For the past two months we've stressed the
fact that, to be successful at this game, you must trade
"what is," not "what should be."
We've furthered that by looking at how the market reacts to news. Bad
news followed by rising prices is a very good sign. Good news shrugged
off with declining prices is a poor sign. Using these two concepts as
our base to make decisions has led us to be on the long side of the
market since late September. In hindsight, it was not difficult. Week
after week, the market rose in the face of negative news, and was led
by industries that told us the economy was healthier than anyone could
conceive.
The above is not written to stick out our chests and to show you how
smart TM is or how smart Connors is. It's written to encourage you to
re-read the past few months' archives found on the right hand column,
and look at the analysis that was done along the way. What clues were
there that showed up? Who on the site pointed out these clues? How was
the analysis done? What indicators were looked at? Why were they
looked at? How can I use this analysis today and in the future? Can I
apply this analysis to other markets? Etc, etc, etc.
What has occurred since September is not an isolated case. The makings
of all major bottoms in all markets in all of history are accompanied
by the doom-and-gloom crowd who preach the end is near. The preaching
is usually led by the self-proclaimed "givers of truth,"
whose main qualification is they got good grades majoring in
journalism. They look at the market for the way it "should
be," based upon their personal biases instead of looking at the
market for what it is telling them. As the ($SOX.X | Quote | Chart | News | PowerRating) streaked
higher and retailing stocks hit new highs, they smugly point out that
PE ratios are too high, and how bear markets don't end in a mere 18
months. As brokerage firms rise 20, then 30 and then 40%, they keep
looking backwards and talk about layoffs and lack of investment
banking business last quarter. And the traders who understand that
markets anticipate (and usually correctly anticipate) the future are
the ones who today have the honor of locking in the substantial gains
that now exist because they simply let the market talk to them instead
of vice versa.
If you only learn one thing from being a member of TM, it should be
the above lesson. It has guided the best traders for many, many
decades, it will guide the best traders in future decades and when you
apply it correctly, it will be your beacon (and money source) for the
rest of your life.
This Week: Two Points To Watch
Last week we discussed the fact that the market, as measured by
historical volatility, was likely to have a large move. On Tuesday and
Wednesday we saw that large move, as the Dow exploded in the direction
of its trend (which it does about two-thirds of the time from
low-volatility situations) and rose over 350 points. This took us into
Wednesday night, with multiple CVR
sell signals, which led us into Thursday's and Friday's declines.
Where does that leave us for this week? With two levels to watch for.
The first is the bottom of the trend line that exists from the lows in
September, up through the early October lows and through last Monday's
lows. If we break that trend, it may be time to cash in some chips and
start looking at the downtrending lists on our Indicators
page. The much-prettier scenario would be for the market to
loop around and take out Wednesday's highs on heavy volume. That would
be the green light that the path of least resistance remains higher.
Both levels are close, so you may want to play close attention to them
early in the week. And with technology and consumer stocks still
dominating Mark
Boucher's nightly lists, that's where your stock selection should
continue to focus on should we take out Wednesday's highs.
Nightly To-Do List: Short-Term Trading
This is the third part of my weekly series on how to best use the TM
site (Parts 1 and 2 are archived in the November
25 and December
2 columns). This week we'll look at how to put together a nightly
to-do list if you are a short-term trader.
1. Start each evening looking the Market
Bias Indicators. Because you are trading over a 2-10 day period,
and likely trading both sides of the market (long and short), these
biases will guide you as to which side of the market you will likely
want to be on over the next few days. For example, as mentioned above,
we had multiple sell and downward bias signals Wednesday night and
Thursday night. The easier money on Thursday and Friday was made on
the short side, as the overall market declined.
2. After looking at the market bias, go to the TM Pullback
from Highs list and the TM Pullbacks
From Lows list, found in our Indicators
section. The names on these lists are computer generated, and they are
ranked by strength of trend. The top names on the uptrending lists are
the strongest stocks which just hit new short-term highs and have
pulled back. The top names on the downtrending lists are the weakest
stocks that recently hit new short-term lows and rose. These are your
candidates to focus on if and when they resume their longer term
trend.
Now, let's go one step further. NOT ALL PULLBACKS ARE CREATED EQUAL.
The very best pullbacks are "first stage pullbacks." These
are stocks that have risen sharply with no rest, and are now pulling
back for the first time. If you only trade one type of pullback,
these are the best to focus on. And, this strategy is further
improved with good tight stops, preferably near the bottom of the
swing low (swing high for shorts).
The other list to look at nightly was
created by Kevin Haggerty. It's his Change
in Direction list. These are stocks that made very short-term
highs and lows and have now turned. Let's go one step further on this
one, too. Ideally, you want to focus on the strongest trending
stocks on this list. For uptrends, look at the ADX and high RS
readings. For downtrends, look at high ADX readings and the DMI
pointing down. This will assure you of entering the strongest names in
the direction of their trend. This weekend, no names qualify. The
trend on most of the stocks on tonight's list is pretty weak. But
that's only this weekend's list. The names change daily, and your
patience will be rewarded with solid names to look at as they pop up
in the future.
Finally, end your night reading Dave Landry's column. Dave is the
author of Dave
Landry On Swing Trading and understands short term trading
about as well as anyone I know. His approach is simple to follow, and
easy to understand. And, not only will Dave point out to you the best
stocks he's looking at and educate you in the process, you will also
get to learn about his kids, family, pets, and many other personal
details that few others in this world have any interest in talking
about.
The above game plan (minus Landry's personal life) will give you a
solid base to work from every day. You will be able to combine market
bias, with the best trending names that have pulled back and are prime
candidates to resume in the direction of the trend. The key to
successful short-term trading/swing trading is to be in the
right names. And the lists mentioned above give you these names
nightly. If you need further help or have any questions on the above,
please feel free to e-mail me at lconnors@tradingmarkets.com.
If You Trade
Options...
CBOE approval has arrived and Saliba
Options is now live. Tony's "Real World Trading For Novice
Options Traders" is the first course launched. I recently took
the diagnostic test and then the course, and I think it is mistitled.
The course is definitely for new options traders but by half way
through, it begins to really dig in. And Tony has gone one level
beyond. The last 35% of the course is real-world scenarios played out
with many of the "what ifs" you encounter once you enter an
options position. I've never seen anybody do this to the level that
Tony has. Plus, his quizzes and diagnostic tests along the way further
reinforce whether or not you truly understand how to use the material
and trade options in the real world with real money. Also, Tony has
launched two trading services at the same time, his three-times-a-day
daily options alerts and his weekly options newsletters. All this can
be found on SalibaOptions.com.
And don't forget, Tony is now writing an options column 3x/week for
TM, published near the opening on Monday, Wednesday and Friday.
Until
next week, best of luck with your trading!
Larry
Connors and Brice
Wightman
Larry Connors
is CEO and co-founder of TradingMarkets. He is also the author of four
books on trading, including Street
Smarts,
co-written with Linda Raschke, Connors
on Advanced Trading Strategies, and his latest release, Trading
Connors VIX Reversals.
Brice
Wightman is a Market Analyst at TradingMarkets.com.
