Wednesday, March 18, 2009

Catching Intraday Reversals With Transitional Structures

One topic I will be covering in greater detail in upcoming blog and Twitter posts is market reversals and transitional structures in the intraday markets. A very interesting one occurred a little after 14:00 CT today. As my last intraday tweet noted, the market had been rising on strong NYSE TICK, spurred by the Fed's decision to goose the economy with its quantitative easing.

We pulled back into about 14:05 CT, with price in the ES futures breaking the low we had made around 13:51 CT. From that point we rallied for the next ten minutes or so, with TICK exceeding +1000 on three different occasions. But volume was unusually low during the upmove, volatility to the upside was very restrained, and upside momentum quickly petered out.

What happened was that buying interest, as measured by TICK, could no longer result in higher prices. In volume terms, large market participants were no longer leaning to the buy side. Such inefficiency--the inability of buyers or sellers to sustain a move to the upside or downside--frequently occurs at the tail end of one-sided market moves. Before sellers enter the market in force, we see buyers retreat from the market.

Admittedly, this is not a precise pattern; it's a relationship that marks a shift in the ability of buying or selling pressure to attract volume and move price. With enough exposure to examples of these patterns, you'll be able to develop a nose for these intraday reversals. Here is a post that elaborates the transitional structure concept. If I see a pattern forming intraday on a day when I'm not meeting with traders, I'll note via Twitter (free subscription here); I'll also use blog posts as further illustrations to help you decide when to get out of trades.
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5 comments:

Arjuna said...

Hi Brett,
What does TICK stand for? Btw - great posts on the VWAP !
thanks!

Matthew C. said...

I was in a meeting today as the reversal happened. I've been planning to set a "reversal trap" trade with a sell at 799 and a stop loss buy at 803 for the last few days when the market approached major resistance at 800 but the market hit 800.5 and crashed right before I got out of the meeting. . .

etoke said...

Thanks for the insightful post.

This post, together with your earlier post on Power Measure, inspired me to plot a correlation between price change and Average Tick (which I defined as (O+H+L+C)/4).

While I am still struggling to find ways of using such patterns constructively in my trading, it is interesting to see that many reversals occur at the points of lowest correlation between Tick and price change.

Brett Steenbarger, Ph.D. said...

Hi Arjuna,

TICK is not an acronym; it is an indicator, usually designated $TICK in the data feeds. I capitalize TICK to distinguish it from "tick", which is a unit of price movement.

Brett

Brett Steenbarger, Ph.D. said...

Hi Etoke,

Very interesting idea, correlating price action and TICK. I'll be interested to hear how that works out for your decision support--

Brett