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Trade for LifeTM
Lesson of the Week From the VCM Research Department For June 27th, 2007 Maintaining a Market
Bias To have a market bias simply means that you have formed
an opinion of which direction the market is most likely to take next. There
are basically three directions available. Up, down, and sideways. We have written
prior articles on what the "market" could be considered, but for
practical purposes now let’s just assume that the S&P 500 will be
our measurement for the market. We will look at the S&P 500 through the
eyes of the SPY, which is the ETF tracking stock for the S&P 500. There are two issues we need to discuss first. The first
is why we need to form an opinion of market direction. The second question is
whether or not we need to incorporate a bias in our thinking on every single
trade. The reason we form an opinion of market direction is
because the greatest odds always lie in playing with the trend. Generally
speaking for most trades, we are either interested in buying pullbacks in an
uptrend, or selling pullbacks (rallies) in a downtrend. So we need to
determine if we are in an uptrend or downtrend. That part is fairly simple,
and should be the primary focus. That is to say, we are most concerned with
what the market is currently doing. However on an intraday basis, on smaller
time frames, the market direction can change several times throughout the
day. So we want to be able to identify the times that the market will be most
likely to change so we can stand aside or begin preparing for the next move. Let’s take a look at the SPY on both the five and
fifteen minute chart on a recent trading day.
The first thing to consider when trying to get a handle
on the market in the morning is what happened on the prior day and what
happened going into the close. On this particular day we can see from the 15 minute
chart that we had a continuous all day drop and the drop actually accelerated
it right into the close on the 20th, the prior day. This is important
information because early-morning sell-offs are
generally bought. They are bought because novice traders think the market is
continuing lower underneath the 1, 2, or five minute lows, get short, and add
to the buying when the market moves up. When this happens, be set to go long
on the first set up available. On the five minute chart we had just such a set
up. At "1" we had a continuous drop into 10 o'clock reversal time
after the extended move down yesterday. We also have the widest bar coming at
the end of the move (on the five minute chart), a likely sign that the move
is almost over. The buy setup that formed at 1, was
an excellent opportunity to get long. The target was the 20 period moving average on the five minute chart. As it turned out we went through the 20 period moving average on the five minute chart. The amount of this rally
was very bullish and creates a bias to want to get long on the next pullback.
Generally anything that retraces more than 60% of the prior drop is bullish.
On an intraday basis we retraced 100%. Because this was such a bullish move,
the next pullback was deemed to be buyable. We had that pullback happen on a
five minute chart at 3, sitting on top of the rising 20 period moving
average. The rally took us to 4, which happens to be the declining 20 period
moving average on the 15 minute chart. Once we get into lunch, the more reliable setups start
to occur on the 15 minute chart. There is too much data that late in the day
for the five minute chart to continue to act correctly and hold all support
and resistance levels. That next pullback which landed at 5 was a fairly nice
looking 15 minute VCM buy setup (VBS) after pulling in with about a 50%
retracement. For a tighter entry we can also see that as this was happening
there was a retest on the five minute chart that gave an alternate entry as a
five-minute VBS. The next pullback landed itself on top of the newly
rising 20 period moving average on the 15 minute chart with bottoming tails
at 7. Rally from here took us into the close that day. Using these tactics that we teach at our seminars and in
the VCM Trade for Life™ Live Trading Room every day can keep you on the
right side of the market. This can be used to trade the market itself such as
trading the QQQQ or SPY, or the E-mini contracts, or the futures themself. They can also be used to develop a bias for the
day to play other stocks and time your entries properly using relative
strength and relative weakness. You are receiving this because you have
registered for our FREE services. You may also be eligible for a FREE 10-day trial
of our PREMIUM services. Simply sign up at http://www.vcmtrading.com/services_premium.php.
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feel free to send any comments to services@vcmtrading.com Remember as always that you should not risk your own
money unless you understand and are comfortable with the position and you
have a full understanding of the risks of trading securities. |
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Please
keep in mind that all comments made by Velez Capital Management, LLC
("VCM") instructors and representatives are for educational purposes
only and should not be construed as investment advice regarding the purchase
or sale of securities, options, futures or any other financial instrument of
any kind. Consult with your investment advisor before making an investment
decision regarding any securities mentioned herein. VCM instructors and
representatives assume no responsibility for your trading and investment
results. Information
for the stock observations was obtained from sources believed to be reliable,
but we do not warrant its completeness or accuracy, or warrant any results
from the use of the information. The author as well as other VCM employees,
representatives and "affiliated" individuals may have a position or
effect transactions in the securities herein (or options thereon) and/or
otherwise employ trading strategies that may be consistent or inconsistent
with the provided strategies. There
is a very high degree of risk involved in any type of trading. Option and
Futures trading is not suitable for all investors. Past results are not
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and all "affiliated" individuals assume no responsibilities for
your trading and investment results. Velez
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