Friday, July 24, 2009

Market Context: The Importance of Non-Confirmations

One of the great values of Twitter is the ability to comment on the market in real time (follow comments here). Here is the comment from earlier this morning:

9:55 AM CT - Note that recent ES lows not confirmed by NQ and Russell; 13 stks up from open, 27 dn. Bk l8r today.

In a solid trending move, sectors and indexes will generally move in unison. When we see multiple non-confirmations, you have to wonder if the move to new highs or lows truly reflects broad market sentiment.

Note what has happened since those lows in ES that were not confirmed by the other major indexes. We've seen a retracement of much of the morning's weakness.

This is why it is crucial to not only see what is happening in the market you're trading, but what is happening more broadly in the stock market--and even among other asset classes. Much of the value of market "setups" depends upon the context in which they occur.