Identifying who is in control of the market will help avoid trading on the wrong side of the market. This translates to measuring buying or selling pressure in the market. Market control is fairly obvious during a trend day or days with strong internals. Trader may look for convergence / divergence in the market and trade accordingly. Trading low volatile days with weak internals is tricky , unless trader can identify who is in control of the Market. Most of the time low volatile days will have weak internals with highs / lows not supported. Trader may get tempted for fading the highs or lows observing the divergence in the Spreads. One important thing to consider before fading the extremes is to figure out whether buyers or sellers are in control of the market.
Who is is control ?
Monitoring price / volume action and market internals can provide good insights into who is in control of the market. During a sell off, if high volume wide range down candles are unable to get follow thru, it implies that selling is getting cut off. It also implies that part of that high volume was indeed buying. Usually during a sell of with broad activity, TICKS will hit -600 and below ( +600 and above for buying ). If TICKS are not hitting -600 during the large volume down candle and the subsequent down candles, if any, it clearly implies lack of selling in the market.
But there is divergence !
Since the internals are weak, the upward move after the sell off may still exhibit divergence in the spreads. For example, spreads may not take out the morning highs while futures made a higher high. Since the TICKS and price action already pointed to lack of selling, it is not a good idea to short the market purely based on divergence in the spreads.
Consider the following example.
ES sold off in the morning with high volume wide range dark candles (marked in the figure below). Even with the huge volume, the selling cut off and price stalled at 1638 range. The long lower shadow on one of the high volume candle indicated buying pressure. During this sell off, TICKS couldn’t even make a -600, clearly indicating lack of broader selling.
Sell off in ES got stalled at point 1
TICKS indicated lack of selling. This pushed the price higher even with marginal buying.
Even-thou divergence in the spreads existed, price continued to grind higher due to lack of selling in the market.
Divergence in ES Spreads. None of the highs were able to take out the morning highs.
Price will eventually correct when such divergence exist in the market during the current session or next few sessions. For day trading, it is important to identify who is in control of the market and trade with them.