Patterns and Direction

Many patterns are highly subjective in nature, often reflecting a trader’s hopes rather than reality. The key thing to remember is if a pattern is not immediately recognisable, it simply does not exist.

The open is also key to market direction. Subsequently, there are two things you want to take into consideration in trying to size up the day’s pattern:
• Where has the market come from, and;
• Where is it likely to go.

One very traditional pattern is for all four indicators – TICK, cash, DOW and Premium – to track together with price. So if the market is declining, all four would be falling. The divergences, of course, tend to occur at the turns – bottoms or tops – where one or more indicators get out of synch with the others. As a rule, futures lead price moves and the Premium frequently reflects this. The Premium is trying to reflect the difference between the futures and the cash price. So it could be futures down, cash up; or futures up, cash stationary; or futures down, cash down less. Nevertheless the Premium is signalling the break. Likewise, a sharp drop in the TICK values can occur prior to a move in either the futures or the cash markets.

In other words, the Premium will typically move first, meaning the futures are leading the market. Stationary cash and higher futures prices will cause the Premium to rise; stationary cash, lower futures, will result in a decline. The rule for spotting a trend is when the Premium moves and continues in one direction. This can be in either direction.

The following table can be used to monitor such events.

Time	Futures	Cash	Premium	Tick	DOW
09:35	UP	UP	UP	UP	UP
09:50	UP	UP	UP	UP	UP
10:05	UP	DOWN	UP	DOWN	DOWN
10:20	DOWN	DOWN	DOWN	DOWN	DOWN

Another aspect of direction involves high-volume points. For example, the open and close are both high-volume areas. The issue to observe is the direction of prices on high volume. The rule is, the market wants to go in the direction of the high-volume move. This is doubly important on the open, because this is the time when the day’s first trend is scheduled to appear. Accordingly, look for tick volume to soar when the prices move in one direction or another. That’s the path of least resistance.

The other point where you will encounter high volume is when a reversal occurs. If the market opens, breaks lower, and quickly snaps back up off the bottom, chances are the move will be accompanied by high volume. As with all such moves, most of the money is made on key moves of comparatively short duration.

Subsequently, I like to compartmentalise my trading into two distinct parts – morning and afternoon. This generally coincides with the fact that there are generally two moves a day – one in the morning and one in the afternoon. They tend to be anywhere from twenty minutes to maybe an hour-and-a-half long. The rest of the time the market is simply setting itself up to move. Often, the afternoon trades are even greater than the morning trades because the trends are better defined. By breaking down the trading day into two components, the characteristics of each trade tend to become clearer. For example, within these moves there are two, sometimes three good trends a day. The first often occurs in the first ten minutes of trading, usually on a gap. This move is often a good trade. The second is also a morning trade. By now, you are typically 20 or 30 minutes into the trading day and the first real trend is about to emerge. This trend typically lasts just an hour to an hour and fifteen minutes. Again, in the afternoon, you can often capture a trend into the closing bell. The afternoon trade, unlike the morning trade, has a substantial intraday price history in front of it and is apt to be shorter in duration than the morning trade. As a rule, it tends to be “more pure” in the afternoon.

And throughout all this, there are probably five or six key trading patterns that tend to repeat, given a few variations, endlessly.

In sizing up a day’s pattern, you need to look at the prior day. Did prices begin low and close high? Did prices begin near the day’s high and trend lower? Or was it one of those lackadaisical affairs when prices simply meandered back and forth throughout the trading session.

Further observations I consider when analysing direction include:
• When prices move away from the prior day’s close, they tend to suggest a trending action.
• When you have strong bullish days with the low occurring early in the day and the high in the final ten or fifteen minutes, the market appears to want to go higher.
• When the afternoon trend is counter to the morning trend, the range often retraces the entire morning range.
• When the afternoon trend is in the same direction as the morning trend, the respective legs of each move are often identical.
• When you have a trendless day, the close is often in the middle of the “value area”.
• The close often occurs at an extreme, making the MOC order a good one if you are on the right side of the market.
• Today’s close can be used to determine whether tomorrow is a trending day or non-trending day – depending on early morning price action.
• You can often forecast the closing price by using time and price measurements.

By and large it pays to be armed with a list of support and resistance levels, prior highs and lows prior to the open.