Monday, May 18, 2009

Short-Term Equilibrium Points in the Market: Tracking Volume at Price

If you click on the Market Delta chart above, showing preopening trade in the ES futures, you'll see a common short-term phenomenon. As a market moves higher or lower, it eventually draws in participants from longer time frames, who perceive the new prices as divergences from value. Thus, rising prices will attract selling from longer time frame participants and falling prices will tend to bring in buyers. That is how markets eventually establish equilibrium.

As we moved steadily higher in premarket trading, we attracted significant new volume between 890 and 891, with volume drying up as we probed above 891 (red arrows). Very often that surge in volume, which we can view within the bars of the chart, marks the appearance of the longer time frame trader and sets up a short-term point of resistance or support. At those junctures, it's not at all unusual to enter a period of short-term consolidation or equilibrium.

Clearly, how the market deals with that 890/891 area as we move toward the open will speak volumes regarding the sustainability of the rally. Taking out that level with above average volume would suggest the emergence of fresh buying; failure to attract volume near that area would indicate a drying up of buying interest.

Reading volume at price and how it evolves over the day tells a great deal about who is winning the battle of bulls and bears.