When Is A Bull Market Not A Bull Market?

By Cory Mitchell AAA

Day traders, who trade the markets each day, often notice things about the underlying dynamic of the market that go completely unnoticed by longer-term investors (and even other day traders). One such thing day traders may notice is when the market is in an overall up trend (these concepts also apply to applicable downtrends), but intraday stocks seem weak or flat. Day traders may mistakenly use trend-following strategies under the assumption the market is trending, but intraday it is not, and therefore they need to adjust the strategies employed to take advantage of the real intraday dynamic. Markets are often not what they appear, and understanding when a bull or bear market is not what it appears can create more profitable trades for the trader because they will be using strategies suited to the actual intraday action.

The Bull That Was Not a Bull
A recent example of this is the bull market rally from the March, 2009 lows. The market moved higher, using SPY (SPDRs S&P 500 ETF) as a gauge, gaining over 63% by the end of that year. Figure 1 shows the market moving higher in percentage terms.

Figure 1. SPY: Daily Chart
March 9, 2009 - December 31, 2009
Source: freestockcharts.com

While this is an aggressive gain from the lows, a day trader trading each day may not have felt she was trading a bull rally. Why? A large percentage of the gains came from gap opens, and overall buying during the day was relatively small, accounting for only 2/3 of the gains. This is still significant, but from September through the end of the year, intraday buying only accounted for slightly more than .25 of the percentage gain. From the lows in March to the end of 2009 intraday (close-open) action accounted for approximately 43% of the overall 63% gain, and from September to the end of the year only accounted for 3.1% of the market's 11% rise. This means, especially towards the end of the year, a large majority of the upside action was not available to be captured intraday, but rather was only capturable by those trading overnight and by investors. (Learn how to profit from gaps in Playing The Gap.)

It is important to note that the tendency was still higher; of the 208 trading days analyzed in this example, 56.7% had positive returns, but traders likely found that intraday uptrends were not as common as one might expect from looking at a regular daily (Figure 1) and seeing the aggressive uptrend. Since the only factors the trader can actually use in trading should be factored into a trading plan, the day trader should have been using strategies that took advantage of only a slight tendency to trend, or even use a range trading strategy intraday with a slight bias towards long positions (For more information, see: Trade Simple, Trade Smart.)

Seeing the Truth Quickly
One can keep track of intraday gains using historical prices, and then compare the statistics to overall market gains (which include gaps); this will give day traders a definitive look into how the market is acting intraday, compared to the possibly false impression the charts are giving because of gaps. This will provide the most detailed information, but there is another more visual way to track how the market is moving intraday, relative to an overall daily trend.

Regression lines are not a common tool for many traders, but they can be a valuable tool for seeing where the majority of price action or the "line of best fit" is taking place. When intraday regression lines do not jive with the longer-term regression line, our strategies need to be adjusted because intraday movement is not what the longer term charts (regression line) would have us believe.

In Figure 2, we have another chart of SPY (15 minute). In this chart, a regression line is shown for price action between December 18, 2009 and December 31, 2009. The large (nine-day) regression line shows a very strong trend higher, and one would be inclined to believe that buying during the day in such a market would be advantageous. That is not necessarily so.

Figure 2. SPY – 15 Minute.
December 18, 2009 - December 31, 2009
Source: freestockcharts.com

A regression line is added to each individual trading day over this period. For the nine trading days shown, once the market actually opened, only two trading days (December 23 and 24) had buying equal to or greater than what the longer-term regression line portrayed. The other days were relatively flat or overall had more selling than buying for large portions of the day.

Regression lines filter out a lot of information, which can be a disadvantage, but it can be an advantage when we need a very basic view of where most of the price action is occurring intraday. As we can see from Figure 2, when we simplify the intraday movements with regression lines and compare those lines to the overall trend, which appears very strong, the intraday regression lines tell a different story. (For more information on regression, check out Regression Basics For Analysis.)

Summary: Know What Market You Are Trading
During some bull or bear moves in the stock markets, investors will be going with the trend, but day traders may find they cannot. A glance at a chart can be deceiving. If a long-term chart shows an aggressive uptrend, but a closer look reveals the stock is gapping higher each morning and moving sideways throughout the day, the day trader must trade the stock or market accordingly. Trying to capitalize on upside movements will be futile if the stock has shown a propensity to move sideways during the day, even though it is moving higher overall.

The aggressive rally higher through most of 2009 was an example of a rally where many of the gains can be attributed to the market gapping higher, and where a significant portion of those upside gains were not accessible to day traders. Traders can use historical price data or they can use regression lines to see intraday tendencies compared to longer term trends.

For an introductory look at day trading, take a look at Day Trading Strategies For Beginners.

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