Thursday, July 17, 2008

Anatomy of a Day

Yesterday was a classic short-covering rally off of extreme oversold conditions. The prior day, a strong stretch of the VIX representing palpable fear set up by strong overnight selling abroad was countered by testimony on the hill and a rapid sell off in the energy complex. The two days together present a good look at how traders view technical levels during the course of a day. Here they are:

  1. Light Horizontal Lines/ Day Trader Pivots - Pivots take the prior day's absolute range and divide it into sections. The gold line is the Pivot, lines below it are 'Support', lines above are 'Resistance'.

  2. Solid Bold Green & Red Line/ Volume Weighted Average - The daily average price weighted by the volume of shares transacted at each price bar.

  3. Dashed Light Blue Line/ Five-Day Moving Average - Speaks for itself. Lots of computer program trades track this line. In general, the expectation is that the market will behave relatively bullishly above the line, bearishly below. Where price lies relative to longer-term moving averages, such as the 20, 50 and 200-day, also tells alot about the current environment. In addition, they often represent key-levels in their own right.

  4. General Behavior/ Higher-Highs & Higher-Lows -or- Lower-Lows & Lower-Highs - The behavior of price action tells you if accumulation or distribution is occurring within a trend.
There is no magic to these levels, but many traders have these same indicators up on their screens and they often act like magnets for day traders and buy/sell programs alike. Cumulative Tick, the Advance-Decline Line and Arms Index/TRIN also provide important clues as to what's happening "under the hood."

Beyond these "levels," well before the Open I review overnight performance overseas, and take a look at the economic and earnings release calendars. During the day, I also like to keep an eye on treasuries, the VIX, unusual volume shifts (adjusting for the AM and PM disparities), and relative strength or weakness plus correlations among the market leaders/ current industries under scrutiny. Financials and Energy are a recent example. Trend and/or rotational changes among these can signal trend changes for the broader indices in advance of a turn.

Traders more accomplished than I are also said to track changes in open interest among option pricing levels and various cross market spread ratios. I hope you find this a useful primer for future reference. What do you track? Post your comments here!

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