First, Recognize The Intraday Trend, Then Find The Right Stock
S&P futures traders will tell you that you generally get only two or three good trading opportunities a day. This is the case for the “upstairs” trader, not the “scalping” trader in the Chicago pits. Typically, these occur in the first hour of the day as well as after the bond futures close in the last hour. Also, there is often a trade opportunity after the midday, lunch hour counter-trade. The afternoon trend is usually the most defined unless it is the strongest of trend days, and you don’t get many of those. Most of the stop-running by the futures traders takes place in the morning.
As an equity trader, you must be aware of these daily intraday trends and incorporate them in your trade selection. If you also trade the Spiders, QQQs, and Diamonds, you are in essence a futures trader if you select them as a trade.
There is nothing more frustrating than having a good pattern setup and getting good trade-through entry, only to see your stock move sideways and eventually drift down below your stop price, leaving you on the sidelines.
This will happen to you time and again if you try to enter a long trade while the market trend is down as it was from 12:00 to 1:00 Wednesday afternoon (see SPX chart).
What you want to do is look for stocks that are moving in line with the intraday trend or are exhibiting much better relative strength than the S&P 500 (see GE chart). If the S&P 500 is trending down as it was on the SPX chart and your stock is going sideways to slightly down, it is a great candidate for a trade if the afternoon trend turns back up as it did in the case of GE and the SPX.
When you see the S&P futures start to go, and S&P cash follows with NYSE TICK increasing and the futures-cash premium expanding, look for corresponding stock dynamics. These stock dynamics include: the bid and offer being raised, the stock trading at the midpoint between the bid and the offer or on the offered side, and the volume increasing. Reverse this for sells. When both dynamics converge, you will have a high-probability, trade opportunity.
These opportunities will come to you; don’t impose your will on the market. Take only your best opportunities. If 80% of your profits come from only 20% of your trades, it makes sense for you to be aware of what the difference is between a marginal trade and a strong one, doesn’t it?
If you’re keeping your market dynamics table that’s covered in the 5-Day Trading course, you’re going to get a good feel for when these trend reversals are coming.
At market bottoms you will probably see the S&P cash, NDX, Dow 30, and NYSE TICK all trading down as the premium (the difference between the S&P futures and the S&P 500 cash index) turns upward. You often see a positive divergence in the TICK as it makes a higher low. You should be watching the better relative strength stocks at this point, waiting for entry.
Market tops are reversed as the major averages/futures trade higher but the premium narrows and you see the TICK indicator dropping and maybe a negative divergence which gives you a better read.
At
the same time, you should be watching the major sector indexes like the MSH, SOX, DRG, BKX, RLX, XOI, OSX, XBD, and some of the institutional Internets to see if they are giving you warning of a possible trend reversal. Also you should be aware of the up volume vs. down volume, which will often give you early warning.
On Dec. 2, 1999, the S&P 500 cash provided good
entry as it broke out of the early morning range and crossed the 20-period
exponential moving average and traded up to 1400 — early trend up
.
The index then went sideways forming a 20-bar Slim
Jim
pattern between 1400 and 1396. Traders were waiting for the S&P 500 cash to break above 1400 on the fourth try, which usually leads to a powerful move. But this didn’t happen. Instead of an up-sideways-up pattern, the cash traded below the 20-period EMA and broke out of the Slim Jim to the downside which provided you with your second good trade opportunity.
1. Buy the breakout of the early range as the S&P
500 cash crossed the 20-period EMA — 1st Trend
.
2. Sell the breakout of the Slim Jim — 2nd
Trend
.
3. Due to the oversold condition and the break of the
down trendline after the lunchtime countertrend, you might have entered on the
3-bar reversal after a close above the down trendline. Both the fast and
slow stochastic had crossed above 20 preceding the 3-bar reversal —
3rd Trend
.
4. 12-bar consolidation. Breakout to the downside and
below the 20-period EMA — 4th Trend
.
5. Last half-hour reversal to the upside after 3 wide-range bars down with the last bar closing right at the top of the bar. At this point, the market dynamics were lighting up the board as someone was very confident of a good November employment report release on Friday, Dec. 3, 1999.
Chart II: General Electric
1. Excellent early-morning trade-through entry as GE broke out of an early-morning range and above the 20-period EMA for a multipoint move. The stock was in synch with the market dynamics and early-morning trend (see S&P 500 chart).
2. The S&P 500 cash went up-sideways-down on its first three moves, yet GE went up and then sideways, but not down with the S&P 500. GE had initially traded from a low of 130.06 to 134.50, then formed a classical consolidation pattern and retraced less than 38% of the move to 134.50. This is very strong positive divergence as the S&P 500 was breaking out of the Slim Jim to the downside.
As the first afternoon trend started (No. 3 on S&P chart), you bought GE breaking out of the consolidation on a wide-range bar and above the 20-period EMA at the 133.625 level (No. 2 on GE chart) and the stock ran to a high of 134.9375.
Key Points
- Learn to recognize the intraday market trends. If you get more than two in a single day, it’s a gift.
- Trade stocks that are in synch with the overall
S&P 500 trend, and ideally, select one that is showing strong positive
divergence.