Recognizing Significant Selling Pressure in the Market

If you review this morning's Twitter comments and follow the NYSE TICK for Monday, you'll see how a weak market sustained weakness through the day and hit one price target after another. These downside trend days are notable in that they generally open near the price high for the day, move steadily lower on very weak NYSE TICK and average/above average relative volume, and stay below the day's volume-weighted average price for the vast majority of the session. Recognizing the structure of a day early in the session is a cardinal skill for short-term traders: it determines whether you fade strength/weakness or go with it by playing counter-trend bounces.

In the chart above, we take a longer-term view that illustrates the significant weakness of the current market. The dark blue line represents the S&P 500 e-mini (ES) futures during 2009; note the breakdown below the 800 level, as represented by the horizontal light blue line.

The pink line is a one-day moving average of the number of minutes that hit -1000 in the NYSE TICK. I call these "strong selling minutes". A reading of -1000 or lower means that 1000 or more stocks are trading on downticks at that moment. That represents very broad market selling pressure. Readings of -1000 or less are rare; they are almost 2 standard deviations below the median low TICK reading for all minutes since the start of October, 2008.

Another way of looking at the significance of that weakness is that the median number of strong selling minutes during a trading day is 11, with a standard deviation of 21. On Monday, we closed with 66 minutes hitting that level--more than two standard deviations away from the norm.

What is significant in the chart above is the elevation in the number of weak market minutes (i.e., minutes where we had TICK readings of -1000 or lower) as we broke the 800 level in the ES contract. That tells us that this was a significant breakdown, with broad participation to the downside. Only the selling pressure of large institutional traders can sustain such negative TICK readings. As individual traders, we want to follow the path of those that move market, not stand in the way.

As long as we see so many stocks trading on downticks, it is premature to expect a durable market rally. Recognizing this strong selling sentiment is important to staying on the right side of these downtrend days.