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Feature
 Tools
for Intermediate Time Frames
by
D.R. Barton, Jr.
“Give us the tools and we will finish the job.” ~ Winston Churchill
The Barton family is quite excited about our upcoming end-of-the-summer vacation to Myrtle Beach in South Carolina. Since our school year starts a little later than those in Virginia and the Carolinas, we get to go to the beach when it’s less crowded.
We look forward to playing massive amounts of miniature golf, eating good food and drinking great wine. And we’ll definitely hit the beach for some body surfing.
While getting ready this week, I pulled out my good ol’ tried and true Nike athletic sandals. They’re
comfortable and easy to put on and take off.
But I noticed that a section of the sole was starting to separate. No problem. I could just glue it back, and they’d be as good as new. Trouble was that I needed to hold the parts together to allow the glue time to set.
Using my fingers was out of the question—the glue takes too long to dry. Rubber bands wouldn’t hold it, neither would tape. Setting some heavy books on top wouldn’t
work (I didn’t want to get glue on the books either).
Then I remembered that I saw these cool ratcheting hand clamps at Home Depot. Now that’s the right tool for the job. I rationalized that there would be other projects around the house that could use this nifty little gizmo, so I went out and got one.
And it was perfect.
The gluing job was done in minutes and the hand clamp held the sandals until they were back to their comfortable and fully repaired self.
Finding a great tool made the job so much easier. Just like in the trading world.
The Right Tools for the Market
These days, I’m often questioned about the market direction. People ask "Will this market keep going up?"
I do have an opinion on that based on ways—“tools”—to look at market action.
Out of all the fundamental, technical, wave counting, and other
tools that are out there, I only want to use the best ones—those
that help me develop an opinion quickly and with the most
conviction. As with the sandal, the right tool makes the job a lot
easier.
I like to look at the market from an intermediate term perspective. I believe that the best tools to help me evaluate intermediate term moves for the market are analyzing retracements versus recent market moves, comparing our market to other world markets, and comparing price and momentum.
Retracement Levels
First, let’s look at the S&P 500 cash index on a weekly chart to see a very interesting point of view on this mid-year rally.
This chart shows the Fibonacci retracement levels based on the down move from the October 2007 to the March 2009 lows.
The traditional way to look at Fibonacci retracement lines is to use them as a trend continuation tool. In this case, we’d look at the big bearish move down and try to gauge the strength of the move based on the intensity of the retracements that follow the move. A retracement of 0.382 (38.2% of the original down move) that then continued down would signal a very strong down market. A retracement of 0.5 would be a “normal” move and indicate a moderately weak market. And a retracement of 0.618 that continued down would indicate that the down move is not very strong. A significant violation of the 0.618 line would indicate that the trend is over and would be classified as an uptrend.
Interestingly, the chart above shows that on the August 7th high, the market
peaked just above the 0.382 line at 1014 and was rejected. We’re still not far from that line.
If the market works down from this level, it would be a very bearish
technical indication. If price does make it through the 1014 level, the expectation then would be for a test of the 50% level at 1121.
In Other Areas of the Globe
China’s markets made a bigger recovery from last fall than most of the world’s regional economies. Now, analysts are looking at that huge and growing economy as something of a bellwether.
This chart of the Dow Jones Shanghai index shows a 20% decline, throwing the Chinese market firmly into “bear mode” classification.
The middle of August swoon in China started earlier and has gone deeper than the minor pullback we’ve seen here in the
S&P 500.
Traders and investors will add a useful tool to their swing trading toolbox by keeping an eye on the movements of the indexes in China.
Market Momentum
The last tool we’ll use focuses on the little double top that the S&P 500 made recently. First, look at the double top price action, then look at what the MACD and stochastic indicators did during that same period. Mabel, that’s called divergence.
Divergence is a great guide for evaluating tests of highs and lows. Since this test of the highs was so close together, perhaps the
third test of 1013-1018 will be more important. But if momentum continues to be weak, the next test is likely to fail again.
(Side Note: Christopher Castroviejo has made a very lucrative career in the markets trading divergences. He is so well-recognized for his specialty that Market Wizard Ed Seykota nicknamed Christopher “Doctor Divergence”.)
Tools and Trading
The perspectives above give you a quick example of how a few simple tools can help you form an opinion about market action. Could you trade that? Well, maybe not just yet, but if you were equipped with the right tools, a set of tested rules and proper risk management, you probably could. At
next month's swing trading workshop, we are going to provide you a full toolbox and sets of rules to help you go home and trade swing systems well.
Christopher and I will teach Tactical Pro Swing Trading in September.
We’ll show the tactics that he and I have developed and used in a combined 60+ years in the markets. We’ll be digging into mechanical strategies while adding some street smart savoir faire to the mix. We also have a great section on using options in the swing timeframe that can add a “power” tool to your systems toolbox.
Viewed as a broad “style” of trading, the swing systems we teach can be rewarding from several perspectives. For a lot of traders, swing trading fits into even the busiest
schedule. Swing trading offers numerous opportunities to catch lots of moves that the longer-term players miss. It also helps you get out of the way of some of the more dangerous market moves.
In addition, we’re teaching a fourth day completely dedicated to band trading. In the current market conditions, bands seem to be working well. Given how we see the markets for the foreseeable future, we expect bands to be a trading method that will work
very well for some time to come.
We look forward to seeing you in North Carolina next month.
Great trading,
D. R
About
D.R. Barton, Jr.: A passion
for the systematic approach to the markets and lifelong love of
teaching and learning have propelled D.R. Barton, Jr. to the top
of the investment and trading arena. He is a regularly
featured guest on both Report
on Business TV, and
WTOP News Radio in Washington, D.C., and has been a guest on
Bloomberg Radio. His
articles have appeared on SmartMoney.com and Financial
Advisor magazine. You may contact D.R. at
"drbarton" at "iitm.com".
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Market
Type for the UK Market (FTSE 100)
