Lessons in Trading and Psychology - 3: Identifying Intraday Reversals
OK, so recall what we talked about in the previous post that looked at how we can use volume to understand market movements: each day in the market offers us one or more important learning lessons. Our job in reviewing the day is to extract these lessons, so that we can improve our ability to recognize opportunities in real time.
Note how the $TICK line quickly moved below zero during the morning session and largely stayed below zero for most the morning. This tells us that stocks were persistently trading with weakness (on downticks) throughout those morning hours. Something interesting happened midday, however. As we made new lows in SPY, we were seeing much less selling pressure. Indeed, the final low was preceded by a sizable spurt in buying. From that final low, we saw a significant spurt in buying and stayed above the zero line for most of the remainder of the day.
In short, we saw in transition from selling pressure to buying pressure, with a waning of selling preceding the upsurge in buying. The trader seeing this shift in supply/demand was alerted to the likelihood that this was not a trend day to the downside and, indeed, there were many traders leaning short who might need to cover.
Notice also that once we surged above two standard deviations in the $TICK measure (both to the downside in the morning and to the upside during the afternoon), we tended to get follow through of price movement (momentum). Just noticing these dynamics helps keep a trader on the right side of market movement, knowing when to trade a market move and when to fade it.