Signs of intraday market reversal

What are the signs of an intra day market reversal? Today was a great example of a day when almost all the sectors gapped up, traded higher for about 1 hour, and then the market took a turn for the worst. We started with the Dow up more than 200pts, just to end the day on the negative side. What happened and what were the signs?

 

First of all, make sure you keep and eye on the sector or the main catalyst for the sharp move higher. In this case we started the day with a large drop in oil prices, after the long weekend didn’t result in any damage to the oil infrastructure. Oil’s large drop yesterday in overseas markets was the reason for the market rally this morning. The minute oil started to trade higher (right from the start of the day, USO traded above its opening range before 10am) the rest of the market started to feel the pressure. Oil ended up more than $2 from the lows/open. This is the main reason why as intraday traders we concentrate on “change vs. open” more than change vs. yesterday’s close; we are looking for continuation flow.

 

The 2^nd thing to remember is that a strong opening like we had today resulted in up gaps across the market. Therefore one of the criteria that we have as a tool for following gaps is the continuation flow, do we have it or not? After a stock gaps up is there enough order flow to keep the stock up and continue higher… today we had a couple of examples were that was clearly not the case; M, T, HPQ, XLF all failed to have continuation order flow after the open.

 

The 3^rd clue is when you see that sectors and stocks that have gapped up, start to test and trade below the opening range. This is usually a sign that the sector or stock will make an attempt to close that gap. We saw that occur with: XLF and SMH started the breakdown, followed by the rest of the market.

 

Lastly, as a trader the faster you realize that every time you buy on support the stock breaks support, the faster you will be able to join the order flow and look for shorting opportunities. That is why it’s important to keep your losses small so you can have enough powder to participate the full day.

 

Today was a great example of why absolute prices will not help you make money as an intraday trader… You need to follow the flow and learn how to read the tape.

 

 

 

 

 

www.keystonetradinggroup.com