Industry Flow – April 15

Apr 14, 2007: 10:29 PM CST

From time to time, I will post results of my scans regarding industry and sector analysis.

How to read these charts:

  • Colors are read from right to left as money flows into an industry (red on right to green on left)
  • The numbers – 100 for example – mean percentile of industry groups (in terms of institutional money flow)
  • The implications are that industries that are strong will remain strong (and vice versa)
  • From industries, you will examine leading stocks and study possible relations among groups

First, the Top Industries (in terms of institutional money flow) over the last three months:

top-sectors-apr-14.jpg

Processing Systems has been in the 100th percentile for the last three months, followed by Life Insurance.

Next, the Bottom Industries in terms of money flowing Out of the industries:

bottom-sectors-apr-14.jpg

Aluminum, Residential Construction, Building Materials, and Home Furnishings have been in the bottom percentile over the last three months.

Also, the industry analysis can be used to identify money flowing into or out of an industry group:

money-flowing-out-apr-14.jpg

In this case, we are viewing money flowing OUT of these industry groups – remember, the chart is read right (past dates) to left (recent dates).

Often, you can find some stealthy trade candidates beginning new uptrends or downtrends before they become at the top or bottom of industry leadership (read “Before the herd catches on”).

Weekends are great times to study the broad market and also sector and industry institutional money flows (and analysis) to set up swing-trade or position trade candidates, provided the stocks have chart patterns or price performance (trends) you are comfortable trading or investing.

Industry Analysis Charts provided by Prophet.net.

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Link: Thoughts on Moving Averages

Apr 14, 2007: 5:25 PM CST

I absolutely use Moving Average analysis in my trading, and – although there are hundreds of articles that address the topic – I found two recent posts in the blog world to be interesting to me.

First, let me preface: Moving averages – like every other indicator – “work” because people respond to them, and when people do so in aggregate, the combined imbalance “causes” them to “work”. Moving averages work best in trending markets, and can be used to define a low-risk entry into a trending market (following a pullback).

Here are a few quotes from an article from the DayTradeTeam:

“One of the biggest reasons moving averages are so popular as trend-following systems is that they embody some of the oldest maxims of successful trading. They trade in the direction of the trend, and moving averages let profits run and cut losses short. These principles of the moving average force the user to obey the rules by providing specific buy and sell signals.”

Richard at MoveTheMarkets posted an insightful analysis arguing against “magic moving averages,” and the entire post is absolutely worth a read for deeper study. I have included a few quotes:

  • Math doesn’t support stocks – people do.
  • The only reason moving averages work at all is because enough people are using them as guidelines.
  • Most stocks are just too fickle to trend along a single intraday moving average for long.
  • People support stocks. That also tells me that there’s no reason to tie yourself down to any “magic” moving average period.

I have learned that Richard is right in my experience. In the past, I used to enter trades because of a pullback to a key moving average and place my stop right below them. Invariably, I would get stopped out right before a major move and then curse the market makers, stock, or anything I could find for gunning me out.

I then realized that moving averages are not magic, and I cannot expect price to reverse the moment they touch the average without at least some wiggle. They can still be used for entries into a trending market, and they often work fine at this, but do not approach “moving average support” as an exact science. In fact, approach nothing in technical analysis as an exact science, but that it reveals probable tendencies of sometimes irrational people. Again, know why you take the trades you do and what the “trade idea” you are executing means.

If you don’t use moving averages for trade entry, you can still benefit by using them to identify a trend condition in the market. Identify whether or not price is above or below a major moving average. This adds information to your analysis. Some traders refuse to go long when a stock is beneath the 200 day moving average on the daily chart. Others use “Moving Average Ribbons” to identify the trend/range axis or picture of the market.

Again, don’t expect price to behave because a certain technical condition is met. Understand the reasons behind “moving averages acting as support” and what that might mean for you and your system as a trader.

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Link: Different Types of Traders on a Chart

Apr 13, 2007: 1:12 AM CST

From the Traders Action Zone, the author writes a brief post regarding the TAZ strategy, but of great importance for my focus here is the areas and confluence of different types of strategies and traders all on one chart. Think about how different traders and strategies create the aggregate charts we see.

The author (Craig) utilizes a chart and notes the subsequent trend and describes where position traders, swing traders, momentum traders, and (gasp) day-traders “do their business” on the chart at certain zones.

Not to get you too hyped up, Craig throws cold water on your developing, greedy ambitions with this statement:

There isn’t ANY trading strategy that will make you a consistently profitable trader. Sorry to disappoint you. The only thing that will enable you to consistently pull money out of the markets is YOU.

YOU must have discipline. YOU must be able to take losses. YOU must be able to take your profits. YOU must eliminate fear. Put simply, you must be able to control the emotional and psychological problems that prevent success.

That will be your biggest challenge in learning how to trade stocks with any strategy.

That’s really the secret, but new traders don’t want to hear that there is no magic strategy or magic indicator that can make your wildest dreams come true.

On another post, the author describes any swing trader’s core strategy specifically as:

…trying to identify when there is a transition from sellers to buyers (long) or from buyers to sellers (short).”

I thoroughly enjoy many of the other posts and easy to understand concepts on the site.

Next time you review a chart, think about where different types of traders see opportunity and where others see risk based on their overall strategy and see where you fit in the (chart) picture.

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Daily Commentary – April 12 – Reversal

Apr 12, 2007: 7:42 PM CST

Today’s action was surprising in the degree and reliability of the (intraday) trend, especially given the down trend (intraday) yesterday and its smoothness. Today’s trend swung with reliable entries and position addition points, which could have resulted in a rather large profit.

First, the Dow reversed course when it reached support at the daily convergence of the 20 and 50 period moving averages (remember, traders cause action, not indicators).

Daily Chart – DIA

dia-apr-12-daily.jpg

Dow Jones Swing Chart – Daily

indu-swing-apr-12.jpg

Observations:

  • Confirmed (short-term) uptrend
  • Support found at moving averages, stopping the down-swing
  • Momentum divergence is occurring (see bottom panel indicator) – this is ok and is not a concern yet
  • The technicals of the market appear stronger than the “doomsayers” and “recession predictors” indicate

Today’s intraday action yeilded a near textbook trend with the 20 period moving average as entry signals (again, simple signals are often preferable)

DIA Intraday Chart – 5 minute

dia-apr-12-5min.jpg

Observations:

  • The Trend signal (signal line) crossed zero at 9:00am and indicated the likely end of the down move.
  • The Low of the Day occurred at the support zone created by the daily moving averages, triggering a longer term trade
  • A “Sweet Spot in the Data” trade (playing for a larger target) occurred with a new higher high around 10:30
  • An “Impulse Buy” trade set-up occurred with the 10:0am pullback after the New Momentum High (and new price high).
  • Following trades could be taken to the long side when price pulled back to the rising 20period Moving Average
  • The Momentum Divergences should be a warning signal, but not enough to keep you from trading long (just not on leverage)
  • The Trend became a “Creeping Trend” which punished anyone trying to short it (trade countertrend)

With the market still chugging higher, odds still favor continued upside, especially following the quick counterswing which was terminated at the moving average support.

We are looking similarly (in terms of data and price action) as we did after the “shock” decline of May 2006. So many people doubted the market, yet it continued to rise in an “oozing” or creeping trend which also punished those who fought it, yet few people rode the trend because of all the ‘doubters’.

Realize that Bull Markets climb a “Wall of Worry.” Until price falls below support AND makes a lower low, we are still in a technically confirmed uptrend and odds favor long (buy) trades.

If anything, do not fight this creeping trend by betting against it. That behavior is exactly what keeps the trend oozing (by shorts covering).

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Link: Anticipation vs Reaction revisited – TraderMike

Apr 12, 2007: 9:08 AM CST

Michelle, guest author at Trader Mike’s site, contributed a summary post of an earlier article (anticipation vs reaction) and also listed four more links to previous posts that are very helpful to newer and experienced traders.

She also discusses an interesting paradox in thinking:

“Beginner traders are often anxious to do the right thing. They want to be firm and disciplined. However, an experienced trader will be able to combined flexibility with a firm hand in order to enhance her/his edge”

Brett Steenbarger recently exemplified this exact sentiment in a post of trades he took on April 11th.  After ‘being flexible’ and switching his perception and trade, Dr. Steenbarger concludes:

“Years ago, I wouldn’t have made that second trade. I would have stuck with my initial long and then watched a small profit turn into a loss before covering. I would have had a good idea, but not the ability to flexibly modify or overturn that idea.”

Take the time to read through these insightful posts from market professionals.

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