Figuring out which way financial markets will possibly travel can seem like an overwhelming task. Anyone that watches the major financial channels knows that after a couple hours one’s head is left spinning with different recommendations. These analysts and portfolio managers on TV are supposed to be professionals so how can all their advice contradict each other and how do we avoid the confusion? There are a variety of ways, first is to stop listening to the “professionals” on TV for advice. Another tool we need to be familiar with is using multiple sectors to determine market direction.
The below chart picture shows six different markets, on top is the popular Dow Jones Industrial Average. Below this market is the Dow Jones Transportation Index, often looked at as a barometer of the markets. Dow theorists like to make sure the Dow Transports are confirming other market moves, such as the Dow Jones. Also notice the recent evening star bullish reversal pattern circled in yellow on the Dow Transports, again telling us that the Dow Transports currently want higher. Finally below are sector ETF symbols, “exchange traded funds”, all crucial to giving hints to market direction. As the chart shows, the Financial, Retail, and the Consumer Discretionary Spending Sector all have broken above their May highs, this is a bullish sign for the health of the markets. On the other hand, Consumer Staples, “known as a sector that is used to shift mutual fund portfolios into protecting from upcoming corrections”, has not broken out of May highs. This can be viewed as a sign that institutional money is not worried about a market correction and is keeping their foot on the gas with portfolios heavily in the higher risk sectors.
Viewing this chart shows us that the markets seem to want higher, does that mean we should buy into a new position at these levels? Depends on your risk management and the amount of time you hold your positions. As traders we want to be patient waiting for high probability areas, an entry at the end of June as we pointed out a couple weeks ago would have been a high probability area for a longer term swing trade. Entering at current levels would be entering at a place not being the ‘first to the party”, and instead entering when there is a good chance “the party” will shortly be over. During these times the highest probability trade is to be swing neutral/flat and capitalize on intraday trading volatility. By being flat during non high probability times we will have plenty of firepower ready for a high probability entry when it presents itself. By knowing how to use multiple sectors to determine market direction we at least benefit from knowing that the brakes are not being pressed yet during this market strength, which keeps us from stepping in front of this upward moving market with short entry set ups.