29 May

Behold the Power of the NASDAQ

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While no one can predict the moves of the stock market…

There are tools you can use to get in range…

They are called leading indicators, and today I want to spend some time to talk to you about them…

Being aware of them…and knowing how to read them…

Can sometimes tip you off on where the market is heading…before it it does.

 

What Is A Leading Indicator?

 

A leading indicator is a set of data that changes before the rest of the market begins to head in a direction.  

Leading indicators help traders and investors predict significant changes in the markets in advance, and can place them in a trade ahead of the herd.

It’s important to note that these indicators are not always accurate, but when combined with other signals or indicators they can help provide valuable information about the direction of the markets for the trading day.  

Example of a Leading Indicator

 

There are many examples of leading indicators that investors and traders use to forecast price action.

Prior earnings reports, price action in other markets, and alternative data sources as customer complaints and online reviews are all different leading indicators for their specific cases.

Investors and economists pay attention to the same leading indicator as one another.  This causes a “herd mentality” reaction to good or bad reports.  

When a group of traders are paying attention to these figures, this can be further exaggerated as these data points are directly related to the stock markets.  

One example of this is the jobless claims number that is reported by the U.S. Department of Labor on a weekly basis.  

A rise in jobless claims indicates a weakening economy, which will likely have a negative effect on the stock market. If jobless claims fall, this may indicate that companies are growing, which is a good indication for the stock market.

The jobless claims is just an example of a leading indicator that many traders use to help predict the directions of the markets every week.  

And the concept is the same as having leading indicators for the upcoming trading day in the pre market session.

The three leading indicators that I use on daily basis are:

  • The Global Markets
  • The VIX “Fear” Index
  • The NASDAQ Futures

So let’s take a look at how I use the three leading indicators to predict market action for the day ahead.

The Global Markets

 

The global markets are interconnected more than we may think.  

When the U.S markets are closed from 8pm to 4am, the world markets are trading.  

And every day the pre market trading session opens at 4:00 am and goes until the opening bell at 9:30 am.  

From bonds, commodities, and foreign exchange, the world markets influence one another around the clock.

Headlines come out from around the world and many major banks and financial institutions begin to release their outlooks and forecasts for the day ahead at this time.

Here’s a headline that I saw come across a major news channel during the pre market trading session in the CoronaVirus market collapse.

 

 

And by monitoring the news channels in the morning, it gives me a chance to determine which way the markets will head going into the trading day ahead.

It’s important to remember that the pre market works in both directions.  

If the US had a poor trading session, and the global markets rebound overnight, there is a higher likelihood that the next trading day will follow along.

In this case, the markets had a strong trading day prior and the global markets are showing strong trading overnight.

 

Source: Finviz

 

And as you can see the Asian markets were up overnight – signaling strength that should carry over into the US markets throughout the trading day.

Which is exactly what happened

 

Source: Thinkorswim

 

The VIX “Fear” Index

 

An example of a leading indicator is the VIX.  

The VIX is known as the “fear index” of the markets and can reflect and even predict when investors are starting to become scared before the markets even drop!

And there is a tremendous amount of predictive power as it’s the pulse of the investors’ fear, hence why it’s regularly called the “Fear Index.”

The VIX suggests:

  • Values of the VIX are high investors are more fearful and sell stocks
  • Values of the VIX are lower, investors are more willing to buy stock.

And this is exactly why I keep the VIX on my premarket list and monitor its move.  

Plus I keep it on my intraday momentum indicator grid as well to see what investors are thinking as the days elapsing!

 

Source: Thinkorswim

 

And in this case you can see that the VIX is supporting that the market is calm and the markets are heading higher without much fear.  

But, that can all change, and the markets quickly reversed.  And when they reversed, you can see that the fear gauge spiked.

 

Source: Thinkorswim

 

By keeping a real-time VIX on your screens when considering entering a trade gives you a look into the feelings the entire market is having toward the price action.

Here are 5 key ways to analyze the VIX for signals to trade the SPY.

  1. Rising VIX + rising S&P 500:
  1. Bearish divergence that predicts shrinking risk appetite and high risk for a downside reversal.
  1. Rising VIX + falling S&P 500:
  1. Bearish convergence that raises the odds for a downside trend day.
  1. Falling VIX + falling S&P 500:
  1. Bullish divergence that predicts growing risk appetite and a high potential for an upside reversal.
  1. Falling VIX + rising S&P 500:
  1. Bullish convergence that raises odds for an upside trend day.
  1. Divergent action between S&P 500 and the other index futures:
  1. lowers predictive reliability.  This often yields choppy price action or whipsaws, confusion and range bound conditions

The NASDAQ Futures

 

Like many of the other leading indicators that I monitor to determine the market direction, I also use other U.S markets.

Since the three major indices are interconnected it’s important to track and monitor each one, but I specifically like to reference the NASDAQ.  

To me this is one of the strongest leading indicators of the direction of the SPY.

Here is a comparison of the SPY to the QQQ’s for the beginning of the trading day.

 

Source: Thinkorswim

 

And as you can see from the chart, the QQQs showed signs of strength in the morning when the SPY showed weakness.

This means that the QQQs as a leading indicator is projecting that the SPYs are actually going to eventually head higher.

 

Wrapping Up

 

A leading indicator is a set of data that changes before the rest of the market begins to head in a direction.  

Leading indicators help traders and investors predict significant changes in the markets in advance, and can place them in a trade ahead of the herd.

It’s important to note that leading indicators are not always accurate, but when combined with other indicators they can help provide information about the direction of the markets for the trading day.

And as you can see, by using these three leading indicators in your daily trading routine, you can gain a huge advantage over the rest of the markets.  

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