Friday, February 26, 2010

Midday Briefing for February 26th: Catching Day Structure

If I had to identify one key skill that intraday traders most need to learn, high up on my list would be the ability to recognize day structure as early in the day as possible. This is because the trading strategies that work well in trending markets (going with strength or weakness) are quite different from what works in range markets.

The ability of the NASDAQ 100 Index to hold its lows around 9 AM CT was a good initial clue that we were in a range environment, not a trending one. Another piece of evidence is that, despite early weakness, we could never get declining stocks to outnumber advancers by more than 1000 issues on the NYSE.

Further confirmation of range trade came with the sharply waning volume as the day progressed (above) and the mixed performance of stock sectors, with financial shares showing relative strength and consumer issues lagging from the open.

A great exercise is to call out the day structure as early as possible and keep a record of the accuracy of the calls. Much of knowing how to trade is knowing the kind of market you're in.