Tuesday, February 23, 2010

Midday Briefing for February 23rd: Thoughts on Game Changers

We can see from the updated Market Delta chart that we rejected the volume bulge that had built up in pre-opening trade around 1104-1106 in the ES futures, with high volume selling following the weak consumer confidence numbers. As noted in the morning briefing, this was not only a break from the volume bulge, but also a breakout from a multiday range.

As a rule, multi-day range breakouts tend to show follow through, as those trapped on the wrong side of the market need to scramble out of positions. We can see that follow-through in the very weak Cumulative Market Delta and Cumulative TICK numbers. We also can see that we've remained consistently below the day's Volume-Weighted Average Price (VWAP; red line).

If you review this morning's briefing, you'll see that we were on breakout watch because of the very low levels of Demand and Supply from Monday's trade. My research finds that we tend to get outsized moves out of such equilibrium. All it took was the consumer confidence numbers to tip the scales. It was a game changer, in that it was unexpected and dashed cold water on the market strength we had been seeing.

You don't need to predict the direction of a breakout move in order to anticipate one and trade it successfully once the markets show their hands. Many traders hold back from trading breaks once they've occurred, not wanting to chase a move in progress. What they fail to appreciate is that the market has shifted from a range mode to a trending one, allowing profitable entries on bounces.