Most investors only watch the daily charts without digging into the minute by minute price action. After all, trading shorter time frames than a daily chart can be very expensive.
Even if you never plan to trade on those short time frames though, there is a lot to learn about market sentiment by watching how short-term traders push prices between the daily open and close.
In this two-part series, we’ll be exploring recent chart action that shows the effect of these trades.
The Dreaded “Fade”
Click to EnlargeRecently, U.S. stocks have been fading (declining) into the close and erasing some gains or accelerating losses. In the next chart you can see these fades over last week. Traders will sell into the close when they are worried about the overnight market. They are likely concerned about Europe and Asia and want to reduce some exposure before those markets open and begin trading.
The fade has been particularly pronounced on Fridays when traders have to consider the risk they are taking through the weekend. This is an intraday trading pattern we have often seen precede a larger decline in the market. However, an important difference between what we are seeing now and how this pattern has played out in the past is that it usually appears when the market is still uptrending. That probably means that much of the potential decline is already being priced into stock prices this time.
Keep in mind that, when examined on an intraday basis, these subtle patterns can look dramatic when, in reality, they usually only represent shifts of a single percentage-point or less. It has also been common for patterns like this to emerge during earnings season. We are on the tail-end of the third-quarter reports, but there are enough big names left to have an impact on investor sentiment. The patterns indicate that investors are worried but not panicked yet. That is mostly in line with our own forecast. We are trading with a relative balance between bullish and bearish positions so we have exposure to both sides of the market for the next few weeks.
John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.