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S&P 500 Corner Part III

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Knowing What Indicators to Monitor

In order to profit trading the S&P 500, it is mandatory for us to know which indicators to monitor.  The successful pit traders watch the Dow Jones Industrial Index, the TICK, the S&P 500 Cash Index, the Dow Transports, certain selected stock issues, and the Intraday Highs and Intraday Lows. Since they're the trading group that substantially moves the very short term market, it is incumbent upon us to also follow these same indicators. The following is a description of each indicator:

Dow Jones Industrial Index (INDU). The Dow Industrial Index is a composite average of the 30 leading stocks. As a generalization, the Dow and the S&P 500 frequently move together, though under some market conditions, this does not occur.

The TICK (TICK).  This indicator tells us the difference between advancing and declining stocks. For example, a reading of -26 means there are 26 more declining stocks than stocks that are advancing. TICK values before 9:30 Central are frequently misleading and it is generally a good idea to ignore this indicator unless extreme values of +/- 700 are recorded.

The TICK may lead  futures; at other times, the TICK may act as a lagging indicator. Additionally, the rate-of-change of TICK can give us valuable information about price direction.

The S&P 500 Cash (SPX).  The cash index is the market since cash is calculated as an average of all 500 stocks comprising the index. This calculated cash index value differs from the S&P 500 futures value because the cash is calculated about every minute, whereas the futures can change instantaneously whenever a bid or ask price gets hit in the pit. This difference in cash and futures is called the Premium.

The Premium is an important concept and  is covered in another section of the S&P Corner. The importance of the Cash S&P is that the futures prices must ultimately follow the cash prices.

Dow Transports (TRAN). This index usually acts as an excellent leading indicator.  When the Transports diverge with the Industrials, values usually follow the Transports.

Selected Stock Issues. Certain stocks may lead the S&P Futures under certain market conditions. Historically, IBM (IBM) leads futures. Other stocks which lead futures can be General Electric, Intel, and General Motors. Which stock or stocks have a predictive ability changes day-to-day and can only be determined empirically.

Intraday Highs and Intraday Lows.  Most floor traders want to take the market to areas where stops are located so that they can scalp those values. Where are the stops located?  The answer is above the intraday high, below the intraday low, and above and below any nearby support or resistance.  The market has an affinity for those areas where stops are located.  What you need to do is observe what happens to the market when price reaches these stops.  Questions to ask are:

  • Does the market go dead?
  • Do prices take off higher; quickly or slowly?
  • Does the market stay down? 

The move away from the stops may be a valuable clue to future market direction.  As a valuable exercise, use the Support/Resistance section of the Overnight Update and attempt to locate the probable location of stops. Realize the current intraday highs and intraday lows should also be included in your evaluation.

Now follow price as it approaches those areas you have identified as "stop bands". Then follow price movement away from the bands. Once the intraday high has been made and stops placed, the market will attempt to return to that level to hit those stops.

Volume is the principle fuel of the markets. The market may not revisit those highs again but if it does and the volume drops substantially, the market can only go down. The converse is true of bottoms.

 

     
Day Trading Chart

  The above example shows a high at 9:42.  Note the volume level at 1. The second high at 10:18 shows a reduced volume at 2 with a resultant small sell-off of about 150 points, followed by a 50 point increase but on substantially reduced volume shown at 3. The resultant sell-off was 850+ points!

Why, one might ask, did we not sell at the 10:05 reduced volume? There are a number of technical reasons (principally short term divergences) for not selling here but the most compelling reason is shown on the Cycle Turning points for January 9th, 1998

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