The longer the market is able to hold up in the face of rising Euro yields, falling oil prices, a rising dollar, and other typically bearish indicators, the longer people will be waiting for it to crack. The longer people are waiting for the market to crack the longer it will have gone without cracking. Our point is do not get caught waiting on something to happen, good or bad, thinking that it is inevitable. We talked about having multiple expectations the other day and Tuesday’s price action was a case study in the importance of this trading characteristic.
Were you paralyzed on Tuesday? Did you expect the market to continue lower following Monday’s down move, but then get caught short as the market stormed back from south of the break even line? Maybe you were long on Tuesday but got shook out of your position when the market started to give up gains and turn red. How many of you knew exactly how to trade Tuesday and why? If you can quickly identify what is leading the market on a given day you will be better prepared to handle the rest of that days trading.
For example, on Tuesday within the first 15 minutes of trading XLE, XLI, & XLB were the best performers, outpacing the market with a 0.5%-1% gains even though SPX was struggling to stay above break even. So right away you could identify that energy, industrials, and materials were playing a leadership role. This is in contrast to technology and financials typically taking on leadership roles. Had you properly identified your leaders at the outset, you would have realized to pay more attention to the strength XOM was showing, and not the weakness that was showing up in AAPL.
In a market that is changing trends on a day to day basis your leaders are going to change daily as well. Some days bond yields will dictate the action, other days oil, other days technology etc.. but if you don’t know how to quickly identify them in the first place then you’re doomed to trade lag. Trade lag is when you have to squeeze out profits from opportunities because you are recognizing them too late in the day. Each morning pre market you should check how all the SPDR ETF’s are performing to gauge which sectors might end up leading the market that day. If you are attentive, you may pick up on a signal to go long or short on the market while others are still simply waiting for the market to do something. Be a trader, not a waiter.
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