Saturday, May 06, 2017

Is the Market Getting Stronger or Weaker?

Here's a useful measure of strength and weakness of the US stock market for the intraday trader (raw data from e-Signal).  Imagine that you are tracking every stock traded on every exchange every minute and computing how many stocks are making fresh new highs for that trading day minus the number making fresh new lows that day.  That tells you how strength and weakness are emerging, across stocks, through the trading day.  

Most of the time, the new highs/lows measure will track price well.  When we have a trending market, we'll see an expansion of new highs over new lows and the measure staying consistently positive or negative (depending on trend direction).  Oscillating above and below a neutral zero point is more common in range bound, rotational environments.

Note how, on Friday, we tested the day session lows in ES (blue line) and yet the new highs/lows measure (red line) held well above their morning lows.  This was an important sign that selling was not gaining breadth.  We then saw the new highs/lows climb steadily higher with price through the afternoon.  The positive and expanding breadth was an important tell that you wanted to be on the long side of the market.  There was no emerging weakness to fade, intraday.

An interesting facet of this time series is that you can track the new highs/lows during premarket hours to see if breadth is strengthening or weakening among stocks trading before the NY open.  This sets up valuable comparisons when the market opens, as on Friday, and breadth immediately deteriorates from premarket levels.  This is a useful indication that early morning participants who rely on liquidity in the opening minutes are distributing shares.  That information helpfully flipped me from long to short in my early morning trades.

At a broader level, this is an example of how traders can benefit from looking at new and different information.  There are many stagnating traders who look at the same information in the same old ways.  Collecting new data sets allows for exploration of patterns, some of which can be useful in innovating and finding fresh sources of edge.