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Towards a better understanding of explosive moves
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Towards a better understanding of explosive moves

  #1 (permalink)
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Towards a better understanding of explosive moves

I am trying to better understand explosive rapid moves (i.e., less than a second) of price which show up on a one minute candle as wicks or a solid bar. A one minute chart is shown for IWM.

First I identified support and resistance at the following times.

Resistance line(purple) drawn at 10:46 at 109.61
Support line (purple) drawn at 10:43 at 109.43

Then I observed the following:

1. Large volume of 591,000 shares moves price only 2 cents
2. Next candle – tail is quick run of 5 cents to 1 cent above resistance on 92,100 shares.
3. Very quick green candle ran up 10 cents on only 39,500 shares
4. Tail down – down 6 cents to 1 cent below support line on 24,700 shares

Notice that after the very high volume bar which only moved the price 2 cents, there was a lower volume bar with a rapid upper wick that move 1 cent above support. I called this a buy stop run. There was a similar sell stop run at (4).

The candle at (3) (11:22 am) was an explosive up run of 10 cents (less than 1 second). It moved 10 cents even though the volume was only 39,500 whereas previously 591,000 shares moved a candle only 2 cents. I labeled (3) as HFT for High Frequency Trading algorithm. When I was observing this candle I also had up a time and sales filtered to show blocks greater than 10000 shares, and there were no large blocks, so this was done with small share trades.

I invite any comments further explaining the above behavior. In particular, how can the price go up so rapidly and large on low volume? Is this an HFT algorithm? Does the market maker do this or can a large trader do it on his own?

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  #3 (permalink)
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IWM moves about 1.1% per day on average, 2.5% on week per average, 5.3% per month on average. You are looking at a 1-minute chart that encompasses only about 90 minutes out of the day best I can tell. You are zoomed way, way in looking for reasons behind a move that lasts just a few seconds from this perspective.

I often find if you zoom out things will be more clear. On a small 1 minute chart things may look random but on a 1 hour chart there may be more visual clues where players from other time frames are stepping in and making trades. Just because you are seeing volume represented by a 1-min chart doesn't mean the person who made that trade is thinking anywhere near that small. Of course reverse could also be true, but not practically when you are already looking at a 1-min chart -- most participants will be far, far bigger.

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Candle Tails, High Volume spikes

I agree with Big Mike in terms of the one minute chart. It will drive you nuts! Back out and look at at least a 5-minute chart and then when you see curious action on a 5 minute chart back out to 30 minutes and get a better long term perspective. Back out even further for context on a daily basis.

For the one minute chart, here are my observations:

1. Look at the diminished up volume (demand) after 10:43. The bulls are getting tired.
2. Look back at the 10:29 down volume (supply). There were willing bears at that time frame and this is a clue that price is weakening.
3. Than there is the high volume spike of 591k. Price went nowhere. The clues are already in that the bulls are tired, supply was encountered prior to the highest demand(#1 comment above), the resistance line held. There was no reward for all the effort in that high volume spike.
reward= amount of price change
effort = amount of volume
4. At 11:02 you see serious penetration of previous resistance @ 109.54 then a weak move by the bulls to push prices up. Weak in terms of volume. Than the bears finally make their point.

The shorting opportunity occurred on the weak move up by the bulls at 11:22am.

The same analysis can be done on higher time frame charts. Before shorting at 11:22am, checking the higher timeframe charts would give you the context you need.

5. The tails are just smart money testing price areas. If they find no takers, then price continues in the direction it was headed.

Looks like you are using an overbought/oversold type of volume plot or buy pressure/sell pressure. I find that a straight volume plot is much better. If you watch time and sales, when those tails and volume spikes occur, you will see that many times those transactions are occurring above the bid or below the ask. From my limited knowledge of market makers, I don't see how these transactions could be anyone but a market maker making those kinds of trades to test the market and see where the bulls and the bears have their stops or are willing to push prices higher or lower. Volume spikes alone, are not of much value in the overall analysis imo. What the market does after the spikes is more valuable and especially whether more demand is coming in or more supply is coming in afterwards. A lot of times I see that after these spikes, price will make one final lunge at the high or low and then it reverses.

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