The New York Lunch

by Charles Holt, CTA

At 12:00 noon in New York many traders on the floors of the stock exchanges break for lunch. This exodus to fulfill a natural need substantially reduces trading volume. This allows a number of reduced volume strategies to be played out in the markets by specialists and market makers.

There is one rule about the lunch hour: trust nothing you see. However, if a strong trend is in effect, a new impulse for this trend can begin at this hour. In the event that the day’s trend is not clear, counter-trend moves are more likely to occur here!

Divergences

Excellent trading signals can be derived from divergences of the S&P 500 with other indicators based on market internals. Included is this class of indicators are:

1. Dow Industrial Average.

2. Dow Transportation Average.

3. TRIN, a volume weighted approach applied to advancing and declining stocks.

4. Tick, the net number of issues on the New York Stock Exchange whose last price change was up or down.

5. S&P Premium, the difference between the underlying cash index and the nearby S&P 500 futures contract.

The S&Ps often exhibit either a leading or lagging effect with the indicators above. The questions to ask yourself about the S&P/indicator relationships are:

a) If one indicator is making a higher low in relation to the S&Ps, what does this mean?

b) If the indicator is making a lower high relative to the S&P 500, what does this mean?

c) Is the market exhibiting strength in a weak bond market?

d) Is either market maintaining either its price at a very high level or conversely a very low level while the other market is exhibiting divergence?

e) What is volume doing at the second divergent point?

About the Author:

Charles Holt
Daytrader's Bulletin
http://www.daytradersbulletin.com
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