Broad Market Analysis Applied to Professional Trading

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Broad Market Analysis Applied to Professional
Trading

• By
• Fernando Gonzalez
• September 23 24, 2001

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Trading versus Investing

• Do not confuse one with the other
• Traders Mindset
• Risk Management Strategy a System

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Technical vs. Fundamental Studies

• The forces of Supply Demand among Short to
  Intermediate-Term Traders will most often
  supercede Fundamental priorities in any given
  market.
• Exception Surprise-a-mentals

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Technical Studies

• The answer to the Markets Direction is in the
  Market Itself (price)
• P/E, Valuation Studies etc Flawed Analysis for
  Trading
• The Trend is the upper hand

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Trading Styles Market Participants

• Masses Mutual Funds, 401K, IRA
• Investors
• Day Traders
• Newbies
• Intermediates
• Professionals

• Market Makers
• Hedge Funds
• Options (the boys)
• Media/Pundits

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Options Expirations Week
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Options Expirations Week
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Broad Market Analysis
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SPx 1196 - 2001
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(No Transcript)
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Sentiment

• How important is Sentiment to the Market?
• Sentiment Contrary Indicator
• Goal Find short-term supply and demand excesses
• Public Individual Perception
• AAII, I.I., Market Vane, Various Polls
• Broad Market Oscillators/Indicators

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Oscillators

• Oscillate between upper and lower extremes
• Market Oscillators measure overbought and
  oversold conditions
• In a downtrend, oversold conditions tend to
  remain oversold
• In an uptrend, overbought conditions tend to
  remain overbought

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Oscillators

• GOAL 1 Search for extreme conditions that
  violate the predominant trend
• GOAL 2 Search for extreme conditions that come
  close to, match or exceed historical proportions

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Some Important Oscillators

• Put-Call Ratios
• Volatility Index or VIX
• Arms or Traders Index (TRIN)
• NYSE TICK Index

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The Put-Call Ratio versus VIX

• Put Call Ratio (PCR) Shorter-Term Extremes in
  Sentiment
• Volatility Index (VIX) Longer-Term Extremes in
  Sentiment

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Put Call Ratio

• Contrary Indicator
• Call Options Contract to Buy in the Future
  (Bulls)
• Put Options Contract to Sell in the Future
  (Bears)
• Put to Call Ratio Puts/Calls
• Higher Put-Call ratio More Puts More Bears
• Lower Put-Call ratio More Calls More Bulls

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Put Call Ratio Breakdown

• Two basic types of P/C ratio
• EQUITY Side
• Contracts to Buy or Sell Individual Stock in the
  future
• Majority Volume used by smaller, less experienced
  Participants
• INDEX Side
• Contract to Buy or Sell Indices (baskets) in the
  future
• Majority Volume used by more experienced
  Participants

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Put-Call Ratio Breakdown

• As a Contrary Indicator, the EQUITY-Side Put-Call
  Ratio is more accurate, while the direction of
  the INDEX-Side is not to be used as a contrary
  indicator, especially when they are diverging.

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Equity-Side Put-Call Ratio

• An equity put-call ratio that is moving in the
  same direction as the market, on an INTRADAY
  basis, suggests a continuation of the trend in
  the near-term

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PC Ratio Normal Direction (Opposite)
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Put-Call Ratio Index Side
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Put-Call Ratio Short-Term Extremes

• Rule of Thumb
• For Equity Side
• Readings above 0.9 More Bears Bullish
• Readings below 0.5 More Bulls Bearish

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SP Futures vs. Put-Call RatioSeptember 19 to
21, 2001
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Equity Put-Call RatioIntraday Moving Averages
May 21 to Sept 21, 2001
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The VIX

• CBOE Volatility Index (VIX.X)
• Measures Implied Volatility
• Complex calculation of changes in price of
  important options over a short period of time.
• VIX more applicable to long-term view
• VXN Nasdaq Volatility

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Volatility

• Fast changes in price over a short period of time
  suggests high emotions
• Emotions (Sentiment) in the extremes are
  indicative of a completion of the prevailing
  trend
• Higher VIX Higher Volatility Higher Emotions
• Higher VIX extremes are seen at important market
  bottoms rather than tops.

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VIX vs SPx 1996-2001
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VIX Notes

• Not just an Oscillator
• Chart Reading Same as Stock or Index
• Trends, Gaps, Support, Resistance etc.

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NYSE TICK

• Counts the net amount of stocks on NYSE that are
  on an up-tick or down-tick
• Highly useful for Intraday Trading
• Useful for identifying short-term Tops Bottoms

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NYSE TICK Extremes

• Rules of Thumb
• 1,000 Readings net 1,000 stocks on the Up
  Tick (moving up) Bearish
• -1,000 Readings net 1,000 stocks on the Down
  Tick (moving down) Bullish
• Notes
• Cross Referencebefore looking for important
  Tops/Bottoms!
• The Higher or Lower the readings, the stronger
  the argument
• Hi Ticks into the close normally signal a gap in
  the opposite direction
• Decimalization has recalibrated common TICK
  readings

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NYSE TICKBefore and After Decimalization
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NYSE TICKNotes for Intraday Use

• Look for surges and collapses in the TICK in the
  Intraday Market (500)
• In identifying surges and collapses, look for an
  immediate reaction

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Nasdaq Composite vs. NYSE TICKSeptember 19, 2001
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(No Transcript)
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Open Q A!
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SR Basics
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SR Basics (Trendlines)
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Trendlines and Fibs (cross-ref)
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SP500 1996 - 2001
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Nasdaq COMP Dailies
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Running Correction
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SPx Dailies Pitchfork
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SPx Stealth Gaps
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(No Transcript)
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Market Factoid

• In the last 2.5 years, there were 41 overhead
  gaps on the SP
• 37 of these overhead gaps, or 91 of the time,
  were filled within seven trading sessions.
• Data taken July,2001.

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Market Factoid

• When the market closes on the high print of the
  last hour of trading, the market will gap down or
  go down from opening the following trading day
  80 of the time.

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Market Factoid

• If Sears was left on the DJIA, instead of its
  recent replacement, INTEL, the Dow would have
  easily cleared new highs in May 2001, to over
  12,000.
• The Dow hit an important high on May 21, 2001 of
  11,345.

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