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5 Steps to Analyze Any MarketPublished: 9/13/2012

By staff at NetPicks.com

The staff at NetPicks.com explains one way to determine whether a trend is for real or will fizzle out.

We want to run through an example of how to analyze the markets in cont ext to help make s ense of daily

moves.

Well use the move in the E-mini S&P 500 on Thursday, September 6 as an example. Weve chosen this daybecause it was a day when many traders were having a difficult time understanding why the markets wereshooting up in the face of global uncertainty.

Once yo u realize what is going on, its certainly not rocket science to spot this kind of thing. On the other hand, many do understand it, yet fail to incorporate this valuable context into their trading plan.

Ill explain my thoughts leading into the NYSE open and why we did not fade the move higher. Heres what welook at:

1. Balance RangeSince August 7, the market had been balancing (with on e exception on August 21 where there was a spikehigher). This simpl y means it was m oving sidewa ys rather than d irectionally over the course of several days.

There was a broad perception of value where "unfair" highs and lows were in place, and retests of thesebrought in opposite trading activit y to return price to the m ain part of the balance. What tends to happen withbalances is they build up tension over time, and when they break, price often moves fairly dramaticallyafterwards.

Specifically in this case, the macro context was that the market was in summer trading mode and wasawaiting specific events before committing to a direction. The first event was the ECB rate decision and pressconference due on Thursday.

2. VolumeVolume does not always change our views on the market. However, it does sometimes confirm them.

Over the past month, volume had been significantly lower on many days than we had generally seen earlier inthe year. Again, summer trading and lack of willingness to commit to a direction before certain unknowns

were cleared up.

3. Risk EventsThe unknowns which the market was waiting for were basically two things: will Europe be OK, and will theFed embark on a course of further stimulus?

The first question is yet to be fully answered in that Greece is not out of the woods and Germany hasconstitutional issues to contend with in its support of Europe. The ECB meeting was an event at whichpeople were anticipating a commitment to support, and this is what happened.

The jobs report on Friday was seen as a possible indicator of whether the Fed might have to act with further stimulus this week at the FOMC meeting. Previously, it had been indicated that they were watching theeconomic indicators (of which the jobs report is key) for cues to the necessity for a new QE program(Quantitative Easing).

4. Confidence on OpenThe next part of the picture was the fact that the market was looking like it would gap up on open. That is, itwould open up higher than the prior sessions close and also its high.

Often, gaps are at the very least tested into and possibly closed as the market attempts to verify the validityof the change in price. On Thursday, it was important to monitor for signs of confidence at open. What it did

RobertPrechter

Larry Gaines

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w y w v w .

In turn, this now acts as a good technical reference point if the market were to revisit these price levels againat some point in the future. But the context was that there was high confidence on open, and this tied in witheverything else to suggest a breakout from balance and possibly a persistent trend for the day.

5. Small Selling RotationsThe final aspect to reading the market was that any move lower that happened throughout the course of theday was very small indeed.

The biggest move lower happened late in the session and was 3.25 points, or 13 ticks. For those who donttrade ES, I can tell you that this is pretty small, especially considering it was the biggest move lower! Small

counter moves are particularly common on strong trend days.

Given the combination of technical and macro context with the addition of understanding the trading activitywithin the framework of this context, it should have been quite apparent that Thursday was not a day to try togo short the ES. In fact, rarely is it so clear that when it is, it is crucial to take advantage of such marketmoves.

This article was written by the staff at NetPicks.com .

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