How To Use TM’s Indicators: TM’s Nightly Plan Of Attack For Daytraders

Each evening,
daytraders can use TradingMarkets Indicators to quickly…

• Get a handle on the short-term
  direction of the overall market.
• Find the best stocks in the best
  sectors, and the weakest stocks in the worst sectors.

Here is a game plan that will enable
you to do it. You can use it “as is,” or modify it to suit
your trading style.

Step 1. Short-term
Directional Bias of the Markets.

To find out what direction the overall market is poised to move in:

1. Click to the Market
   Bias Indicators, to determine in which direction the market poised
   to move. These indicators were developed by Larry Connors for his
   hedge fund to determine the short-term direction of the overall
   market. Here is your rule of thumb: Look for multiple signals that
   agree with one another. The more signals there are, the higher the
   probability of an explosive short-term move! Note that you should
   place more weight on the signals from the Market Bias Indicators than
   the more subjective interpretations from 1b, 1c and 1d. More advanced
   CVR alerts and indications for individual stocks are available at Connors
   Nightly VIX And Volatility Service.

2. Go to the Tools
   And Research page, and pull up charts of the major indices to
   determine the short- and long-term trend of the market. Make a note of
   the trend of the S&P
   500 and the Nasdaq
   Composite over the past seven days. A strongly trending market may
   tell you to have more of a directional bias in your trading.

3. Zoom in to a three-day period and
   change the time frame to five-minute bars. At what price levels do you
   see the bounces occurring? These may be the key “support and
   resistance” levels that influence tomorrow’s trading.

4. Look at how the market closed today,
   paying close attention to the final hour of trading. Remember this: If
   you see strength or weakness surging into the market in the final hour
   of trading, that action could carry forward into the next trading day.

Step 2. Strongest
and Weakest Sectors

Find out what the strongest and weakest
industry groups are. As much as 70% of an individual stock’s movement
is tied to the industry group to which it belongs. If you’re going to
better your odds, then you want to buy stocks in a strong industry
groups and short stocks in weak industry groups

1. Check the Strongest
   Sectors of the Past Five Days and the Weakest
   Sectors of the Past Five Days.

2. Determine which groups are strongest
   and which are weakest. As you proceed to Step 3, you should be able to
   see stocks within these groups as major “themes” in the
   Indicator Lists. (More about this concept in Step 3.)

Step 3. Finding
Stocks — Indicator Lists

Create your pool of stock candidates.
To do this, look at the Daily
Indicators page. If the market in the short-term is biased to the
upside, focus on buy candidates. If to the downside, focus on shorting
candidates.

An
important point on themes: Pay
close attention to whether many of the strongest or weakest stocks
belong to the same or related industry groups. Do these industry
groups match those that were found in your sector analysis in Step 2?
If so, that serves to corroborate your big-picture analysis. A good
sign.

Here are good places to start your
search:

1. To
   find powerful buy candidates, run through all the stocks in the Proprietary
   Momentum List. For shorts, go through the Proprietary
   Implosion List. Click into and look at every chart in both daily
   and intraday time frames, confirming the strength of the trend and
   looking for the price levels at which intraday setups may form the
   next day.

   Repeat this process with the following lists:

   For Longs

1. Pullbacks
   From Highs List

2. New
   60-Day Highs on Double-Volume

For Shorts

1. Pullbacks
   From Lows List

2. New
   60-Day Lows Double Volume List

2. To
   find stocks that have the potential to explode to the upside or
   downside, check all the stocks in the Explosion
   List. These are stocks that are trading much more quietly than
   usual. Through research conducted when he was managing his hedge fund,
   Larry Connors found that these stocks tend to explode. While it is
   impossible to predict the direction of the explosion with anything
   approaching 100% accuracy, you certainly improve your odds by looking
   at the information that accompanies each stock on the list.

   1. For longs, look for stocks with high
      short-term relative strength, ADX readings over 30, and DMI
      indications that are “Up.”

   2. For shorts, look for stocks with low
      short-term relative strength, ADX readings over 30, and DMI
      indications that are “Down.

3. To find highly volatile stocks, go to
   the “Trading
   Where The Action Is” list. These stocks are the most volatile
   stocks in our database over the past 50 days. Look at the charts and
   focus on those that are exhibiting big intraday swings. Also, as with
   3b, you can determine the directional bias of each of the stocks
   listed by looking at the following information.

   1. For longs, look for stocks with high
      short-term relative strength, ADX readings over 30, and DMI
      indications that are “Up.”

   2. For shorts, look for stocks with low
      short-term relative strength, ADX readings over 30, and DMI
      indications that are “Down.”

4. For strong candidates that have trades
   in the process of forming, check TM’s
   Nightly Daytrader’s Report. There you will find explosive setups
   which we call Slim Jims, stocks likely to open strongly or weakly in
   the next day’s trading — and much, much more.

Step 3a For
Haggerty-Style Traders

Kevin Haggerty developed his unique
aggressive style of trading using the insights he developed when was
senior vice president for equity trading at Fidelity Capital Markets
for seven years. His perspective gave him an edge at identifying
specific patterns that are indicative of massive institutional money
flows into and out of stocks. These patterns are available at TM and
are listed below. To learn how to trade with them, take Kevin’s “Trading
With The Generals Course.”

1. S&P
   500 Index Screen

2. Nasdaq
   100 Index Screen

3. 3
   Day wake up call

4. Change
   in Direction

Step 4. Finding
Stocks — The Stock Scanner

You can also find trading candidates
through the Stock
Scanner. By specifying your own parameters, you can identify
additional daytrading candidates on the long and short side that meet
your own special criteria. Here is one set of parameters that will get
you strongly trending stocks with high short-term relative strength,
good liquidity, and good intraday moves. Feel free to tighten the
parameters if this gets you too many candidates. But don’t loosen the
parameters. A lack of candidates may be indicative of a market that is
best watched from the sidelines.

1. Closing price of 30 or higher.
   Higher-priced stocks tend to have greater intraday trading ranges.

   

2. 50-day average volume of 300,000
   shares/day. To do this, you enter 3000 because the Stock Scanner
   automatically adds two zeros. This enables us to get the liquidity we
   need for easy entries and exits.

   

3. ADX of 30 or greater. Along with an
   ADX of 30 or greater, look for stocks with an “Up” DMI for
   longs and stocks with a “Down” DMI for shorts.

   

4. 3-month RS of 80 or higher for longs,
   and 3-month RS of 80 for shorts.

   

We’ve barely scratched the surface of
what you can do with the Stock Scanner. Play with the numbers and
parameters. You will be amazed at what you can accomplish with a small
investment in time experimenting with this tool.

Step 5: Tips On
Knowing When And What To Trade

The obvious final step is to narrow the
choices to the stocks which have the highest potential reward and the
lowest potential for loss. Also, no matter how good the setups look,
you need to decide whether it’s appropriate to trade any of them,
given other factors.

Here is a checklist:

1. Do not trade against multiple
   market-bias signals. For example, if all your stock candidates are to
   the long side, but you have six CVR down signals, it’s better to focus
   on shorts or stay on the sidelines.

2. Check the news on the stocks you are
   considering trading. Many traders will be cautious or not trade in
   front of Fed announcements, earnings reports, or other types of major
   announcements. Surprises can work both for or against you.

3. Make sure that the buy candidates you
   are considering are in the hottest sectors or industry groups and that
   your shorting candidates are in the weaker groups.

4. Be cautious when your list doesn’t
   contain very many names. When there aren’t many buying candidates to
   choose from, it is a sign of overall market weakness. Remember that
   the market is made up of stocks. When many stocks are behaving well,
   there is a greater likelihood that the overall market is healthy.