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These are critical in helping me to establish trades and staying on the right side of the marketINDEX RADAR SCREEN ALERT Looking at one index in a couple of different timeframes can be a handful to track. But what happens if you are looking at all these different charts and timeframes for three to four different indexes, a couple of sectors, and a handful of stocks? It can get confusing. However, knowing what's going on across multiple trading instruments and multiple timeframes gives a trader a much better feel for the overall markets. To that end. I've put together the following table to help me keep it all straight (see Fig. 18.7). This table gives me the opportunity to write in my chart interpretations in an easy-to-read, take-it-all-in-at-a-g lance worksheet. With the key indexes that I'm viewing on the far left, I can then go through the stochastics, MACD, RSI, and squeeze on all the different indexes in all the different timeframes. For stochastics and MACD. I have M, W, and D as for monthly chart, weekly chart, and daily chart. For the RSI and squeeze I have W, D, and S as headings for weekly chart, tfaily chart, and sixty-minute chart. I can then go through and see at a glance that the monthly and daily MACDs are in buys across the board, and the 60-minute RSIs are also in buys (as they are showing bullish divergences) as well as some of the daily RSIs. For the squeezes, I have N, R, S, and B representing neutral, red dot, sell, and buy. Neutral just means that there currently isn't a signal in place, nor is a .squeeze even in a heads-up. The red dot (which is the black dot in this book because of the black and white charts) means that a squeeze play is setting up, but hasn't yet fired. Whenever I see a market that is in R mode, I start paying close attention because I want to see when it fires off. Finally, after it does fire off, if it's a long squeeze, that is a B for buy, and if it is a short squeeze, that is an S for sell. Il may seem like a lot of work, but it doesn't take long to do. The monthly and weekly charts do not change very oftenmost of the attention is spent on the daily and 60-minute charts. 1 update this table each evening after the stock markets are closed, and post the results in my daily newsletters. One of the reasons I started sending out newsletters in 1999 was that it forced me to keep these tables updated each and every day, no matter what else was going on in my life. By having everything in place, I can see when one index is breaking down before all the others, like the NASDAQ did in early 2005. When one index starts to buck an overall trend, that is a heads-up that the rest are setting up to roll over as well. SECTORS AND KEY STOCKS RADAR SCREEN ALERT This radar screen alert is the same as for the indexes, except that this will have key sectors and key stocks that I'm watching (see Fig. 18.8). It is set up just the same and works just the same. When markets turn, you can see it first in the key sectors and stocks that make up the index. Also, if I'm looking for trading ideas and I can see that the semiconductors, for example, have just fired off a short squeeze, it is fairly easy to figure out where I should go looking for short plays. Both these radar screens are included in the daily newsletter I write. Traders who want to do these themselves will benefit from the exercise. Traders who simply don't have time or like to have a second opinion can get these daily readings from my own research. I like to watch the daily volume in the cash indexes to see how much activity there is going on behind the moves. Each day I take the volume and key it into an Excel spreadsheet like the one shown in Figure 18.9. What I'm looking for is the strength or lack of strength behind the move. If the markets push higher, I've got to see two things in order to validate the move: First, the volume has to be greater than it was the day before. Second, the volume has to be greater than the 50-day average volume. The bigger the difference in these numbers, the better the odds that the move is the real deal and the start of something big. Conversely, if the markets have a big day to the upside and the volume is lighter than that of the previous day and lighter than the 50-day average volume, then the more trouble I have believing in the move. The lower the actual volume in relation to these other numbers, the greater the chance that the move was a mere probe and is going to reverse violently at the drop of a hat. Think of it this waya car going uphill on a full tank of gas has a much better shot at making it than a car that is running on fumes. High-volume days show the markets riding on a full tank of gas, while low-volume days show the markets riding on fumes. THE KEY PRICE LEVELS TO KNOW EACH AND EVERY TRADING DAY There is a specific set of numbers that I want to be aware of every day, because these are critical in helping me to establish trades and staying on the right side of the market. I like to follow most of these price levels in the S&P futures, just because it is the biggest and broadest index and tells me a lot about what is going on in the market. However, I also like to do the same in the Dow, NASDAQ, and Russell futures. For the sake of this example, we focus mostly on the S&Ps, but bring in the other indexes for part of it as well. The first thing I want to look at is today's close in relation to the prior three-day highs and lows. Did today's price eclipse either of these levels or was it contained within these levels. If it eclipsed either of these levels, then we have a trending market. If it stayed contained in these levels, then we have a trading range. It is very important to always understand what type of market environment you're currently in, and this is one of the easiest and most accurate ways to tell. If today is Thursday and the close is 1050.50t then you just look at a daily chart and review the highs and lows for Wednesday, Tuesday, and Monday. Did Thursday's close make it past these levels, or was it contained within these levels? I also like to note where the close was in relation to the day's range. Did the market close at the top or its range? If so, there is a good chance for upward continuation tomorrow. Did it close near the bottom of its range? Or did it close in the middle-indicating massive indecision. Next I want to see where the highs and lows are located for the prior day, prior week, and prior month. These are all important support and resistance levels, and [ want to know where they are sitting in relation to current market prices. 1 like to note if we are trading above any of these levels, which is bullish, or below any of these levels, which is bearish. If we are stuck in the middle, then I call that neutral. After this I'm looking at HOLP and LOHP levels Any moves above or below these key levels are a major opponunity. I also like to note whether we are trading above or below these key levels, because that is also bullish or bearish. The next number 1 want to know is the number of days in the current trend. The reason for this is that many trends reverse after three days, so I want to be aware if we are in the third day of a trend. Also, after six to seven consecutive days markets just lose their gas and fail to move any further. I want to know about this so Tni not the last one jumping on the bandwagon. Finally, I want to know where all the open gaps are sitting. When we talk about open gaps filling within 5-10 trading days? It's important to know where those gaps are located. PIVOT NUMBERS, OF COURSE We have talk extensively about pivots in Chapter 7, so I'm not going to explain again why I look at them. However, I do like to have them handy so 1 can look at them before the trading day. By placing them in this easy-to-use Excel spreadsheet (see Fig. 18.11 )t 1 can quickly glance at these levels and see if any of them line up with the key price levels we just talked about. Is the daily pivot also lined up with an open gap? That is important because that level will be particularly strong on that trading day. In addition to the daily pivots, I'm looking for confluence among the weekly and monthly pivots with my list of key numbers. KEY SENTIMENT READINGS We talk about the put-call ratios in Chapter 5.1 like to record where it closes on the day, as well as note where the 10-day moving average of the put-call ratio is trading. While the daily number is good for gauging market direction on that particular trading day, the 10-day moving average pinpoints major market turns. The following chart (Fig. 18.13) from Decision Point shows the key turning points in the markets based on the reading of the 10-day moving average on the put-call ratio. This is data that you can get from TradeStation, but I just subscribe to www.decisionpoint.com and get it there. It's $20 a month and provides nearly every key historical technical study on the planet, and it's where I spend a lot of quality time each weekend shows that whenever the put-call ratio gets near 1.00, this excessive bear-ishness in the form of put buying puts a bottom into the market. All these shorts then spend the next several weeks frantically covering their positions. The opposite is also true. When the crowd gets frothy and overly bullish, driving the PC ratio to 0.70, the market is overloaded with bulls and either halts its advance or rolls over. I also like to look at AAII investor sentiment, because this is a good gauge of how traders are feeling about the current market. This is also a contrarian indicator When there are too many bears, look for the markets to bottom out and reverse. When there are too many bulls, look for markets to take a breather or roll over. Figure IS. 15 is a chart is from April 5, 2005, the day I'm writing this. You can see that we are at excessive bearish levels. This tells me that the market is looking to bottom out and starting to beat up on all the shorts. The other item I have listed in Figure JS.I3 is the daily arms index reading, which is shown in Figure 18.15. This is the indicator we discuss in Chapter 5, and I'm looking for readings of over 2.0 or under 0.50 as key action signals. IT'S A GOOD IDEA TO KNOW WHAT THESE PEOPLE ARE DOING The last key number in this series is the NYSE member net buy/sell numbers* which I get from www.decisionpoint.com. This shows whether NYSE members are net long or short. If they are net long, it is because they have very strong reasons to believe that they will be able to distribute their holdings to the public at a higher price. If they are net short, they have strong reasons to believe that they will be able to buy back their inventory at a cheaper price. These people make a lot of money, and I like to follow what they are doing. Figure 18.16 shows a couple of huge readings that came into play over the past few years. The first was during the March 2003 bottom. These people loaded the boat with a record amount of longs, Lo and behold the markets moved significantly higher shortly thereafter. They sold their inventory all the way up and then reloaded the boat in October 2003 just before the next leg higher. Finally, in September 2004 they loaded the boat again with a record number of long positions. The markets chopped around for six weeks and then rocketed into 2005. If these people are loading the boat one way or the other, I want to know about it. The final things I want to know about are any key economic and earnings reports that are coming out on the day. I'm not concerned with every company that is reporting, but I want to know if a big one like MSFT or IBM is coming out with numbers after the close. I also want to know when key economic reports are going to be hitting the tape. There are two main reasons for this. First, if traders are waiting for a key earnings or an economic report, they will generally stand aside to see how the market reacts. This means that the markets are going to be choppy, and [ don't want to be trying to catch trends intraday if the markets are going to be choppy. On these days I will focus on fading pivots levels and fading extreme tick readingsthese are the best plays I've found to follow on days where the trading is light and choppy. The second thing I'm looking for isn't the actual number itself, but how the markets react to it. The number, whether it is earnings or economic, has no importance. What is important is if the market sells off on the news, rallies on the news, or ignores the news. The market is efficient at pricing in information before it ever comes out. In addition, large firms have access to the same research as the government, and they hire an army of economists to figure out what the numbers are going to be before they are announced. These reports mean little in the grand scheme of things because they get priced in well before the actual number is released. The moral of the Mory? Find a couple of setups and stick to them and don't get sucked into the waiting for the next report game. Just because it's hyped on CNBC doesn't mean it's a good idea to place a lot of importance on it. WHAT DOES YOUR MOTHER THINK? My final piece of research has to do with random comments 1 hear from people who are not in the industry. A classic example is a recent conversation 1 had with my mother, who mentioned that she had read about eBay in Business Week. Was it a good time to buy? Normally in situations like this 1 just run out and look for a short setup on the stock, but, because it was my mother, I told her I would hold off on buying it for now. Then 1 shorted it, A few weeks later it got killed on earnings. Anything that is just now hitting the ears of the nontrading public is a major signal. This typically means that the people who are usually the last to know are thinking about finally getting in. I can't think of a better topping signal in my arsenal of trading tools. As I'm writing this, there is this same flurry of activity going on in real estate. More and more random people are talking about things like buying parcels of land sight unseen from out of the back of magazines because real estate is doing so well. It's almost at the same ferocity as when Beanie Babies topped out and crashed back to earth. Pretty soon we are going to start seeing major magazine covers talking about how everyone is making money in real estate. Shortly thereafter, prices will start to soften. And no, it's not different this time. |
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