Tuesday, February 17, 2009

How Is The Market Moving?

For the short-term trader, there is important information in how a market moves. Consider three posts from today's intraday Twitter comments:

9:31 AM CT- Watching closely: We need to sustain prices above their day session open w/ positive TICK distribution to get a good reversal.

This first comment came after we spiked lower in the first half hour of trading on extreme negative TICK and high volume. Such capitulation often leads to a reflex bounce, sellers are "all in" and no one is left to drive prices lower. As buyers are attracted by the low prices, short-covering contributes to the bounce. For this bounce to become a true reversal and turn the short-term trend bullish, we need to see the majority of sectors sustain prices above their opening levels, and we need to see net buying pressure (positive NYSE TICK). Gauging the participation of the sectors and the vigor of the buying interest helps us distinguish between a bear market bounce and a bullish reversal.

9:38 AM CT - Rel volume has dropped off on the attempted rally; back l8r in day.

Within a few minutes, I'm seeing that relative volume (how volume at a particular time of day compares with average volume at that time of day) is tailing off after a surge on the early selling. This is a sign that higher prices are not attracting fresh participation. Recall that volume is strongly correlated with volatility. When we're trading directionally, we want volatility to be expanding on moves in our direction. When relative volume tails off, it's one sign that the volatility winds are not at our back, which leads us to suspect that the upmove is a bear bounce, not a fresh bull move.

10:06 AM CT - Unless we can sustain positive TICK and above avg volume to upside, that 800 support will start to act as resistance.

I hadn't planned another post so soon, but I thought the point was worth reiterating. In a valid breakout move, we should not move back into the prior trading range. That means, on a downside break, that what had been support (the 800 level of the S&P 500 Index) is now resistance. We need buying pressure (TICK) and volatility (relative volume) to push us back into the range. That wasn't happening, and that observation helped set us up for weakness later in the day.

What I'm trying to do with the intraday Twitter comments is model a way of thinking about price action by synthesizing observations about ranges, market sentiment/strength, volume, and historical price patterns. Much of this thinking is based on looking at not only *what* the market is doing, but *how* it is doing it. Following Cumulative TICK, where we traded relative to VWAP, relative volume, and leading sectors (financials) all were helpful in tracking the market's weakness during the day session. Subscription to Twitter comments is free; you can also pick up the five latest "tweets" on the blog home page under "Twitter Trader".