Earlier in my trading career I used to be caught completely by surprise by days like today, but now the most important skills I have developed is anticipating zones of likely corrections and market turns. It helps a lot in avoiding market traps.
I use a simple indicator to anticipate market turns which I talked about earlier when I became bullish in August. It is based on a ratio of up and down stocks price in last 65 days. It gives you an objective consistently tradable signal. The same indicator was flashing danger signals since last few days. Yesterday when I ran my end of day scans it was clearly flashing trouble, so most of the morning, I spent reducing positions to bare minimum and now watching the action from sideline.
Tuesday, August 01, 2006
Some stocks set for rallies
The overall market action may look dreary but below the surface there is a strong rallies developing in some sectors and it looks like these rallies have legs.
How does a market turn and how can you anticipate market turns. Everyone has different ways to do it and it is a function of your understanding of overall market mechanics. It is also a function of your trading philosophy. Those who go by fundamentals look at stocks trading below a certain valuation levels. The macro players look at interest rates, liquidity, consumer spending, jobs etc. The cycle followers and Elliot wave followers look at cycles and their length. Technical traders look at support, resistance, chart patterns etc. No matter what trading style you follow you should have a way to determine overall market direction.
I follow a very simple objective method to determine market direction. It is based on a ratio of up and down stocks price in last 65 days. It gives you an objective consistently tradable signal. Going by that indicator we have a high probability of a rally developing in next couple of weeks.
When a rally starts developing you will see first set of stocks starts to rally, they have follow through , then more join in. In last couple of days certain set of stocks have started moving and are also witnessing follow through. So the early birds are off and that also gives clear indicator of what sectors are likely to rally.