Friday, September 25, 2009

Example of a Short-Term Transition Reversal Pattern

Many of the transition, reversal patterns that I've posted cover longer time frames, where we look at 30 or 60-minute bars. Here is an example using 5-minute bars, in which the move back toward overnight highs stalls out, with less volume transacted at ES 1048 and above as we stall out. We can also see from the bottom histogram less net volume transacted at offer vs. bid as we trade near those highs. Recognizing that we weren't breaking away from the volume bulge identified in yesterday's trade led to the range idea that we would revert back below VWAP.

Again, these patterns work because you're catching short-term traders leaning the wrong way. They're playing for an upside breakout and have to cover their positions once it becomes clear that, for the time being, we've put in a high.