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

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

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.

Related Articles
  1. Professionals

    How to Protect Your Portfolio from a Market Crash

    Although market crashes are usually bad news for your portfolio, there are several ways to minimize losses or even profit outright from market movement.
  2. Investing Basics

    3 Key Signs Of A Market Top

    When stocks rise or fall, the financial fate of investors change, as well. There are certain signs that can reveal a stock’s course, and investors don’t need to be experts to spot them.
  3. Investing

    Asset Manager Ethics: Rules Governing Capital Markets

    The integrity of the capital markets needs to be kept at utmost importance for all investors. This article shows how to maintain the integrity while investing.
  4. Investing News

    6 Signs You Are Addicted To Investing

    An addiction to trading can ruin your life and relationships. Not to mention the monetary costs. There are telltale signs that you've gone too far.
  5. Mutual Funds & ETFs

    Using Short ETFs to Battle a Down Market

    Instead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
  6. Markets

    Is Another Bear Market Ahead?

    With market volatility recently reaching its highest level, investors are questioning what the outlook is for U.S. stocks in 2015 and beyond.
  7. Professionals

    How to Know When to Pass on an Investment

    Knowing what to invest in is important, but knowing what not to invest in is equally important. Here's how to decide when to walk away.
  8. Investing News

    Understand the SEC Rules on Equity Crowdfunding

    The SEC's adoption of equity crowdfunding rules, initiated under the JOBS Act, enables small investors to invest in companies that show early potential.
  9. Investing Basics

    Tax-Efficient Strategies For International Clients

    In a globalized world, international clients seek to diversify holdings by accessing U.S. markets. Creative strategies will help optimize tax positioning.
  10. Professionals

    Do Bear Market Funds Make Sense for Investors?

    Bear market funds have their place. But are they right for individual investors?
  1. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  2. How can I hedge my portfolio to protect from a decline in the food and beverage sector?

    The food and beverage sector exhibits greater volatility than the broader market and tends to suffer larger-than-average ... Read Full Answer >>
  3. How attractive is the food and beverage sector for a growth investor?

    The food and beverage sector is attractive for a growth investor. The sector's high degree of volatility means it tends to ... Read Full Answer >>
  4. What techniques are most useful for hedging exposure to the insurance sector?

    Investing style determines the best hedging techniques for the insurance sector. This sector comprises three segments, two ... Read Full Answer >>
  5. What is the formula for calculating the receivables turnover ratio?

    To calculate a company's accounts receivable turnover ratio, start with the net receivable sales for a given time period, ... Read Full Answer >>
  6. How can I hedge my portfolio to protect from a decline in the retail sector?

    The retail sector provides growth investors with a great opportunity for better-than-average gains during periods of market ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  2. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  3. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  4. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  5. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  6. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!