web analytics

[dc]O[/dc]ne of the main challenges for stock traders is understanding the ebb and flow of the broad market on the shortest timeframes. There is so much noise in price movement at this level, and so many instruments are traded, that it is hard to know what is important. Some traders have their go-to bellwethers and market leaders that they track, but this can result in a process that is a little myopic and subject to the whims of that trader’s taste and experience. Other traders simply watch the broad indexes, but a lot of detail is lost at that level.

This screenshot shows a tool that I have found to be very useful for understanding strength and weakness on the shortest timeframes. This information is less useful on a multi-day horizon, but, for understanding what’s driving the market on a particular day, there’s no better tool. This tool presents broad market and sector indexes (though not shown, it also extends down into sub-sectors. For instance, some sectors are divided into 15 sub-sector indexes.) ranked by their percent change on the day (first numerical column.) Next, a volatility-adjusted standard deviation spike number is listed along with a rough overbought/oversold (on the daily timeframe) measure. Last, and perhaps most important, is a graphical representation of where the instrument sits within its current day’s range. (This tool, with exact steps to produce it, is discussed in the book.) Basically, the vertical line shows the current price within the day’s range indicated by the dashes. The colon, for reference, shows the opening print of the index, though this is often less useful in cash indexes.

This tool allows you to see what is driving as the market presses to new highs and lows. (Combine with audio indicators for new highs and lows on the major indexes and you have a very powerful tool.) You can also see, at a glance, where indexes are trading relative to their opening print. This tool has implications for traders trading broad indexes—for instance, the market just made a new high, but what if we only see 1-2 sector indexes also pressing to new highs, and, furthermore, we see that they are very defensive sectors? This would be a warning to be careful of longs. It also can give both swing and daytraders some insight into what is actually going on with specific positions, though this requires some finesse and artful understanding of how to balance many competing factors.

It is not important that you replicate this screen exactly, but you may want to at least consider the following core concepts:

  • Intraday strength and weakness can be gauged by where a set of related markets sit in the current day’s range.
  • When the broad market makes a new high or low on the day, seeing what sectors are also making highs and lows can give some good clues to market direction.
  • Simple percent change on the day can be a misleading measure of strength and weakness.
  • The move off the opening print is also a valuable tool.

Tools like this can give a trader a much better perspective and can round out the information already provided by other tools.