It really looked as though we were going to fall out of bed in the stock index futures markets this morning before the open. The Yen once again strengthened against the dollar and you could see selling hit the ES, NQ, and ER2 contracts. Early after the open, we dipped to 1409.25 in the ES futures, breaking the lows from the prior two days. Then we got some buying in ES, returning us to the prior trading range before another selling wave hit shortly after 9:00 AM CT.
So what do you do? Sell the market in anticipation of further weakness or decide that selling has exhausted itself? That's when an analysis of what individual stocks are doing can be helpful.
It turns out that, although the ES contract made a 3-day low on the early down move, only 11 Dow stocks broke their lows from the prior two days. In general, I've found that, whenever fewer than half of stocks participate in a move, that move is more likely to reverse than if there is broad participation. Moreover, despite the selling in the futures, my TICK Volume measure--while negative--was holding well above the prior day's lows.
From the vantage point of individual stock action, the subsequent rally in the futures was not so surprising. As popular as they are, the index futures *are* derivative of the broader stock market. If a majority of large cap stocks are refusing to participate in a move, it is difficult to sustain a trend. Knowing how individual stocks are moving provides important clues as to directional shifts in the futures.