Learn to Trust Your IntuitionMarket & Sector Review
This Week's Economic Reports
Learn to Trust Your Intuition
Many people who begin trading think of the markets in purely mathematical terms: If the ultimate multiple regression equation could be devised, one could simply put in the inputs and get the outputs from your computer. The working assumption seems to be that the markets can be predicted in much the same way that engineers can use equations to construct a bridge or a tall building. The markets however, are not consistent, and in some ways, they are far more complex. Many seasoned traders tend to rely on abstract feelings as much as cold hard facts. They trade intuitively.
How do you observe the world and gather information? Do you just want the facts and the specific details? Or are you more intuitive? You don't believe in "facts." You think reality is subjective and prefer to think in theoretical and abstract terms. You should identify whether you are intuitive or data oriented. If you are data oriented, you should learn to trust your intuition. Many times I look at setups which years ago I would have considered perfect, yet now my intuition tells me something is wrong with this setup, I couldn't tell you what is wrong, just that something is wrong, and I move on.
There are those who prefer cold, hard facts and see the world as rational, predictable, and orderly. Intuitive types however, see the world as random, theoretical, and conceptual. The hard facts type of trader may want to know the specific price level where resistance begins. He or she would prefer to follow a specific set of rules and may want to pin down exactly where an abstract value, such as resistance, begins and ends. An intuitive trader, however, views the "rules" to identify resistance as merely guidelines. For example, perhaps resistance is perceived to be a round number or a previous peak or trough. No one knows for sure; such guidelines are just possibilities, not hard and fast rules. Some look at market concepts literally, believing they are true-life entities, rather than just abstract concepts. An intuitive trader looks at the markets in a figurative sense. All signals and indicators are subjective in the end, may be a little inaccurate, and are a mere approximation of reality. There's a good chance they will be wrong and that's all right.
When it comes to the markets, it's generally advantageous to be an intuitive trader. Reading charts and getting a feel for the markets is subjective in the end. Trading decisions are merely based on educated guesses, attempting to put the odds so-to-speak in our favor. It isn't exact, but random, unpredictable, and conceptual. It's not linear, matter of fact, and predictable. Because the markets are so complex and chaotic, it takes intuition, hunches, and a kind of creative and artful mastery to win consistently. The logical analysis of facts and figures can only go so far when you are trying to trade the markets, which have inaccurate figures and are largely inexact. So if you are a "natural" intuitive type, you've got a head start. And if you are a data-oriented, sensor, try to nurture your more intuitive side. Experience in and of itself will often help develop the intuitive, present in all of us, even if you are the cold, hard facts type of person. Become an intuitive trader, and you'll see your profits grow.
Market & Sector Review
Let's first go over a brief discussion of the overall market and what I see as going on and then I'd like to spend a little time going over some ways to use the data provided on this site for your use. Last week I pointed to the put/call ratio as a bullish omen for one simple reason, apparently there are way too many people looking to catch "The Top". The market rarely if ever allows the majority that convenience so I have to go opposite what the majority appear to be thinking. Make no mistake about it I am looking for a major top but it will in all likelihood be accompanied by the popular philosophy of buy the dips, not short the rallies. Here is a chart of the put/call ratio with a 10-day moving average and the S&P500 over the last 2 years.
Notice how each time the 10-day moving average has moved over 1 it was accompanied by a bottom in the S&P 500. This Friday the 10-day moving average of the put/call ratio stood at 0.99. I would therefore expect a return to the upside fairly soon, within the next couple of days anyway and probably new four year highs. The sentiment on the intermediate to longer term outlook however is becoming bearish as the Investors Intelligence survey finds the bullish advisors minus the bearish advisors the highest since last January. A word here about looking at any technical or sentiment indicator you must put them in context. This is a bull market be it a cyclical bull as I believe or the beginning of a new secular bull and it will be a bull market until it is not. If we were in a bear market right now I would not read this data as particularly meaningful. Certainly not as I am reading it now! Context!
That being said what I am noticing is rotation amongst groups and sectors as some fall out of favor and others become in favor. Let's take a quick look at the most improved and the largest declines this week.
Notice how the metals have made this list so often since the beginning of June. By the way in the June 18 Newsletter I mentioned Newmont mining as indicative of the group since it is the largest gold miner and perhaps the best known but I did mention to look through group 135 (Gold) as there were stronger relative strength issues than Newmont. Well this past week while compiling the new 5-year high list, one of those higher relative strength gold stocks made a new 5-year high Anglo-American AAUK and another FNX shot up nicely to new highs but it hasn't been trading for 5 years. Interesting! Now look at the red print for the most declined in relative strength and/or PPO a common theme, interest rate sensitive issues. After the Fed this week raised rates by the expected ¼% for the 10th time. The surprise came in not the raise but the statements that followed. Apparently, they are not done raising rates as so many expected they would, so interest sensitive stocks suffered namely home builders, motgage companie, real estate investment trust, and utilities. They are telling what I believe to be an early story, that interest rates along with the price of oil will in all probability cause a recession sometime next year and the markets will discount that recession beginning this fall at the latest, in my humble opinion anyway, just not yet. The bottom line is play this market close to the vest with reduced position sizes and smaller than normal risk parameters.
From emails that I receive I uderstand that some are having a little difficulty putting all the information on the site together in order to make decisions, so from time to time I will go over examples of how to use some of the information and also build a small watch list. We are working to make the navigation and compilation of the data much easier, bear with us. By the way if anyone has any questions or comments on any data or written comment please do feel free to write. Your email will be answered. For now one thing you can do is use Microsoft excel or you can use a similar spread sheet program to make notes and gather data. If you subscribe to a charting service you can also use their notepad features to keep your notes, that is personally what I do. I will use the new Elder's Triple Screen as an example, you could use any market scan. This week I looked through the triple scan for both potential buys and potential shorting candidates. First my criteria (note: your criteria may be different this is just an example)
The Elder position (i.e. slope of weekly MACD) and the 26 week EMA must be in agreement, i.e. Long and UP; Short and Down.
I wanted fairly volatile stocks so the moving average of historical volatility must be above 40.
This kind of criteria will quickly eliminate most of the scan listings narrowing your choices. Next I click on the chart link to see if the weekly chart looks bullish or bearish and the position it is in. Once that is accomplished I copy the stock into the excel spreadsheet. Next I click on the link for the group ranking reports and sort them by symbol, making it easier to look through, and copy the group data for that day into my spreadsheet and I get something that looks like this:
In the above example I drew lines to indicate whether the relative strength and/or PT-PPO of the group were improving or not, you could just use an adjacent column and make some notes. Again if you have a charting service such as TC2000, Amibroker, Incredible charts, or stock charts you can make the notes in your charting program and bypass the spreadsheet. But if you do not then this is a good way to do it.
Now let's take a look at one on the list Carpenter Technology's weekly and daily charts:
Carpenter made the list on Tuesday evenings close because the weekly MACD histograms slope was positive AND the daily force index was negative. Remember Dr. Elders philosophy is to buy strong stocks during corrections. CRS dropped off the list the next day because the force index rose above zero on Wednesday, and then made the list again last evening as the force index again dropped below zero. According to Dr. Elders theory you would now put a buy stop above Friday's high of 62.35 to buy. This is not a recommendation to buy CRS by the Prudent Trader.com but is an example of how to use the data we provide.
There is a great deal of information on this site for anyone's perusal. The reason there is so much and so much more coming is there is a myriad of styles, and time frames that differing people operate. Once you decide where you lie, write down your criteria, you can then ignore everything else, some of which will be of value to some others. Try and use the KISS method, Keep It Simple Stupid! This is just one example of how to quickly go through just one scan, and it the criteria outlined is your criteria you eliminate 75% of the stocks on that list right off the bat.
This Week's Economic Reports
Have A Great Week!BillDisclaimer:Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.
Notice how each time the 10-day moving average has moved over 1 it was accompanied by a bottom in the S&P 500. This Friday the 10-day moving average of the put/call ratio stood at 0.99. I would therefore expect a return to the upside fairly soon, within the next couple of days anyway and probably new four year highs. The sentiment on the intermediate to longer term outlook however is becoming bearish as the Investors Intelligence survey finds the bullish advisors minus the bearish advisors the highest since last January. A word here about looking at any technical or sentiment indicator you must put them in context. This is a bull market be it a cyclical bull as I believe or the beginning of a new secular bull and it will be a bull market until it is not. If we were in a bear market right now I would not read this data as particularly meaningful. Certainly not as I am reading it now! Context!
Notice how the metals have made this list so often since the beginning of June. By the way in the June 18 Newsletter I mentioned Newmont mining as indicative of the group since it is the largest gold miner and perhaps the best known but I did mention to look through group 135 (Gold) as there were stronger relative strength issues than Newmont. Well this past week while compiling the new 5-year high list, one of those higher relative strength gold stocks made a new 5-year high Anglo-American AAUK and another FNX shot up nicely to new highs but it hasn't been trading for 5 years. Interesting! Now look at the red print for the most declined in relative strength and/or PPO a common theme, interest rate sensitive issues. After the Fed this week raised rates by the expected ¼% for the 10th time. The surprise came in not the raise but the statements that followed. Apparently, they are not done raising rates as so many expected they would, so interest sensitive stocks suffered namely home builders, motgage companie, real estate investment trust, and utilities. They are telling what I believe to be an early story, that interest rates along with the price of oil will in all probability cause a recession sometime next year and the markets will discount that recession beginning this fall at the latest, in my humble opinion anyway, just not yet. The bottom line is play this market close to the vest with reduced position sizes and smaller than normal risk parameters.
In the above example I drew lines to indicate whether the relative strength and/or PT-PPO of the group were improving or not, you could just use an adjacent column and make some notes. Again if you have a charting service such as TC2000, Amibroker, Incredible charts, or stock charts you can make the notes in your charting program and bypass the spreadsheet. But if you do not then this is a good way to do it.
Now let's take a look at one on the list Carpenter Technology's weekly and daily charts:
Carpenter made the list on Tuesday evenings close because the weekly MACD histograms slope was positive AND the daily force index was negative. Remember Dr. Elders philosophy is to buy strong stocks during corrections. CRS dropped off the list the next day because the force index rose above zero on Wednesday, and then made the list again last evening as the force index again dropped below zero. According to Dr. Elders theory you would now put a buy stop above Friday's high of 62.35 to buy. This is not a recommendation to buy CRS by the Prudent Trader.com but is an example of how to use the data we provide.
There is a great deal of information on this site for anyone's perusal. The reason there is so much and so much more coming is there is a myriad of styles, and time frames that differing people operate. Once you decide where you lie, write down your criteria, you can then ignore everything else, some of which will be of value to some others. Try and use the KISS method, Keep It Simple Stupid! This is just one example of how to quickly go through just one scan, and it the criteria outlined is your criteria you eliminate 75% of the stocks on that list right off the bat.
This Week's Economic Reports