Wednesday, March 04, 2009

Observing Buying and Selling Pressure at Key Market Levels

The most recent post emphasized the relevance of tracking expansions and contractions of relative volume as markets move to and away from value. Equally important is tracking buying and selling pressure as markets move toward or away from key levels of support or resistance. After reversing midday and moving to an important resistance level at the market's opening range, the ES futures declined for the remainder of the afternoon with multiple NYSE TICK readings below -1000. As I stressed earlier, such weak readings are only possible when institutions are selling baskets of stocks, causing a large number of issues to trade on downticks simultaneously.

What this action tells us is that market participants are rejecting the level of value at the day's opening range, which is also a level of value that is within the prior day's range. The rejection of this level after a market bounce at the very least places us within a range environment and a likely retracement of the range, given the strong selling pressure.

The lesson is that it's not just whether a market rejects a level of value but *how* it rejects it that provides important clues to the near-term price path. When markets reject a level on solid relative volume and heavy selling pressure, it means that the large participants who move markets are perceiving the level as a selling opportunity: a clear sign that they see "true" value lower. Until lower prices bring significant buying interest--something that didn't happen late in the afternoon, given the weak bounces in TICK (not one reached the +800 threshold of significance representing a two standard deviation buying event)--the market will probe lower levels of value in search of equilibrium.