to read transitions in real time. The more you see different examples, the more sensitive you become to the nuances of the patterns. This is the real time cultivation of implicit learning, part of the skill development crucial to any trading career. By amplifying our screen experience, we can hasten our learning curves.


Tracking the Large Trader

The Structure of Market Reversals

When Do I Get Out of a Trade?

Webinar: Assessing Market Psychology