YES! I have found the holy grail of trading, the magic 8 ball! Well, no not exactly. Though a few indicators I use are as close as you can get to a crystal ball. No one indicator should ever be solely relied on, sampling from a core group of indicators will provide the most accurate leading foresight. Sentiment indicators are as important as ever given our current unforgiving market environment. The first indicator i want to focus on is PREMium, a leading indicator, which is the spread between the S&P's futures & S&P's actual cash value. (A great explanation on how to read $PREM here) In a nut shell this leading indicator can help tell you where the S&P's(SPDRs) are going before they get there.
*I recommend reading this Interview with Hank Camp who is an expert in program trading & interpreting $PREM.
Interpreting the PREM correctly can help formulate a decision to enter/exit/hold a trade based on the direction PREM is indicating. Extreme PREM readings are the basis for which most trading programs are turned on or off, if you can catch the effect of the programs you can benefit from the way they move the market. Specifically if you trade in some of the larger cap S&P components, which are all bought/sold simultaneously in baskets as these programs are being executed. These programs create a highly suspect mass of business on the bid or offer quantified by the $TICK reading (I generally use the NYSE TICK) which in a way also acts as a reversal indicator. Er, i take that back TICK can act in two capacities.
1. Can indicate current market sentiment
2. Helps graphically illustrate reversal/pivot points
Extreme readings of + or - 1200 can mean a reversal is imminent. If the daily moving average of the TICK is over +100 are bullish, -100 bearish. *Are extreme +-1,200 readings correlation with the markets direction a coincidence? I say no because a group of human traders cannot move the S&P's 10 handles in minutes seemingly out of nowhere in a flat market. When a program has finished its executing its instructions you will see the individual stocks bought or sold by the program (every action has a opposite or equal reaction) reverse as the SPY's are still falling or rising. My theory behind this anomaly is the stocks the program bought or sold were more than likely artificially driven up or down to a temporarily unsustainable level thus a retracement occurs. Sooo how can you profit from this?
For one you must fully understand the cause and effect of the values the indicators are showing before you can "trust"(profit) from their cause and effects. Second translating the indicator values into meaningful actionable data(signals) quickly and accurately can mean the difference between a trade or a miss trade. Take this trade setup as an example:
You are looking for to put on a long market idea by way of buying the SPDR's (SPY), but you are unsure if the selling has stopped!?
The indicators values are showing the following:
$PREM is making new daily breakout highs as the market is sitting on lows for the day
$TICK just spiked down below -1500 (indicating heavy unsustainable selling on the bid)
$TRIN(continuously computes the formula (advancers/decliners / advancing volume/declining volume)This helps detect overbought or oversold market conditions. If TRIN is falling this indicates less and less stocks are advancing (bullish) think reverse psychology
These four indicators are foretelling a market reversal, though the SPY is still selling?! This anomaly is the best indicator to get long. Think about the psychology behind why these indicators work. The sell programs are designed to push and squeeze all the weak hands JUST past the point where they say "IM OUT". This is the PRECISE time to buy because when everyone is panic selling with the "i dont give F$&# just get me the hell out of this trade" mentality the rubber band is about to snap back.
The trade: Boom you take the SPY offer just as you and feel the capitulation volume come in because you concluded all the indicators are telling you a reversal is imminent. Now your trade is probably already 5c in the money which is cool, but what happens next is the most exciting. As traders who sold out realize they should not have sold scramble to buy the SPY for fear they will miss the ride back up will demand the offers up further. This is the moment where i take my cost basis off the table, selling into all the buying, letting the rest run. To simplify this trade even more, when you see market conditions hinting at a reversal per the indicators we discussed, put on your trade idea before the crowd does so you can ride with the trend.
Take a couple weeks watching these indicators so you can get a feel for how they work, then you to can trade with EDGE most traders only thought was available to professionals.
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