Tuesday, October 06, 2009

Passing the Plate: The Value of Trading Tools

In this latest "passing the plate" post (click on the above display), you'll see two new indicators that Henry Carstens has been working on and displaying on his site. These indicators are based on the same logic that drive some of the systems that Henry uses in his money management. The above charts were taken from Monday morning's market.

At left, Henry is tracking the odds of a trend day in each of nine S&P 500 sectors. From left to right, those are XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, and XLY. Note how the sectors look mixed (though generally positive); that led me to not chase market strength, recognizing that we might not be closing near our highs for the day.

At right, we see that Henry is tracking a large basket of liquid stocks and evaluating each one for its trend status. By summing across the basket, he is able to get a good reading for the overall market. The indicator updates every five minutes, providing a useful measure of whether the market is strengthening or weakening. When indexes were at highs around 10 AM CT, I saw that the cumulative status of the indicator was having trouble sustaining its highs and (wisely it turned out) waited for a pullback before engaging the market on the long side.

In trading, as in carpentry and auto mechanics, the expert craftsman looks for the right tools--and the best tools--for the job. Some of the best tools for traders allow them to see the market's big picture, even as they stay focused on short-term patterns and sound trade execution.