Here Comes Santa Claus
Well, we dropped about five points, gained it back, and then the big blue arrow tells it all. But I don’t think this picture is really worth 1,000 words, so I’ll keep this short. (That last drop all occurred after the stock market closed.) I didn’t see any trades I liked today.
I’m not sure how much posting I’ll do next week since we have company, but being the compulsive person I am, I’m sure I’ll put something up. For those of you keeping regular trading hours, we’ve finally reached the starting gate for the yearly Santa Claus Rally.
(If you want a break from the market but can’t keep away from your computer, check out my other site — www.OurWindowOnNature.com.)
According to Yale Hirsch who did the original research, the Santa Claus Rally occurs during the days between Christmas and New Years, and continues into the first two trading days of the new year. Popular culture has expanded this time period just like it has the holiday shopping season, but then popular culture doesn’t do any research.
Does it still work? From what I’ve read, about 65% of the time. But here’s a quote many overlook from Hirsh’s 1986 book Don’t Sell Stocks On Monday:
If Santa Claus should fail to call,
Bears may come to Broad & Wall.
With that encouraging thought, Happy Holidays.
For More Information:
Don’t Sell Stocks on Monday
Out of print, but still available if you’re willing to pay these prices. The second “used” copy is listed at $120!
Comparing Oscillators
Today had some indexes breaking out, the DOW to a record high and the S&P to a six year high. The Russell 2000 tried with a nice early rally, but then went flat in a narrow range for the rest of the day.
Unless you are trying to catch very small moves, today would have been full of whipsaws as you kept expecting the market to continue (or reverse) the early trend. And looking at the wrong indicator can give you signals that are not reflected in price.
You’ll usually see a Stochastic oscillator at the bottom of my charts, and I use it for both timing and directional information. The Stochastic is what is called a “normalized” oscillator, meaning that it will keep going back and forth between zero and 100, even if the price swings become very small.
That works well if the market is moving in tradable swings, but can give you a false impression of what is happening in a narrow sideways market. Look at the Stochastic (bottom) with the MACD (Moving Average Convergence Divergence) oscillator above it.
The MACD is constructed by taking the difference between two moving averages. Compare its rise and fall with the separation of the moving averages I keep on my price chart. (It won’t match exactly, because the moving average lengths are not the same.) After you’ve watched them long enough, you can actually get equivalent information from either, but some find the MACD easier to read.
The MACD is not “normalized,” meaning it has no arbitrary limits to its up and down moves. But this also means that, being smoother, it sometimes gives you less detailed information. That’s why many traders like to keep an eye on both types of oscillators.
Their differences are most apparent when the market is going sideways. When the market becomes less and less volatile, the MACD starts to stay very close to the zero line, while the Stochastic keeps giving overbought and oversold signals.
After todays early rally, the sooner you decided there was no tradable movement the better. And using the MACD (or carefully watching the moving averages) was the easiest way to stay out of trouble.
Multiple Markets
While many people trade multiple markets or multiple stocks, when I am working on a very short timeframe I feel more comfortable concentrating on one. But that doesn’t mean that I ignore all the rest. On intraday moves, my market (the Russell 2000) sometimes leads the others, and recently it has been lagging. But overall, your best trades will occur when the markets are moving together.
How can you keep an eye on other markets without becoming distracted from your own? My solution is to standardize my charts so the important things stand out. I use two monitors during the trading day, but that doesn’t mean I am limited to two screens full of data. With a mouse click I can bring up a general market layout to see what is happening elsewhere in the trading world.
First the standardization. On my markets page each of the six charts has a green line showing yesterday’s high, a red line for yesterday’s low, a thin blue line at yesterday’s close, and two moving averages. All six of the charts are linked, so by simply typing in a number (3, 15, etc.) they will all switch to a different timeframe. The bars are color-coded (see Dunnigan post) so I can instantly see the direction of the last bar. And in the bottom pane is a modified MACD to show the overall trend.
In addition to the major futures markets (NQ, ES, and YM), I have a chart for the semi-conductors (SOX) and the two parts of the S&P 500 (the large cap and mid cap sections.) Although this is a screenshot from the end of last week, look at the information available at a glance.
The DOW futures (lower right) are above yesterday’s high (green line), while the midcaps (upper center) are still trading below yesterday’s low. All the other charts are inside yesterday’s range. Quite often, just watching the OEX and the MID charts, you can get a feel for the strength of a rally or decline. If they are moving together, there is momentum. If they are fighting each other, there is more likely to be congestion.
Seeing how price and the two moving averages are acting gives you another clue to trending or non-trending motion. Notice how easy it is to see that the SOX are the most congested at the present moment.
On a shorter timeframe, look at the colors of the last few bars. The mid-caps are rallying — trying to catch up (many green bars), while the other markets are going sideways (magenta or alternating red and green bars.) And the MACD at the bottom is oscillating in smaller and smaller moves as option expiration day expires in a sideways motion.
I keep this chart hidden to avoid being distracted from my interest in the Russell, but when I’m trying to get a feel for the markets, or just before initiating a trade, I’ll take a quick look at these charts. Never for signals, but for the context to know what to anticipate from my own trades.
Tracking TRIN
Watching the overall market, the number of advancing and declining stocks, the rise and fall of sectors, and what is happening to volume is all a part of understanding the context of your trades. Although most traders can see the importance of this information, setting up a structure that is easy to use can be intimidating. I’ll be out of town the day before and after Thanksgiving, so I’ll use this opportunity to show how I track the rest of the market. I’ll start by talking about TRIN.
I have the actual numbers for the NYSE advances and decline, as well as up and down volume figures, showing on one of my monitors all the time (image on left.) But one key element of my trading requires that all my basic information can be interpreted at a glance, and the raw numbers don’t do that job.
Richard Arms came up with one solution in 1967. It is the ARMS index, but more people probably know it by the name TRIN, or the Short Term Trading Index. It is an attempt to measure the amount of volume going into advancing and declining stocks by combining their ratios into a single index. The number of advancing stocks is divided by the declining stocks to get their ratio. The same is done with advancing and declining volume. Then the first ratio is divided by the second to get TRIN.
According to Gerald Appel’s Winning Market Systems
This is a quite sensitive indicator and frequently changes direction moments in advance of market turnarounds on an intra-day basis. It is usuful in trading operations but its extreme sensitivity does result in false signals and fosters emotional activity.
He goes on to say that, in its raw form, the best use is to time the exact moment for pre-planned entries or exits in the market - not as a signal in itself.
There are many ways to use TRIN, and the most simplistic don’t work very well. You’ll find it written that a number less than 1.0 is bullish and over 1.0 is bearish. As a very general observation, this is true, but it is actually the direction (or change of direction) of TRIN that is most important to traders. And that leads to a visual problem, that in turn can lead to mistakes in a fast market.
When the market is rising, the TRIN tends to be falling. When you chart the TRIN under the market, a falling TRIN is bullish, and a rising TRIN is bearish. In one of his columns Dick Arms said that if he had it to do over, he would have turned the Arms Index upside down to make it easier to read. Of course, after almost 40 years, no one is going to change the actual numbers.
But with a computer you can reverse the direction of the numbers yourself. Because the indicator is so sensitive, many traders slow down the action of the TRIN, usually with some type of moving average. I use a modified MACD on the raw TRIN, and in the process, I flip it upside down.
The MACD (created by Gerald Appel - that’s his quote above) uses three moving averages to create a momentum oscillator. But by putting the numbers in backwards, you can reverse the direction of the oscillator. This way I accomplish two things — I slow the TRIN down to a level that matches my trading, and when my indicator goes up, so does the market.
The normal numbers for an MACD are 12, 26, and 9 — all exponential moving averages. The second moving average is subtracted from the first to give the MACD. Then you create a moving average of that result (using the third number) to create a trigger line. And if you want to reverse the direction of the oscillator, just reverse the order of the first two numbers.
Experiment with the input numbers to come up with a TRIN oscillator that matches your trading style. At the present time I’m use the Fibonacci numbers 34, 21, and 8 on various timeframes, but the goal is not to match my indicator — it’s to find something useful for you.
A magic indicator? Not at all. This is not even necessarily what your market is doing — it’s just another way of tracking whether your potential trade is riding the general market trend or fighting it. Have a nice Thanksgiving tomorrow, and Friday I’ll show you how I track multiple sectors of the market in real time.
For More Information:
Gerald Appel’s Winning Market Systems: Eighty Three Ways to Beat the Market