10 Jul

First Look: Using The SPY’s Momentum Indicators To Trade The QQQ’s

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Momentum indicators are some of my favorite tools to use when trading the SPY

It’s exciting when you find the trend and watch it rip in the direction you selected

But sometimes the momentum setup just doesn’t want to work in my favor using the SPY’s

And even though markets are connected…

…there are times when they do their own thing.

Which is why I’m going to show you how momentum can be when applied to other markets.

No matter the SPY, DIA, VXX or QQQ’s, momentum is considered a leading indicator in the entire market.

Now, let’s take a chance to have a first look into why the momentum indicator worked on the QQQ’s today instead of the SPY’s.


Leading Indicators


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, and said to be “backwards looking”

Now I don’t believe this idea… I find that when combined with other signals or indicators they can actually help to predict the markets and provide valuable information about the direction 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 two leading indicators that I use on daily basis are:

  • The Global Markets
  • The VIX Index

So let’s take a look at how I use the two 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.

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 end to the prior trading day and the global markets are showing strong trading overnight.


Source: CNBC


As you can see the Asian markets were up overnight, with China slightly down.  This is signaling strength that should carry over into the US markets throughout the trading day.


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


In this example, you can see that the VIX / VXX is in a downward trend and showing that the markets should be in a position to rally.


How To Read The VIX


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:

-Bearish divergence that predicts shrinking risk appetite and high risk for a downside reversal.

2.) Rising VIX + falling S&P 500:

-Bearish convergence that raises the odds for a downside trend day.

3.) Falling VIX + falling S&P 500:

-Bullish divergence that predicts growing risk appetite and a high potential for an upside reversal.

4.) Falling VIX + rising S&P 500:

-Bullish convergence that raises odds for an upside trend day.

5.) Divergent action between S&P 500 and the other index futures:

-lowers predictive reliability.  This often yields choppy price action or whipsaws, confusion and range bound conditions


SPY vs QQQ’s – What Happened


Now this is where things get interesting!

Let’s take a look at two charts of the SPY and the QQQ’s


Source: Thinkorswim


Looking at the SPY’s a normal spot to go long that a trader would look for is for support at the day priors or overnight lows.

Unfortunately that’s not what happened, and the markets just continued lower.

But what about the momentum indicators?  How could they be wrong?

Well…wait a minute… maybe they are not wrong at all, but just being used on the wrong ETF.


Source: Thinkorswim


As you can see, the QQQ’s actually listened to the day priors pivot prices.

And if you were to buy the QQQ’s at that level, you would have perfectly timed the momentum that sent the markets back to daily highs by the end of the day.


Wrapping Up


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 two leading indicators in your daily trading routine, you can gain a huge advantage over the rest of the markets.  

Plus… by looking at other markets, you are in a position where you could turn a losing day into a potential winner.

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