Since the collapse of the stock market in 2008, the entire internal Market Structure has been undergoing massive changes. Much of the reconstruction was due to a flood of new regulations, restrictions, and compliance requirements for both the Buy Side and Sell Side Institutions. This altered how both Institutions now influence price and therefore technical patterns that retail traders had been using on stock charts.
Relational Analysis™ is the evolution of Technical Analysis that incorporates more data into the stock chart, to enable retail traders to keep up with the onslaught of changes that are often invisible to them due to their constrained position within the market. Most of the time retail traders deal directly with their online retail based brokers. These brokers fill the retail order internally from their inventories if the stock order is for a big blue chip or popular stock, and then send orders they are unable to fill through a known High Frequency Trader HFT venue. This practice is being investigated by the Securities and Exchange Commission SEC but until a decision and ruling is made, puts retail traders in higher risk as they enter or exit a trade.
Relational Analysis provides that fill of information which bridges the gap between what retail traders hear about on their retail side news feeds, and what is really going on inside the market in Dark Pools, HFT zones, and professional traders trading venues. The first goal of any Relational Analysis is to interpret who is in control of price, which gives you several pieces of vital information.
Knowing which Market Participant controls price tells you with a high degree of probability the following information:
- How price will behave in the near term due to how each group moves or doesn’t move price. Whether that group impacts the current short term trend or not.
- How long the trend will last. Sustainability of the short term trend for intraday, day, and swing or momentum trading is a crucial piece of information. Some Market Participant groups sustain a trend for a long period of time, others for a few minutes.
- The risk of the trade. Sometimes price action alone with MACD and other popular indicators will give buy signals, just as a stock is about to top. Risk factors are dependent upon who is controlling price, because this provides invaluable information regarding what level of resistance will stall or reverse price, and which support levels will hold price.
Below is a chart example of Nike, Inc. (NYSE:NKE)
There is plenty of Relational Analysis that can be done on this chart. The first is the HFT spike of Volume that caused the gap. The question is whether this was a true breakaway gap, or a running gap. Many times HFTs enter and control price at a trend level where the risk of a reversal is extremely high. Understanding the relationship between HFTs and the smaller funds who use Volume Weighted Average Price VWAP orders, helps retail traders see this risk factor. Volume declining as price moves up in a volatile pattern, is also relational to the smaller funds VWAP orders triggering and then fading away due to lower capital reserves.
Another aspect of Relational Analysis is the TechniTrader Quiet Accumulation TTQA which is intended to reveal who controls price as well. The TTQA is showing a Dark Pool Quiet Rotation pattern as the stock moves up. The Dark Pools will sell into a stock that is rising on HFT and Smaller Fund VWAP runs, triggering quietly in the background to avoid disrupting the run upward. The Dark Pools on this chart are selling as the stock moves up.
NKE has seen a steady decline in Percentage of Shares Held by Institutions PSHI, dropping over time to below 70% which is the percentage that distinguishes stocks at much higher risk of a top for a big blue chip company. Therefore when considering trading NKE to the upside at this time, retail traders must take into consideration the higher risk of Dark Pools selling as smaller funds are buying on lower volume. This can shift quickly the bias and trigger HFT action to the downside.
Trading with the smaller fund VWAP orders requires an understanding of how and why this group moves price. That way the retail trader can know in advance what to expect in the run, as well as where and when profit taking and rotation will turn the stock downward.
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Martha Stokes CMT
Instructor & Developer of TechniTrader Stock and Option Courses
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