Know the Algorithmic Enemy

 | Apr 18, 2012 | 11:02 AM EDT  | Comments
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Stock quotes in this article:

aray

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nq

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mm

As I've been discussing lately, the market has a tendency to move in trend in one direction following the open. Yesterday we trended up all day after a flat open and today we are trending up again after the gap down. Last Thursday it was up all day while last Friday we were down all day.

I believe this is a function of algorithmic trading, which tries to exploit poorly-positioned market players who struggle to react each time the action shifts. They are caught by surprise when we have a big up day like yesterday and the programs push the action even more, which creates more chasing and more upside.

Simply being cognizant of these intraday tendencies is probably the best thing you can do. If you simply understand what is going on you can better deal with it.  Of course, as soon as it seems obvious things will likely change, but it helps to develop a feel if you study the patterns.

The key right now is that we hold above the opening lows. As long as we hold that level there is going to be some dip-buying interest. But the bears will push if we trigger stops at day lows.

I'm focusing on some good charts but remain skeptical of further market upside here.  As I've mentioned the big picture has some problems and I think the potential for a failed bounce is quite high especially given the poor reception for earnings so far.

A couple good charts that I'm trading this morning are Accuracy Incorporated (ARAY) and NetQin Mobile (NQ). Both are good volume breakouts. I'm also looking at Millennial Media (MM) as a bottom fish. This was a very hot IPO that has found support around $19 and is now trying to turn back up.

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