Looking under the hood of the auction
Profiling markets does not negate other useful tools that are part of a trading system. Another tool to consider adding to your arsenal is what some call a “breadth” indicator. It’s a measure of where volume is going (what is the breadth of activity)….whether into appreciating stocks or depreciating. It’s like looking under the hood to see how the auction is going.
To put this into context, consider the following rally in Nasdaq futures. Quite a move in a short number of days. This move was impulsive and looks strong.
Now, consider that move matched against the “breadth” indicator below. This indicator looks at the Nasdaq stocks. At first, the “breadth” was very strong, and then on subsequent days, the “breadth” contracts.
This is a subtle clue that the auction is exhausting and will likely need to auction lower to find more buyers. It may still go higher from here, but conviction does not appear to be there. So, from a trade management perspective, if you’ve been long for a couple days, time to protect those gains. If you want to get long, you can buy here, but be warned that you will likely have to add to your position at lower prices.
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