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Author: Linda Raschke (MarketClub Trading Service)
If the market closes with a strong premium but opens weak the next morning, odds favor that the first "play" will be to the upside. If the market closes weak, and the futures close with a discount, yet the market gaps up the following morning, the first "play" should be a retest down to attempt to fill the gap. If the market closes with an extremely unusual discount OR excess premium, it is giving the trader a very loud and clear signal that continuation is likely the next day.
TRIN measures the concentration of volume in advancing and declining stocks. It is also called the Arms Index, (after its creator, Dick Arms). Think of it as the market's "gas pedal". If the TRIN is falling, buying is coming into the market. Someone is stepping on the market's "gas pedal". The trend of the TRIN is more important than the absolute level of the TRIN. However, if the TRIN is able to register a low reading, less than .60 going into the second half of the day, this is quite bullish. If the TRIN registers a reading greater than 1.25 after lunchtime, this is quite bearish. Never go home short a TRIN reading less than .50. There are approximately 85% odds the market will be higher the next morning. In the first 1/2hour, the TRIN can jump around if there is a large stock trading close to unchanged. As volume increases for the day, the TRIN will stabilize. The TRIN is a coincidental indicator with the S&P. Its main value is qualifying the overall tone for the market. An increase or decrease in the TRIN reading reflects strong buying or heavy selling. The trend of the TRIN is what is most important. Watching this helps smooth out some of the noise in the S&P price and confirm turning points.
Afternoon TRIN Lead trade:
There is a time period where the TRIN sometimes leads the market. Around 2:00 PIVI (EST) in the afternoon, it can display a 5-10 minute leading function by indicating a change in buying or selling pressure before the S&P starts to move. This is quiet buying/selling by the smart money. So, if you see the TRIN dropping like this: 86 ... 84 ... 82 ... in the afternoon and the S&P's are going sideways, there are extremely high odds a good afternoon rally is about to take place.
DOW AVERAGE and NASDAQ
Buy and Sell signals are given by non-confirmation (divergence) between one of these indexes and the S&Ps. In a trending market, especially on the upside, high beta indexes and stocks tend to lead. Thus, the NASDAQ has been an excellent indicator to watch over the last three years. In down markets, the big caps tend to lead, as this is where the liquidity is when funds are forced to dump. There are also periods where a sector of stocks or a particular commodity sets the tone for the market's psychology. (Internet stocks, the price of crude oil, or the trend of the dollar). Be aware of the key factor the market is focused on for that particular week and watch that individual market for leadership.
TIME OF DAY
The SP tends to have 2-3 main swings or trends during the course of a trading day. The moves tend to last 1 - 11 /2 hours on average before either entering a consolidation period or reversing to go the other way. As a general rule, there tends to be 2-3 choice reversal points during the day. "Choice" means capturing one of the 1-2 hour swings. There are 6-7 main patterns that tend to repeat themselves. For example: The market opens weak, sells down into the 10:00 - 10:15 time frame (EST) and then rallies into 12:00, the lunchtime pivot. (Institutional New York traders like to take lunch at this time!). A countertrend reaction lasts until 1 - 1:30. The afternoon rally attempt then begins, but if it starts too soon, it won't be able to sustain itself. Profit taking might come in during the last hour as the market trades sideways to down. This could be a classic trading day. A few things to look for: The first "inflection" point happens 20 - 40 minutes after the opening. At this point there will either be a countertrend reversal that will carry the market through the rest of the day, or there might be a brief 20-minute countertrend reaction before the market resumes its original trend off the opening price. The first hour is key for setting the tone for the day. If you find you are in sync with the first "play", you will most likely be in "sync" with the market for the rest of the day. Noontime can be a tough time to initiate trades. It is usually better to use limit orders when half the pit is empty. Do not chase prices if the market is in a noontime trading range. Look for a spot where the market might start to resume its afternoon trend as 1:30 approaches. Morning reversals are much stronger plays to look for than afternoon reversals. If the market does reverse in the afternoon, it will usually try first to resume the original trend but then fail. When the afternoon trend is strong and true, volume will be good during this time. On a trend day, the last hour's move will be the strongest, as losing traders are forced to cover going into the close.
When the bonds close there is a trading opportunity called the 3:00 jiggle. Many traders are focused on how the bonds are going to go out. Once this market closes, it is as if the pressure on the SPs is released, almost along the lines of "buy the rumor, sell the news". If the market has been trending between 2-3:00 EST, expect a small tradable 10-minute countertrend trade!If there has been little afternoon action, expect a last hour move. Gaps are a form of impulses. Gaps on the opening indicate an order imbalance. The larger the opening price gap, the greater the odds of a trend day. Because a gap indicates an imbalance between the buyers and the sellers, one side will be wrong and forced to eventually cover. Every trader should be able to readily distinguish a common gap from a breakaway gap or an exhaustion gap. The point is not to guess at the latter but just be prepared for it. Breakaway and Exhaustion gaps have STRONG forecasting value, but only if the gap has held by the end of the day. The common gap just sets up short-term scalping opportunities. The easiest way to take advantage of a large opening gap is to trade in the direction the market starts to move after the first 40-60 minutes of trading. The easiest way to do this is to place a resting buy/sell stop to pull you into the market. If the trade is exited on the close, this strategy tends to win approximately 2/3rds of the time. This includes a stop and reverse function. If the first hour's range is broken to the upside, and the price then fails and comes out of the low end of the range, an order should be placed to stop and reverse at this point. The second trade almost always makes up for the loss on the first trade. The second best way is to trade a breakout function off the opening price. This variable is best calculated off a percentage of the previous day's average true range. A good default value is 60%. In other words, add +/60% of the previous day's average true range to the opening price. By using a range function, the system will be adaptive in an environment of increasing or decreasing volatility.
About the author:
Linda Raschke, President of LBRGroup, Inc., has been a full time professional trader for nineteen years. She began her trading career on the Pacific Coast Stock Exchange and later moved to the Philadelphia Stock Exchange. In the early 1990s, she became a professional money manager and started LBR Group, Inc. Linda was written up in Jack Schwager's book, The New Market Wizards, and also in Women of the Street by Sue Herera. In 1995 she co-authored the best selling book, Street Smarts-High Probability Short Term Trading Strategies. Linda continues to trade every day and posts her trading activity to the Internet (mrci.com/lbr). Linda also continues to be actively involved in presenting trading workshops and online seminar for companies such as the MarketClub Trading Service. To find out more about MarketClub, see what others are saying about this tool: MarketClub review.