Monday, April 06, 2009

When Breakouts Turn False: Catching Intraday Sentiment Shifts

The above chart is a bit busy; if you click on it, you'll see detail better. What I've done is overlay the NYSE TICK (blue bars; scale at left; zero line in yellow) on the ES futures (green/red candles; scale at right). Where you see the checkmark midday, you can see how there was an upside breakout in TICK, as buyers came into the market aggressively once we took out Friday's low.

As the Twitter post at 12:53 PM CT noted, once you see that the market cannot sustain a move below its prior range, you want to think about a rebound move into the range, with VWAP, the day's high price, and the prior day's pivot as logical initial targets to the upside.

It's not unusual to see influxes of buying or selling pressure in TICK herald a shift in sentiment that leads to an intraday swing move. Once we broke TICK to the upside, you can see that the distribution of subsequent TICK values shifted upward, reflecting the confidence of buyers once we could not sustain a break of the prior day's low.

These false breakout moves are excellent trading patterns, as they enable traders to benefit from shorts or longs who have to bail out of their positions. In a subsequent post, we'll take a look at these patterns through the lens of the Market Delta information; then we'll integrate the data from TICK with the volume data at bid/offer.