Sunday, April 05, 2009

Viewing Charts Horizontally and Vertically to Catch Market Transitions

If you click on the five-minute Market Delta footprint chart from Friday morning, you'll see that we tried several times to surmount the 833 level in the ES futures from 8:35 AM through 8:50 AM CT. Notice in the 8:50 AM CT bar how large sell orders entered the market at the 832.75 price. This led to an influx of sellers over the next several minutes that took us below the market's early opening range.

It is helpful to look at charts horizontally, comparing total volume and distribution of volume at the same price from one time period to the next. That tells us if traders are becoming more active at that price over time and if their activity has a directional bias. When we see a market unable to move past a price level and then see large traders taking the market in the opposite direction, that is a good sign that we're about to revisit the lower end of whatever trading range is currently in force.

That then allows you to track total volume and distribution of volume vertically to see if lower prices are attracting more participation and if that new participation is also skewed to the sell side. As long as you're picking up volume and it's mostly transacted at the bid rather than the offer, it makes sense to stay in the trade and ride the mini trend.

Coordinating the horizontal view--how demand and supply are shifting from one time period to the next--with the vertical view (how demand and supply evolve within a time period) is quite helpful in catching market transitions and framing short-term trades.