Why actively trade ETFs?
- Thread starter deronwagner
- Start date
A trendline is not drawn from peaks and troughs but from where an O or X column is greater than the previous.
Check out http://www.ez-pnf.com
http://www.chartcraft.com/ChartcraftCollege.pdf
for tutorials and do a search on google.
Check out http://www.ez-pnf.com
http://www.chartcraft.com/ChartcraftCollege.pdf
for tutorials and do a search on google.
This is why I scalp. There is no worry for over night holds and CEO's with greedy paws.
BOLT
Thanks Deron for starting this thread...
As far as th BBH, I don't see where it broke it's 200 day EMA.. it thrust above it's simple moving average on one day... but as a swing trader I would not get in on that alone in a bear market.. would want to see it close above and hold on more than a single day... and begin showing 'some' upside momentum. Rather miss a little and be more sure of my entry. But then, I'm fairly skepitical in these markets, as far as long positions when the underlying merely thrusts above some key level.
I was curious if you think a break of a 200 day --simple-- moving average is significant enough of an indicator, to trade off of; and why. (I'm in a habit of only using EMAs)
I
As far as th BBH, I don't see where it broke it's 200 day EMA.. it thrust above it's simple moving average on one day... but as a swing trader I would not get in on that alone in a bear market.. would want to see it close above and hold on more than a single day... and begin showing 'some' upside momentum. Rather miss a little and be more sure of my entry. But then, I'm fairly skepitical in these markets, as far as long positions when the underlying merely thrusts above some key level.
I was curious if you think a break of a 200 day --simple-- moving average is significant enough of an indicator, to trade off of; and why. (I'm in a habit of only using EMAs)
I
FYI, I recently wrote two articles on the ETF trading methodology discussed in this thread in case anyone is interested in learning more about ETF trading with the HOLDRS. Several subscribers to this thread have formerly inquired about this.
One article is in the March issue of Active Trader magazine and the other article is in the February issue of SFO magazine. I'm also speaking at the NYC Online Trading Expo. (www.onlinetradingexpo.com).
One article is in the March issue of Active Trader magazine and the other article is in the February issue of SFO magazine. I'm also speaking at the NYC Online Trading Expo. (www.onlinetradingexpo.com).
From today's issue of The Wagner Daily:
Besides price, volume is the most important technical indicator there is. Ironically, volume also tends to be the one indicator that novice traders, and even experienced ones, often forget to pay attention to because they get too wrapped up in analyzing trendlines, support/resistance levels, and moving averages. The fact is that none of those other indicators will as accurately predict price movement as volume because volume is a leading indicator to price. Very rarely will you ever see a sustained breakout or breakdown in the market without a relatively sharp increase in volume. Have you ever bought a breakout or sold short a breakdown in an index or stock that you thought was a "no-brainer" because all the technicals looked good, yet the trade failed anyway? Chances are that the volume was too light and did not confirm the price. Selloffs and breaks of support often do not follow-through if the volume does not simultaneously increase. This occurs because it only takes a small amount of buyers or sellers jumping into the market to move prices in the opposite direction of the trend. However, once those buyers or sellers are done, prices will often revert back to where they previously were, thereby causing a lack of follow-through and choppy conditions. Any trends that form on light overall market volume must be taken with a grain of salt and an extra ounce of caution. Light volume selloffs usually indicate a lack of buyers rather than an abundance of sellers, which is why we chose not to participate in shorting much of the selloff over the past couple of weeks. The short side did not show much conviction due to the light volume. This is what we mean we refer to the market being in a "slow bleed" over the past several weeks. Conversely, light volume rallies often fail because they are based on a lack of sellers, rather than an abundance of buyers. Therefore, it only takes a few big sellers to step in to make prices collapse. Overall, it is usually not a good risk to enter new positions when the total market volume is very thin.
In order to determine whether total market volume is heavy or light, we plot both a 5 and 50-day moving average to look for changes in volume. The 5-day moving average shows us the average daily volume for the past 5 trading days, which we have found to be a good time horizon to indicate short-term changes in volume. In general, we trade more aggressively when the total market volume is above the 5-day moving average because it indicates a short-term increase in volume, which typically leads to continued follow-through in pricing. However, when total volume is below the 5-day moving average, it usually leads to a lack of direction and less desirable trading conditions. The 50-day moving average gives us a longer term view of volume, which is useful in confirming multi-month trends (or lack thereof). We also use the crossover of the two moving averages as an indicator to a change in sentiment. When the 5-day is above the 50-day MA, it typically indicates a more sustained increase in volume. But, if the 5-day is below the 50-day MA, it points to a sustained period of decreased volume (and hence a lack of interest). Below is a daily chart of the total Nasdaq market volume, along with the moving averages discussed above:
Notice how the 5-day moving average is slowly drifting further away from the 50-day moving average. This indicates a steadily increasing lack of interest in the markets, which will continue to make trading difficult until that trend changes. Also notice how only one out of the last eight trading days have been above the 5-day moving average. Generally, it is not wise to be aggressively in the markets when volume is below the 5-day moving average.
One clear example of why markets are difficult to trade during light volume periods can be found by looking at a 15-minute chart of yesterday in the S&P futures:
Looking at the chart above, notice how after testing the 822 support level three times and breaking to a new low not seen since October of last year, which occurred around 1:15 pm EST yesterday, the S&P futures (and SPY) should have sharply and quickly collapsed to a new low. However, notice how the futures instead deliberated and actually rallied back ABOVE the upper channel trendline resistance of the downtrend from the past two days. Then, after everyone was stopped out of their short positions, the market eventually sold off to set new lows, though the futures only dropped 4 points below the support level. This was all the result of light market volume! Looking at the entire day, it looks like the 20-MA on the 15 min. chart formed resistance for a smooth and steady downtrend. But a closer look on a shorter time frame indicates why it was tricky to stay short in the afternoon.
We began noticing substantial changes in sector rotation yesterday, which is apparent by looking at the daily charts. In general, we noticed that the sectors which have been holding up well relative to the market during the selloff over the past month were very weak yesterday while the sectors which have been getting whacked down to their prior October lows were strong yesterday relative to the market. Pharmaceuticals (PPH), Biotechs (BBH), Software (SWH), and Oil Service (OIH), all of which have been holding up well over the past two months, were each very weak yesterday. However, sectors such as Semiconductors (SMH) and Retail (RTH), both of which are trading at or near their October 2002 lows, held up well relative to the market yesterday and did not even trade below the prior day's lows. We took a long position of RTH overnight, as called in the ETF Real-Time Room, because we perceived it to be a low-risk trade due to the sector rotation and yesterday's relative strength. By paying attention to which sectors are showing strength and weakness relative to the market, you can ensure you are always putting the odds of a profitable trade in your favor by being in the right sectors. For more details on sector trading, you may want to check out the March issue of Active Trader magazine in which I wrote about a specific strategy on sector trading the HOLDRS.
Unless volume picks up, I expect much of the same action we have been experiencing over the past several weeks. The jobless claims and retail sales reports come out at 8:30 AM today and Dell reports earnings after the close. Although technicals have been overshadowed by news lately, it's important to note that the daily charts of SPY and DIA are now at the lower channel support of the downtrend from the December 9. Take a look at the SPY chart:
Besides price, volume is the most important technical indicator there is. Ironically, volume also tends to be the one indicator that novice traders, and even experienced ones, often forget to pay attention to because they get too wrapped up in analyzing trendlines, support/resistance levels, and moving averages. The fact is that none of those other indicators will as accurately predict price movement as volume because volume is a leading indicator to price. Very rarely will you ever see a sustained breakout or breakdown in the market without a relatively sharp increase in volume. Have you ever bought a breakout or sold short a breakdown in an index or stock that you thought was a "no-brainer" because all the technicals looked good, yet the trade failed anyway? Chances are that the volume was too light and did not confirm the price. Selloffs and breaks of support often do not follow-through if the volume does not simultaneously increase. This occurs because it only takes a small amount of buyers or sellers jumping into the market to move prices in the opposite direction of the trend. However, once those buyers or sellers are done, prices will often revert back to where they previously were, thereby causing a lack of follow-through and choppy conditions. Any trends that form on light overall market volume must be taken with a grain of salt and an extra ounce of caution. Light volume selloffs usually indicate a lack of buyers rather than an abundance of sellers, which is why we chose not to participate in shorting much of the selloff over the past couple of weeks. The short side did not show much conviction due to the light volume. This is what we mean we refer to the market being in a "slow bleed" over the past several weeks. Conversely, light volume rallies often fail because they are based on a lack of sellers, rather than an abundance of buyers. Therefore, it only takes a few big sellers to step in to make prices collapse. Overall, it is usually not a good risk to enter new positions when the total market volume is very thin.
In order to determine whether total market volume is heavy or light, we plot both a 5 and 50-day moving average to look for changes in volume. The 5-day moving average shows us the average daily volume for the past 5 trading days, which we have found to be a good time horizon to indicate short-term changes in volume. In general, we trade more aggressively when the total market volume is above the 5-day moving average because it indicates a short-term increase in volume, which typically leads to continued follow-through in pricing. However, when total volume is below the 5-day moving average, it usually leads to a lack of direction and less desirable trading conditions. The 50-day moving average gives us a longer term view of volume, which is useful in confirming multi-month trends (or lack thereof). We also use the crossover of the two moving averages as an indicator to a change in sentiment. When the 5-day is above the 50-day MA, it typically indicates a more sustained increase in volume. But, if the 5-day is below the 50-day MA, it points to a sustained period of decreased volume (and hence a lack of interest). Below is a daily chart of the total Nasdaq market volume, along with the moving averages discussed above:
Notice how the 5-day moving average is slowly drifting further away from the 50-day moving average. This indicates a steadily increasing lack of interest in the markets, which will continue to make trading difficult until that trend changes. Also notice how only one out of the last eight trading days have been above the 5-day moving average. Generally, it is not wise to be aggressively in the markets when volume is below the 5-day moving average.
One clear example of why markets are difficult to trade during light volume periods can be found by looking at a 15-minute chart of yesterday in the S&P futures:
Looking at the chart above, notice how after testing the 822 support level three times and breaking to a new low not seen since October of last year, which occurred around 1:15 pm EST yesterday, the S&P futures (and SPY) should have sharply and quickly collapsed to a new low. However, notice how the futures instead deliberated and actually rallied back ABOVE the upper channel trendline resistance of the downtrend from the past two days. Then, after everyone was stopped out of their short positions, the market eventually sold off to set new lows, though the futures only dropped 4 points below the support level. This was all the result of light market volume! Looking at the entire day, it looks like the 20-MA on the 15 min. chart formed resistance for a smooth and steady downtrend. But a closer look on a shorter time frame indicates why it was tricky to stay short in the afternoon.
We began noticing substantial changes in sector rotation yesterday, which is apparent by looking at the daily charts. In general, we noticed that the sectors which have been holding up well relative to the market during the selloff over the past month were very weak yesterday while the sectors which have been getting whacked down to their prior October lows were strong yesterday relative to the market. Pharmaceuticals (PPH), Biotechs (BBH), Software (SWH), and Oil Service (OIH), all of which have been holding up well over the past two months, were each very weak yesterday. However, sectors such as Semiconductors (SMH) and Retail (RTH), both of which are trading at or near their October 2002 lows, held up well relative to the market yesterday and did not even trade below the prior day's lows. We took a long position of RTH overnight, as called in the ETF Real-Time Room, because we perceived it to be a low-risk trade due to the sector rotation and yesterday's relative strength. By paying attention to which sectors are showing strength and weakness relative to the market, you can ensure you are always putting the odds of a profitable trade in your favor by being in the right sectors. For more details on sector trading, you may want to check out the March issue of Active Trader magazine in which I wrote about a specific strategy on sector trading the HOLDRS.
Unless volume picks up, I expect much of the same action we have been experiencing over the past several weeks. The jobless claims and retail sales reports come out at 8:30 AM today and Dell reports earnings after the close. Although technicals have been overshadowed by news lately, it's important to note that the daily charts of SPY and DIA are now at the lower channel support of the downtrend from the December 9. Take a look at the SPY chart:
Deron,
This past week I was looking at various indexes at the AMEX and noticed there is one with the symbol XSH titled "Semiconductor HOLDRs Index". It seems as if it's the index of those components that make up the SMH with the representative weighting of those companies. Do you know if that's true and if so what are your thoughts about using this index vs. the SOX index when your trading SMH? (My question applies to a few other ETF's that have what appear to be matching indices as well - see below for others.)
Specifically I've noticed times when trading a ETF and using an index that's from the same industry/sector that there isn't always a good match in what the index is doing and the ETF is doing. I think this is because in some cases the ETF and the index I'm using have different representation and weighting of the individual components.
It seems to me that using the index that most closely matches the ETF might be of particular value at times. One benefit is for those ETF's that have a wide spread and trade infrequently. Looking at the index that closely correlates with the ETF would give one a better sense of where a fair price is in the absence of recent trades and a very wide spread. But I'm curious about other thoughts you might have on something like the XSH vs. SOX in your use of your ETF trading strategies.
At the same time I would also imagine that if the widely watched SOX index is moving that that information would still be highly valuable even if the XSH index (and SMH) hasn't moved the same yet. It may be a tip off to possible movement or change in movement to between the narrower XSH and the SOX that could make for useful input into the trade decision process.
Thanks,
- David
Other holder indices I noticed: IBH - Biotech Hldrs index (vs BTK), XUH - Utilities Hldrs index
This past week I was looking at various indexes at the AMEX and noticed there is one with the symbol XSH titled "Semiconductor HOLDRs Index". It seems as if it's the index of those components that make up the SMH with the representative weighting of those companies. Do you know if that's true and if so what are your thoughts about using this index vs. the SOX index when your trading SMH? (My question applies to a few other ETF's that have what appear to be matching indices as well - see below for others.)
Specifically I've noticed times when trading a ETF and using an index that's from the same industry/sector that there isn't always a good match in what the index is doing and the ETF is doing. I think this is because in some cases the ETF and the index I'm using have different representation and weighting of the individual components.
It seems to me that using the index that most closely matches the ETF might be of particular value at times. One benefit is for those ETF's that have a wide spread and trade infrequently. Looking at the index that closely correlates with the ETF would give one a better sense of where a fair price is in the absence of recent trades and a very wide spread. But I'm curious about other thoughts you might have on something like the XSH vs. SOX in your use of your ETF trading strategies.
At the same time I would also imagine that if the widely watched SOX index is moving that that information would still be highly valuable even if the XSH index (and SMH) hasn't moved the same yet. It may be a tip off to possible movement or change in movement to between the narrower XSH and the SOX that could make for useful input into the trade decision process.
Thanks,
- David
Other holder indices I noticed: IBH - Biotech Hldrs index (vs BTK), XUH - Utilities Hldrs index