Tuesday, January 17, 2017

Making Sense of the Market's Auction Process

Here's an admittedly unusual chart taken from last week's stock market action.  The red lines represent the amount of total upticks in the market on a one-minute basis.  I use this as a measure of buying pressure.  The blue line represents one-minute closing prices in SPY.  The chart is arranged so that the week's high price for SPY is at the left and moves toward the low price at the right.  Time is not a variable here.  We are looking at buying pressure at each price level of SPY during the past week.

What we see is that buyers were quite active as we crossed the 227 level in SPY.  We also see very low levels of buying and in fact net negative buying from approximately 226.75 to 226.87.

It's a way of smoking out where the buyers and sellers are located.  I've found this to be a very useful way of thinking about "support" and "resistance"--and an especially effective way of identifying points where fresh buying or selling are entering the market.  

It's also an example of how looking at market data in new ways can provide fresh perspectives that aid market understanding.  If a price level has held sellers this past week but cannot hold sellers early this week, it's a very useful indication of a shift in supply vs. demand.

I find my most effective trading captures an understanding of who is in the market and what they've been doing.  Too many traders attempt to forecast what prices *will* do before they truly understand what they've been doing.  The market is an auction, and you're watching the behavior of buyers and sellers to determine whether the price of the goods is likely to rise or fall.  It's amazing what we can see when we place market behavior in proper context.

Further Reading:  The Most Powerful Step We Can Take Toward Becoming Solution Focused