When the market rallies, these 2 tools tell you if it has legs

As a trading psychologist, I am vitally concerned with the ways in which we process information.  It is interesting that all of us know that we have different learning styles--very different ways of understanding the world--and yet many of us rely on standard charting screens and screen configurations to make sense of the markets.  I learned this lesson in a quite personal way when I switched one of my indicators--a measure of leading stocks making breakout moves--to an auditory alert from a standard chart display within Excel.  Hearing the indicator updates took some getting used to.  The value, however, was tremendous as the beeps allowed me to keep my eye on my market and how it was trading.  By following one market (the leading stocks) in one information processing channel and my market in another, I essentially doubled my brain's CPUs.

Other ways of maximizing the brain's computing power is to present maximum information in a single display and to create simple displays that allow for a quick processing of information.  Let's take a look at how we might have processed the morning breakout in Friday's (September 9, 2005) market:

Below is a graphic of the morning trade (Central Time), with the breakout move labeled.  Once we extended to new morning highs, the market continued to trend higher, making for a nice trade.

Now let's take a look at the move in a different charting application called Market Delta.  Once again we see bars plotted on an X-axis of time and a Y-axis of price.  Note, however, that there is information within each of the bars.  At every price level within the bars, we can see two numbers separated by "x".  The first number is the number of contracts in the S&P emini that traded at the bid price.  The second number is the volume that was transacted at the offer.  As I noted in a recent article, this provides valuable information about very short-term market sentiment.  When we see large volume willing to accept offers, we know that buyers are eager to get into the market.  Conversely, size that hits bids tells us that big players want out of the market.

Notice in the Market Delta chart how volume at the offers built up during the breakout move in the 11:15 ET bar.  The numbers below the bars along the horizontal axis are a calculation of the net number of contracts transacted at the offer vs. the bid.  When the summary numbers are positive, we have net positive sentiment; when the numbers are negative, we know there is a leaning toward the sell side.  To make information processing even easier, we can see that the balance is positive when we have more blue than red and vice versa.  Observe how we first could identify the breakout by seeing expanded volume lifting offers and then how we could ride the positive balance until we no longer had a dominance of blue.

My second display is quite different.  Here we are looking at an output from a stock screening program called Trade Ideas.  I programmed Trade Ideas to spit out all occasions when exchange traded funds (ETFs) make new 15 minute highs or lows.  By following the ETFs, I get a sense for strength versus weakness across market sectors.  In point of fact, I could have programmed Trade Ideas to follow any basket of stocks, futures, or sectors I desired, and I could have varied the time period of new highs/lows.  Alternatively, I could have created different criteria for screening, such as number of block trades in the ETFs or moving average crossovers.  Instead of obtaining a chart as immediate feedback, I received a simple listing of stocks meeting the chosen criteria, color coded for new highs and new lows:

Notice that the ETFs began making new 15 minute highs at 10:11 and 10:17 AM CT and then never looked back after the breakout.  The quick reversal of the new lows from 10:03 CT and the steady stream of new highs demonstrated that the breakout move was broad based.  Whereas the Market Delta chart told us how the move was happening--the volume lifting offers and moving price higher--the Trade Ideas screen was confirming that this was a rising tide lifting all boats.  A quick glance at the relative proportion of green (new highs) vs. red (new lows) provided important information.  Had only one or two sectors formed new highs with the market move, the odds of reversal would have been greatly increased.  (A nice option, in line with my aforementioned experience, is that the alerts can be made audible.  The rapidity of the beeps itself becomes an indicator, as volatile and trending markets tend to be noisier).

There are many features of these programs I have not outlined.  Market Delta can display total volume within bars and change from time-based bars to tick-reversal bars (bars that form when price moves a set number of ticks).  Trade Ideas runs off its own servers and can monitor events as fine as large changes in the size of bids and offers for the stocks and futures in your lists.  Programs such as these may or may not be helpful to you.  I use them personally; I have no proprietary stake in them; and I have found them to be beneficial to my trading.  This is not only because they display useful information, but because they display it in a form that facilitates rapid decision making.  All of us differ in how we process information, and all of us have different trading styles that require different information.  If you're using standard tools in standard ways, you may be selling yourself short.

Brett

Brett N. Steenbarger, Ph.D. is Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of The Psychology of Trading (Wiley, 2003). As Director of Trader Development for Kingstree Trading, LLC in Chicago, he has mentored numerous professional traders and coordinated a training program for traders. An active trader of the stock indexes, Brett utilizes statistically-based pattern recognition for intraday trading. Brett does not offer commercial services to traders, but maintains an archive of articles and a trading blog at www.brettsteenbarger.com.