Thursday, April 09, 2009

A Multifaceted View of Intraday Sentiment

Among the short-term sentiment indicators that I find most useful are the NYSE TICK (the running balance between stocks trading on upticks vs. downticks) and Market Delta (the relative balance between volume transacted at the offer price vs. the bid price).

Today's trade was an example of an occasion when these two measures gave somewhat different signals. Volume transacted at the offer vs. bid for the ES futures had a very modest bearish cast in midday trade as the S&P 500 Index churned in a range, but significantly more stocks were trading on upticks than downticks (positive TICK).

The reason for this disparity, as I noted in the Twitter posts, was that buying was significantly stronger in the broad market--particularly the small and midcap stocks--than in the large cap S&P 500 names. While traders hit bids in the ES futures, in part reflecting early consolidation among the financial stocks, net buying interest sustained the rally in the Russell 2000 shares.

Only once we saw net volume transacted at the offer in the ES *and* strong buying interest in the TICK later in the day did all the markets move to new highs in tandem, completing an uptrend day.

A multifaceted view of sentiment, in which we look at the sentiment specific to a single index (such as ES) and the sentiment across the broad market, can be helpful to traders in teasing out when markets are prepared to move in sync and when they are not. I notice that the new version of Market Delta can display cumulative NYSE TICK and cumulative Market Delta--even a price-weighted version that approximates money flow--on the same screen. This strikes me as a valuable way for traders to obtain a well-rounded view of moment to moment sentiment, all at a single glance.

I will be further investigating the relationship between these two indicators and how traders might benefit from the information.
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2 comments:

Barefoot Trader said...

I don't use market internals for the most part for intraday trading, but do find them more useful than most indicators. Based on your posts and extensive use of internal/breadth indicators are you scalping trades for the most part? I don't believe I've seen your trading stats - does your win/loss ratio exceed 1.5? Just curious, because I try to capture bigger intraday price movement and don't find these indicators (or any other for that matter) particularly useful. For scalping on the other hand I would imagine they could be more valuable.

Brett Steenbarger, Ph.D. said...

Hi Barefoot Trader,

I don't consider myself a scalper; I hold positions intraday, with an average holding time of 20 min or so on average. My win ratio is roughly 60%, but varies around that depending on market conditions.

Brett