Monday, April 27, 2020

How Can You Identify A Trend Day In The Stock Market?

A topic that TraderFeed has covered in the past is identifying trend days in the market.  (For example, see here and here and here).  These do not happen often, but when they do, they can be tremendously profitable.  Today's market was a great example of an upside trend day, and I thought I'd share a couple of tells that helped me identify the trend in the first hour of trade.

The upside trend day typically begins with significant strength.  One tell, which Market Tells has noted and backtested, is a high level of NYSE TICK early in the session.  Related to that is breadth strength in the market early in the day's trade.  Above you can see a chart of the intraday advance/decline ratio for the Standard and Poor's 500 stocks for today's market.  (Chart from Sierra Chart).  Note that the ratio started at over 7.0 in the first five minutes of trading and, after an early dip that still left the ratio high, expanded even further to over 9.0.  In other words, practically everything in the SPX universe was going up.  That was a great sign that sellers were just not in the market.

But here's another worthwhile tell below:

This is the same advance-decline ratio for the day session, but this time it's constructed with the Russell 2000 stocks.  (Chart from Sierra Chart).  Observe that we opened the day with a ratio of over 5.0 and quickly moved higher on the day.  In other words, among small caps, we started strong and got even stronger over time.

So what does that tell us?  The big caps were strong and getting stronger and the small caps were strong and getting stronger.  Nothing was weak!  That tells us we can literally be in dip buying mode all day and make money.  Or we can buy early weakness and hold through the afternoon.  Or we can hold a piece of a position through the day and buy dips with added pieces along the way.

And, yes, the NYSE TICK was positive through the day and the TICK specific to the Russell stocks was positive as well.  Quite simply, when we get *broad* strength on any time frame that is a favorable condition for upside momentum.  On the day time frame that creates trend days--and great opportunities for riding momentum for profits.  This is a great example of the principle that edges in markets come from looking at information that others are not looking at and seeing it in ways that others can't perceive.

Further Reading: