How To Use TM’s Indicators: Strongest And Weakest Sectors Of The Past Five Days
If you read This
Week’s Battle Plan each week, you should be familiar with the To
Do List recommended by Larry Connors. This lesson will focus on the
third step of the list, using the strongest/weakest
sectors:
1.
Begin with the Nightly
Market Bias page.
2.
Look at the Proprietary
Momentum lists.
3.
Then move onto the strongest/weakest
sectors for the past 5 days lists.
4.
If you are looking for a stable of good names to focus on, both to the long side
and to the short side, Mark
Boucher’s lists are a great place to start.
5.
End each evening by looking at the nightly TradingMarkets
Reports
on the home
page.
TM’s Strongest
And Weakest Sectors Of The Past 5 Days list is updated every night by
7:30
and is designed for traders to easily identify which sectors money is flowing
into or out of. Following the lists can be extremely informative for all trading
strategies. Daytraders, swing traders and intermediate-term traders alike
benefit from keeping up to date with sector strength and weakness. Making the
analysis part of your trading routine will ensure that nothing slips past you,
as you will always be alert to shifts in the market. As mentioned in This
Week’s Battle Plan, when you see a sector moving in a direction it’s not
supposed to be moving, it is an opportunity to act counter-intuitively. This is
just one of many uses of the sectors lists.
Every trader has a certain
style, and there is no one right way to do everything. Analyzing sector movement
is best from the perspective of a top-down approach, and here are some of its
typical uses: Daytraders can easily identify the quickest-moving sectors and
know which ones have the strongest trends for big intraday moves. Swing traders
know where to select strength and weakness for moves that may last anywhere from
a couple of days to weeks. Intermediate-term traders can stay on top of the
leaders and laggards and monitor where institutional money may be strategically
flowing in or out of.
As Dave Landry illustrates
in Dave
Landry on Swing Trading that traders
need to set up in stocks that show the most immediate potential. When using the
top-down approach, sector analysis is a filtering tool used to screen for the
best candidates. Traders are best positioned when the momentum of a stock, as
well as the sector, are in tune. Selecting the strongest stocks in the strongest
sectors, as well as the weakest stocks in the weakest sectors, will keep a trader
where the action is no matter what the strategy.
Keep in mind that sectors have more influence on
an individual stock than the overall market. Strong-trending sectors may also
move against the overall market, which can be important to identify, as some
setups may have less obvious potential or appear to be better than they really
are. The same is true of sub-sectors, which can deceive you if you don’t have a
good understanding of how they are trending. Following the lists every night
will ensure you know exactly where things stand.
An example of using the
Strongest Sectors of the Past 5 Days
list would be if one night you notice
a sector show up on the list at the number 5 position. This may be your first
indication that money is flowing in. In the next few days or even weeks, you may
notice the sector move up a position or two. This is further indication of a
sector’s strength. Early warning that a sector is on the move can be very
valuable when it comes to pinpointing an appropriate time to enter or exit a
trade. It is best to use some form of technical analysis to identify a
“trigger,” and depending on your strategy, it may be classic support
and resistance zones, pullbacks, chart patterns, or more involved Fibonacci and
Elliot Wave principles.
Below is an example of the Internet Index
(
$INX.X |
Quote |
Chart |
News |
PowerRating)
showing up on the Strongest Sectors of the Past 5 days list:
Once the sector is identified as having
potential, a screen for candidates is done by looking for any technical setups
that may prove profitable. Below we see a pullback with Yahoo!
(
YHOO |
Quote |
Chart |
News |
PowerRating):
Yahoo! represented a pullback play
just as the Internet sector showed up on the Strongest Sectors of the Past 5
Days list. The next day the stock triggered with a gap up, resuming its prior
trend. The trend was reinforced each day as the Internet sector remained or
moved up on the list. A good exit strategy here would have been to watch for a
trend change on Yahoo!’s chart pattern and to have kept an eye on the sector
strength lists for any changes. The Internet sector began to reverse after a
week, and simultaneously, Yahoo! began to pullback. Once the stock traded below
its prior day’s range, a stop should have been hit to lock in a profit.
This was just one example of how the
sector lists can alert you to potential setups. Dave Landry has perfected
pullback strategies, and any swing trader would do him or herself justice by
educating themselves with Dave’s excellent methods for high-probability entries.
Daytraders would have used the
information above to be on the watch for Internet stocks setting up for powerful
intraday moves. In the same way swing traders use the Strongest
And Weakest Sectors Of The Past 5 Days lists to filter for candidates, daytraders
do as well, but only for the purpose of capturing the moves
intraday. The idea is to spot stocks on the move, and by familiarizing yourself
with where the sectors are stacking up against one another, you will always know
where to look.
One of the advantages of following sectors is
that technical analysis of an entire sector will be a lot smoother because there
is less volatility than in individual stocks. Institutions often exhibit
behavior in which they will move money out of a sector and into another. Many
traders use market-timing methods to capture these trends. With mutual funds and
exchange traded funds (ETFs), it is possible to trade the sector as a whole.
When you as a trader make it a routine to watch the Strongest
And Weakest Sectors Of The Past 5 Days lists
you will always be on top of these moves. Below is an example of how
money can shift.
Here we have the Utility Sector
(
$UTY.X |
Quote |
Chart |
News |
PowerRating), which
was routinely on the Weakest Sectors of the Past 5 Days list for the past
couple of months:
In the same time frame as the example above, the
Computer Technology Index $XCI.X|$XCI.X] was a member of the Strongest Sectors of
the Past 5 Days list for the past couple of months:
When a trader sees a certain sector begin to show
up on the list, he or she then screens for potential entries. Routinely doing
this ensures that virtually no potential moves will slip under the radar. To
best take advantage of trends in a sector, a trader should use forms of technical
analysis as triggers for entry. Because timing sectors requires a time frame of
usually at least a couple of months, you will want to look at weekly as well as
monthly charts for indications of a potential shift. Trendline breaks,
moving average crosses, and play-outs of common chart patterns have proven to
be effective indications of shifts in money flow. Keeping an eye on the Strongest
And Weakest Sectors Of The Past 5 Days
list is an excellent way to tune in to these potential triggers.
Following the sectors’ action is also a
crucial aspect for intermediate-term traders. People familiar with the IT
strategy know how important it is to have the trend of a stock confirmed by
other stocks in a sector. Because sector movement usually has a direct influence
on individual stocks, keeping up to date with this list gives traders a heads up
for potential shifts. For example, if you have your eye on a stock that meets
your fundamental and technical requirements, you will want to be sure that the
sector it is a member of is also exhibiting similar technical behavior. In a
weak market, there may be situations where you have a great candidate that breaks
out of a nice base, but fails because the sector it is a part of does not confirm
the price action. IT traders need to stay alert to anything that could
potentially thwart a good stock’s progress.
Traders should also keep in mind that the
weighting for each stock in a sector can vary. The bigger the company, the more
money it will take to move the stock, so it will be allocated with a heavier
weighting on the list. For example, Microsoft represents the biggest
company on the Nasdaq 100, so it is given a 10.77% weighting compared to a
smaller company like McLeodUSA Incorporated, which is only given a 0.02%
weighting. This information can be helpful in understanding why a whole sector
may have moved more than an individual stock. Typically, the stocks in a sector
will move in lockstep fashion, but one great day for Microsoft may not always be
true for the rest of the sector.
To sum things up, TM’s Strongest
And Weakest Sectors Of The Past 5 Days
lists provide critical information for complete market analysis. No matter what
the trading strategy, these lists will alert a trader to “hot spots”
in the market action. By routinely following the lists, a trader will ensure that
no big money shifts in the market slip under the radar. As mentioned earlier,
this is just one of the components in TM’s To Do List that can help you
stay profitable and on the way to achieving your trading goals.
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