Thursday, August 9, 2007

Which Mouse Gets The Cheese

The early bird might get the worm, but its the second mouse that gets the cheese!

It is always tempting to try to be the one who buys the low and sells the high, but in the end the goal isn't to be right, it is to make money. There are as many strategies and indicators as there are traders. That said, it is important to use tools that fit with your trading/investing personality, and to not try to find the system of the day because the market has turned choppy. Recently when combining three indicators, that I have personally used for years, into one indicator, the result is something that might be of help in turbulent times.

Below is a chart of the S&P 500 Index. The lower pane shows an indicator created from volume, the daily pivot price, a secret twist, and a moving average. This indicator is similar to other money-flow indicators, but the "secret twist" is the difference. I use this indicator to gauge the internal health of the market. If the index is trending with higher closes with good volume, the indicator tracts higher. If when the down days have greater volume that up days, it then starts to flatten out. This doesn't necessarily mean it is time to sell, but it does signal it is time to tighten stops and be more selective in positions held.

It is important to watch this indicator in relation to the zero-line and to watch the general slope. Another way to apply this is to use two moving averages of this indicator and watch for crossovers and zero-line crosses. Below is another chart of the S&P 500 going back to last year.

This chart show these moving averages in the lower pane. When the faster moving average crosses below the slower moving average it signifies it is time to tighten stops, reduce margin exposure, or trim positions. As long as the indicator is above the zero line things are still positive, but that doesn't mean ignoring the signs of slowing momentum. Below are some other charts to help get a feel for this indicator.

Nasdaq 100 - NDX

Bank of America - BAC

Goldman Sachs - GS

Applied Materials - AMAT

Juniper Networks - JNPR

Oil Service Holders - OIH

This indicator can be calculated with any charting software that allows custom indicator formulas. Telechart offers a free 30day trial if anyone is interested in applying this formula to their own charts. If you use Telechart or Metastock charting software, email me, , and I will share the specific code. If you would like to see this indicator plotted for a specific stock or index email me and I will email you back with a few charts.

No comments: