Wednesday, March 04, 2009

Observing Buying and Selling Pressure at Key Market Levels

The most recent post emphasized the relevance of tracking expansions and contractions of relative volume as markets move to and away from value. Equally important is tracking buying and selling pressure as markets move toward or away from key levels of support or resistance. After reversing midday and moving to an important resistance level at the market's opening range, the ES futures declined for the remainder of the afternoon with multiple NYSE TICK readings below -1000. As I stressed earlier, such weak readings are only possible when institutions are selling baskets of stocks, causing a large number of issues to trade on downticks simultaneously.

What this action tells us is that market participants are rejecting the level of value at the day's opening range, which is also a level of value that is within the prior day's range. The rejection of this level after a market bounce at the very least places us within a range environment and a likely retracement of the range, given the strong selling pressure.

The lesson is that it's not just whether a market rejects a level of value but *how* it rejects it that provides important clues to the near-term price path. When markets reject a level on solid relative volume and heavy selling pressure, it means that the large participants who move markets are perceiving the level as a selling opportunity: a clear sign that they see "true" value lower. Until lower prices bring significant buying interest--something that didn't happen late in the afternoon, given the weak bounces in TICK (not one reached the +800 threshold of significance representing a two standard deviation buying event)--the market will probe lower levels of value in search of equilibrium.
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10 comments:

Globetrader said...

Hi Brett,
on the other hand, despite all that selling volume, the market needs the illiquid afterhours to conclusively break support. Only to see these new lower levels being rejected in a forceful V-shaped move.
Actually to me it looks like one or more funds being forced to liquidate, while others start to perceive these levels here as good buying opportunity. The classic accumulation phase, which might take weeks or months before a new stronger upmove will start.
Best regards,

Chris

Here the chart I refer to: Chart

SSK said...

HELLO BRETT, THANKS FOR YOUR INSIGHTS INTO PATTERNS, I AM LEARNING MUCH AS ALWAYS. HERE IS A DISSENTING OPINION THOUGH, HERE IS THE LINK FROM A TICK CHART, AND THE THINGS THAT I SAW LEADING INTO YESTERDAYS 3/3'S CLOSE. THANKS AS ALWAYS, BEST SSK

http://www.screencast.com/t/sS8dcK7JmhY

atype said...

I know that this comment doesn't have anything to do with the post but I'd like you to post something regarding to using stops
my stops are bleeding me to death in last few sessions

This is the best trading blog on the web btw

minoo said...

Hi Brett

One question really needs to be asked here, whose action are you looking at ? The Crowd ? The Herd ?
When the Professionals, Institutions & most join in the Bears party and do the obvious think & thing.
Well we all get sucked into this from time to time and become part of it
I wonder how many times traders must have tried to short this 'Bear Market Rally' ? ?
I am no expert but hope the excerpts from the below article helps:
Ta Minoo


http://www.investorsintelligence.com/img/edu/ii_advisors_sentiment.pdf


Profiting from the Madness of Crowds.
"men think in herds, go mad in herds (and) recover their senses slowly, and one by one"

Another legendary contrarian was Humphrey B. Neill whose book .The Art of Contrary Thinking., published in 1954, helped popularise this strategy for investment. He too observed that .when everyone thinks alike, everyone is likely to be wrong., and promoted the practice of .throwing your mind into directions which are opposite to the obvious..
Neill provided much practical advice on how, and importantly when, to apply contrary thinking. He was happy to admit that the public is right more of the time than not and concluded that .the crowd is right during the trends but wrong at both ends.. In other words, as a market trend develops, there is still a dichotomy of views amongst investors and it is not until these views become extremely uniform that investors resemble a crowd. This was aptly described by Sir John Templeton .bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria., the extremes in this case being pessimism and euphoria.

When does the crowd get crowded?
The answer to this question is dependent on whether or not the Advisors surveyed in the report act as .the crowd. or rather as .experts. who are emotionally divorced from the irrational exuberances often shown by the investing public. The historic sentiment readings show that Advisors views do indeed follow general market sentiment. They do after all (subconsciously or not) have to satisfy a market-orientated readership, being generally reflective of market optimism during uptrends and pessimistic during market declines.

Conclusion
The historical evidence does suggest that the Advisors Sentiment data provides evidence of extremes in market confidence and that these extremes are, more than not, present around market turning points. However, bear in mind that this is anecdotal evidence of how advisors feel towards the market not necessarily how they, or their readership, acts

I dont know how to post chart here, I have a thread called 'Charting the Past Bear' at Traderslaboratory so refer their if you can for the charts

Ta Minoo

Globetrader said...

atype,

the market volatility has changed and you might need to change as well. I posted some rules of what to do, when you are digging yourself into a trading hole, which you might find interesting.

Being in a trading hole

Best regards,

Chris

TraderPsyches said...

Having been asked to leave a comment here by one of the readers, my opinion is that Brett's description of the process of finding value and understanding the flavor of how a market rejects level is absolutely spot on.

As to following crowds, the fact is that you want the crowd going with you as long as you are in early. You need their trades to push yours in the direction you want it to go.

Brett Steenbarger, Ph.D. said...

Thanks as always for the perspective, Chris!

Brett

Brett Steenbarger, Ph.D. said...

Much thanks for the input; I enjoy the dissenting views, SSK.

Brett

Brett Steenbarger, Ph.D. said...

Hi Atype,

Yes, many people are setting stops too close and getting chopped up. The key is waiting for strength to occur and peter out before selling and waiting for weakness to occur and peter out before buying. Once you make that turn, you have a natural stop level should the market go to new highs or lows.

Brett

Brett Steenbarger, Ph.D. said...

Hi Minoo,

Good points re: sentiment. What we're finding with the current bear market is that oversold levels that have led to rallies in the past are not behaving that way now.

Brett