Chart of the Week – April 25, 2004
Brett N. Steenbarger, Ph.D.
Timing is everything in short-term trading, and I am always on the prowl for tools to assist timing on an intraday and swing basis. The indicators I have found most useful for short-term timing are the Efficiency Index and the Volume Intensity Index.
The Efficiency Index is shown below. Recall that it assesses the price movement per unit of NYSE TICK. A trending market is one that is high in efficiency, generating much upside or downside movement per unit of TICK. As trends lose potency, their efficiency wanes, and eventually it reverses. This is what happened this past week. The market could not sustain downward price movement per unit of negative NYSE TICK, and we rallied higher late in the week. Note that we are coming off levels in the Efficiency Index that normally mark momentum peaks in the market. Note also that peaks in the Index are occurring at lower price levels, suggesting that we are also not seeing efficiency to the upside.
The second useful short-term timing measure is the Volume Intensity Index. This is a normalized measure of the ES trade volume that goes into advancing versus declining price movements. The Intensity Index tends to peak and trough at momentum highs and lows, giving advance warning of short-term market turns. As you can see from the chart below, the Volume Intensity Index spiked lower on 4/20 and then snapped higher ahead of the broad market averages. Similarly, during the prior market top, the Intensity Index was well into a decline as the ES futures made their highs. Note in the current market that the Volume Intensity Index, like the Efficiency Index, is coming off levels normally associated with market peaks. If the market can work off these extremes while holding above the price lows of this past week, the stage will be set for a possible test of the bull market highs.
In an intermediate-term bull market, the Efficiency Index and Volume Intensity Index will make successive lows and highs at higher price levels. We have seen a higher high during the rise this past week. Sustaining a higher low on any corrective movement this coming week would further support the scenario of a test of the bull highs.
Next week I will identify my best intermediate-term timing measures and explain how these can be put together with the short-term timing tools to aid market timing.
Brett N. Steenbarger, Ph.D. is Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY. He is also an active trader and writes occasional feature articles on market psychology for MSN’s Money site (). The author of The Psychology of Trading (Wiley; January, 2003), Dr. Steenbarger has published over 50 peer-reviewed articles and book chapters on short-term approaches to behavioral change. His new, co-edited book The Art and Science of Brief Therapy (American Psychiatric Press) is due for publication during the first half of 2004. Many of Dr. Steenbarger’s articles and trading strategies are archived on his website, .