1) When you see a market extended to the upside or downside, in which many new buyers or sellers pile in at the new highs or lows, be on the lookout for opportunities to fade the move. The market, on average, doesn’t reward those who chase highs or lows or who panic out at price extremes.
2) A market that trades above or below its value area on weak volume is likely to return to that value area. A breakout turns into a trend when higher/lower prices attract market participation.
3) A broad, high volume breakout move to new highs or lows from an extended range is more likely to continue in its breakout direction (and move significantly in its breakout direction) than a narrow, low volume breakout move from a briefer range. Such moves are sustained by the larger number of traders on the wrong side of the market who will have to cover their positions, thus accentuating the breakout move.
4) A breakout move accompanied by a fundamental catalyst (earnings report, news event, shift in interest rates, currency movement) is more likely to continue in its breakout direction than a breakout move that occurs without other asset repricing. Large institutional traders are more likely to reprice equities in the face of significant fundamental drivers in correlated markets.
5) Don’t chase price highs or lows; sell when buyers take their turn and can’t move the market highs; buy when the sellers take their turn and can’t move the market lower. Measures such as the NYSE TICK will tell you when buyers or sellers are going against the price trend. Fade weak TICK moves against a dominant price (and TICK) trend.
6) Identify what the market’s largest traders are doing and go with it on weak countertrend action. The large traders account for the majority of the market’s volume and volatility. If they are buying or selling stocks, you don’t want to get caught fighting them. Wait for pullbacks to enter in the direction of the institutions.
7) If it’s a slow market (relatively few large traders), consider the possibility of range bound action. Low volume means low volatility, and that is generally associated with relatively narrow price ranges. Take profits quickly in such markets and set targets modestly; moves tend to reverse readily.
8) If it’s a busy market (relatively many large traders), consider the possibility of volatile market action. A market with high volume means that large traders will be capable of pushing price up and down to a greater degree than average. Adjust your stops and targets to account for this incremental volatility.
9) If many sectors don’t participate in a new high or low for the broad market index, consider fading the new high or low. A trend with staying power will tend to lift or depress all major stocks/sectors. When many issues or sectors don’t participate in a market move, the buying or selling in the index is often confined to a few issues that are highly weighted. Such moves generally are not sustained.
10) If you anticipate a broad move by equities, consider trading the most volatile indexes and the sectors with greatest relative strength. What you trade is just as important to results as the timing of trades. Go with the dominant market themes unless you have tangible evidence that those themes have changed.