Recognize Neutrality to Identify Change

In our daily futures class we frequently refer to a list of axioms that reveal market tendencies. This “Tool Box” is divided into sections that focus on different situations traders face when developing strategy or trade ideas.

In this week’s newsletter we will focus on a few scenarios that frequently telegraph the end of a trend and sometimes the reversal of one.

When markets trend higher they tend to make lows very early in the day and closes tend to be above the midpoint of the range. When bears are in control, highs tend to be made in the first hour of trading and closes are often below the midpoint of the day range.

Before a trend ends there are subtle changes in short-term price action that signify the trend is exhausted. One of the most reliable indicators of change in trend is the time of day the high is made in an uptrend or when the low is made in a downtrend.

When an uptrend is nearing exhaustion the high of the day is often seen in the first hour of the day. Conversely, first-hour lows are common at the end of a downtrend.

Another common occurrence at the end of a trend depends on where the market closes in relation to the open or better yet the highest-volume or fair price. The logic here is much like a candlestick. A close above an open is considered a bullish candle and a close below an open is a bearish signal.

The chart below shows a more precise way to determine short-term momentum or the change of it.

The dollar index is shown using Macrograph, a derivative of Market Profile. This charting method illustrates time at price, which is a proxy for tracking volume at every price. The more time spent at price leads to more volume. High volume prices or fair prices are portrayed as nodes in each daily profile. Note that during the uptrend the closes are above the high-volume price. And when the market trends lower the closes are below the fairest price.

If you have a long position, closes above the pivot should keep the market moving in your favor. And short positions should continue to pay, provided the closes are below the high-volume price. When this price action is reversed it is often an indication that a trend is over.

John Seguin, Market Taker Mentoring

Trader Education