As Speculators, we use Tools of Context to assess the underlying “story line” of the market. There are four tools of context we utilize when attempting to understand the sentiment (story line) of traders intent: straight line support/resistance, accumulation/distribution, classical bar chart patterns, and divergence.
Each of these tools, used independently and/or collectively, gives us a picture of where capital is being deployed in a certain timeframe. We understand our place in the markets — we do not move markets — therefore we must determine where the market-moving-money is being deployed so that we may follow.
In the chart below, which is from Friday (07Jan11), we identified the market failing at 1265 and entering into a period of slight distribution heading into the lunchtime lull sesssion. As traders returned from lunch, so did the bidders, which ended the distribution pattern (breaking the straight line resistance point) & marched the market higher into the close.
Everyday, in everytime frame, the market tells us a story on where other trader’s intent lies. We utilize these tools of context as well as other intraday trading techniques to aid in understanding the story.