technical dominated, excellent
Why actively trade ETFs?
- Thread starter deronwagner
- Start date
Wednesday was an auspicious day for ETF traders worldwide as it marked the debut of the much anticipated ONEQ. ONEQ is a new ETF that tracks the entire Nasdaq Composite as opposed to the QQQ which tracks only the Nasdaq 100. This new instrument trades on the Nasdaq as opposed to the AMEX where most other ETF's are listed. That in itself should be a boon to traders as it eliminates the specialist and will make fills that much easier. Volume in the ONEQ has been respectable from the outset as it traded almost 2.5 million shares today on its second day of trading. Although this is only about 2-3% of an average day in the QQQ, I would not be surprised to see a lot of the liquidity flow out of the triple Q and into the ONEQ as more traders learn about this exciting new ETF. If any of you have ever traded the QQQ, you know first hand that it can be frustrating. I am fond of saying that taking .15 cents (intraday) out of the QQQ is a base hit and if you can make a quarter it's a home run! At roughly $73.00 per share, the ONEQ will have a bit more volatility/average daily range and trade more analogous to the SPY or DIA.
That being said, today we traded the ONEQ for the first time. Below are some annotated charts that show the setup and some notes that detail our rationale for entering the trade, and how it turned out.
The first 2 charts are intraday snapshots of the S&P500 (represented here by a chart of SPY), and the nasdaq composite. As you can see, both markets showed some initial strength at the outset, and then sold off later in the morning quite sharply. These rallies and subsequent selloffs created the downtrend lines in the major averages that you see connecting the highs in red. Whenever trading the broad market (through the use of ETF's such as SPY, DIA or ONEQ), your first point of analysis should always be to identify if any one market is showing relative strength or weakness to the others. By looking at these 2 charts you can clearly see that the Nasdaq is relatively weak to the SPX. When both markets sold off, the nasdaq retreated to a much lower low and retested the morning lows around the 1825 area (circled in green). As noted on the SPY chart, the SPX sold off to a higher point relative to its morning lows and did not break its 20ma as sharply as the nasdaq. I think its safe to say that it is a basic tenet of technical analysis that when an instrument or index retraces its entire upward move, and then bounces into trendline and moving average resistance, a positively correlated risk/reward scenario to the short side ensues.
I think most traders would agree that the charts never tell the whole tale, and that there are always a myriad of other factors to consider when gauging an entry. Not the least of which is what is going on internally in the market. There are many ways to gauge internal strength or weakness in the markets, but to keep this brief, I will concentrate on two main items that we were looking at to confirm this short entry.....breadth and TRIN.
Above is a table of the nasdaq advance/decline volume for the day as measured hourly. Although we use a proprietary indicator that is far more accurate, the simple table above will suffice to show the steadily deteriorating situation between the advancing and declining volume. Notice how on a percentage basis, although the breadth (relationship between the advancing and declining volume) stays positive overall up until our entry, the declining volume keeps steadily advancing and growing as a percentage of the up volume. ie: breadth is weakening. By 2PM, not too long after our entry, it actually gets negative as declining volume begins to outpace advancing volume.
The second chart is of the Nasdaq TRIN. It is far beyond the scope of this post to give a detailed explanation of how the TRIN works, but for those who don't know, its a measure of the number of advancing stocks and advancing volume in relation to the number of declining stocks and declining volume. To oversimplify for the sake of brevity, its expressed as a fraction and when its value is rising its bearish and if its dropping its bullish. Generally, a reading below 1 is considered bullish and above 1 is bearish, but anyone who is familiar with this indicator will tell you that it is the pattern of the TRIN readings that is far more important. Given that, observe the pattern in the TRIN circled in green on the chart. The indicator clearly moves up to form a new base well off its lows and looks poised for upside breakout around 1:00 pm which was the time of our entry.
So to recap, that was our criteria coming into 1pm. Technical chart setup of weaker index rallying into resistance of downtrendline and 20ma resistance above, with breadth weakening and TRIN looking to break out to upside (bearish). Now for the actual trade............................
We shorted ONEQ @ 73.23 in the area of resistance denoted by the green circle. initially our stop was @ 73.50 just above the swing highs around 11:30 or so. After some chopping around, the nasdaq began to follow through to the downside briefly. You can see the correlating spike in the TRIN at the same time and the deteriorating breadth confirming this. After this move down we tightened our stop to 73.45. The obvious first target would have been for the ONEQ to test the 73.00 area. As you can see, this never happened as buyers stepped in and pushed the market higher, stopping us out at 73.45 for a .22 cent loss. It would be pointless for us to theorize about the infinite number of possible scenarios that caused the market to reverse. The fact is that it did and our stop was in the right place to allow the trade to either work itself out and move to its target area, or result in a small loss and protect capital for the next entry.
That being said, today we traded the ONEQ for the first time. Below are some annotated charts that show the setup and some notes that detail our rationale for entering the trade, and how it turned out.
The first 2 charts are intraday snapshots of the S&P500 (represented here by a chart of SPY), and the nasdaq composite. As you can see, both markets showed some initial strength at the outset, and then sold off later in the morning quite sharply. These rallies and subsequent selloffs created the downtrend lines in the major averages that you see connecting the highs in red. Whenever trading the broad market (through the use of ETF's such as SPY, DIA or ONEQ), your first point of analysis should always be to identify if any one market is showing relative strength or weakness to the others. By looking at these 2 charts you can clearly see that the Nasdaq is relatively weak to the SPX. When both markets sold off, the nasdaq retreated to a much lower low and retested the morning lows around the 1825 area (circled in green). As noted on the SPY chart, the SPX sold off to a higher point relative to its morning lows and did not break its 20ma as sharply as the nasdaq. I think its safe to say that it is a basic tenet of technical analysis that when an instrument or index retraces its entire upward move, and then bounces into trendline and moving average resistance, a positively correlated risk/reward scenario to the short side ensues.
I think most traders would agree that the charts never tell the whole tale, and that there are always a myriad of other factors to consider when gauging an entry. Not the least of which is what is going on internally in the market. There are many ways to gauge internal strength or weakness in the markets, but to keep this brief, I will concentrate on two main items that we were looking at to confirm this short entry.....breadth and TRIN.
Above is a table of the nasdaq advance/decline volume for the day as measured hourly. Although we use a proprietary indicator that is far more accurate, the simple table above will suffice to show the steadily deteriorating situation between the advancing and declining volume. Notice how on a percentage basis, although the breadth (relationship between the advancing and declining volume) stays positive overall up until our entry, the declining volume keeps steadily advancing and growing as a percentage of the up volume. ie: breadth is weakening. By 2PM, not too long after our entry, it actually gets negative as declining volume begins to outpace advancing volume.
The second chart is of the Nasdaq TRIN. It is far beyond the scope of this post to give a detailed explanation of how the TRIN works, but for those who don't know, its a measure of the number of advancing stocks and advancing volume in relation to the number of declining stocks and declining volume. To oversimplify for the sake of brevity, its expressed as a fraction and when its value is rising its bearish and if its dropping its bullish. Generally, a reading below 1 is considered bullish and above 1 is bearish, but anyone who is familiar with this indicator will tell you that it is the pattern of the TRIN readings that is far more important. Given that, observe the pattern in the TRIN circled in green on the chart. The indicator clearly moves up to form a new base well off its lows and looks poised for upside breakout around 1:00 pm which was the time of our entry.
So to recap, that was our criteria coming into 1pm. Technical chart setup of weaker index rallying into resistance of downtrendline and 20ma resistance above, with breadth weakening and TRIN looking to break out to upside (bearish). Now for the actual trade............................
We shorted ONEQ @ 73.23 in the area of resistance denoted by the green circle. initially our stop was @ 73.50 just above the swing highs around 11:30 or so. After some chopping around, the nasdaq began to follow through to the downside briefly. You can see the correlating spike in the TRIN at the same time and the deteriorating breadth confirming this. After this move down we tightened our stop to 73.45. The obvious first target would have been for the ONEQ to test the 73.00 area. As you can see, this never happened as buyers stepped in and pushed the market higher, stopping us out at 73.45 for a .22 cent loss. It would be pointless for us to theorize about the infinite number of possible scenarios that caused the market to reverse. The fact is that it did and our stop was in the right place to allow the trade to either work itself out and move to its target area, or result in a small loss and protect capital for the next entry.
Wow.
I didn't even know about this ONEQ. Where have I been ?
Too much intraday studying of the futures I guess.
Great to have another instrument available.
By the way, when your posts include charts embedded into the message, they are difficult to read because they extend horizontally off of the screen and ya have to scroll left and right as well as up and down. It's just such good information it would be great to see it all at once.
Thanks for the posts.
I didn't even know about this ONEQ. Where have I been ?
Too much intraday studying of the futures I guess.
Great to have another instrument available.
By the way, when your posts include charts embedded into the message, they are difficult to read because they extend horizontally off of the screen and ya have to scroll left and right as well as up and down. It's just such good information it would be great to see it all at once.
Thanks for the posts.
Duly noted, Savvy. will try and adjust on further posts.
Glad you are enjoying the material.
Glad you are enjoying the material.
tradersaavy
10-04-03 04:55 PM
By the way, when your posts include charts embedded into the message, they are difficult to read because they extend horizontally off of the screen and ya have to scroll left and right as well as up and down. It's just such good information it would be great to see it all at once.
Just a quick tech post for Tradersaavy. You may have the resolution of your screen to low. Up the resolution until you can both see the whole thing, and still big enough text wise so that you can read it.
Don
PS. Nice thread to the posters here.
10-04-03 04:55 PM
By the way, when your posts include charts embedded into the message, they are difficult to read because they extend horizontally off of the screen and ya have to scroll left and right as well as up and down. It's just such good information it would be great to see it all at once.
Just a quick tech post for Tradersaavy. You may have the resolution of your screen to low. Up the resolution until you can both see the whole thing, and still big enough text wise so that you can read it.
Don
PS. Nice thread to the posters here.
"ITS Exception
There is talk that the SEC is considering a 2-3 cent âde minimusâ exemption to the ITS trade-through rule for listed stocks. The trade-through rule currently requires trades to be routed to the market with the best price. Such a move could give ECNs an important new foothold in building NYSE market share because it would make it easier for traders to interact with ECN prices that are just beyond the best NYSE bid or offer. A pilot three-cent trade-through exemption presently applies to exchange traded funds, and traders have found it extraordinarily helpful. In fact, most traders seem to want the exemption increased to five or ten cents. In ETF trading, slow moving ITS participants, such as the AMEX and NYSE, are still severely impairing traders in fast markets by using ITS rules to âblockâ access to ECNs quotes that are more then three cents above or below the best bid or offer. "
nitro
There is talk that the SEC is considering a 2-3 cent âde minimusâ exemption to the ITS trade-through rule for listed stocks. The trade-through rule currently requires trades to be routed to the market with the best price. Such a move could give ECNs an important new foothold in building NYSE market share because it would make it easier for traders to interact with ECN prices that are just beyond the best NYSE bid or offer. A pilot three-cent trade-through exemption presently applies to exchange traded funds, and traders have found it extraordinarily helpful. In fact, most traders seem to want the exemption increased to five or ten cents. In ETF trading, slow moving ITS participants, such as the AMEX and NYSE, are still severely impairing traders in fast markets by using ITS rules to âblockâ access to ECNs quotes that are more then three cents above or below the best bid or offer. "
nitro
Hi Dale,
Sure, no problem. I will do that this weekend when I get a little more time.
Dalegrief,
When I began my trading career about 6 years ago, I mistakenly focused most of my energy and attention on chart patterns, support/resistance, trendlines, etc., but rarely paid much attention to broad market volume changes from one day to the next. Although it took me several years to learn, I eventually figured out that studying the changes in volume from day to day is MORE IMPORTANT than any chart pattern because, unlike failed chart patterns, volume never lies! This applies to both volume in individual stocks, as well as the total market volume, but especially with regard to the total market volume. Although I could probably write another book just on volume analysis, I will see if I can summarize within the context of this post.
In a nutshell, my analysis combines broad-market volume analysis techniques, which were originally made popular by William O'Neill of Investors Business Daily, with a shorter time frame for intraday volume analysis. On days when the broad market closes higher, I look for an increase in total market volume compared with the previous day. This is known as an "accumulation day." On days when the broad market closes lower, we also look for an increase in volume, which often confirms the presence of an increase in institutional selling. This is known as a "distribution day." We then measure the number of accumulation and distribution days each week compared with the previous week. The changes from week to week provide us with a "big picture" of what is really happening beneath the surface and provides us with early warning of potential trend changes well before they actually happen. By applying this "big picture" information to a shorter time frame, we can use this analysis as a great benefit to our swing trading. To further explain, I have cut and pasted text from previous Wagner Daily newsletters in which I have written about volume:
Although it sounds like a cheesy cliche, I truly believe that volume speaks volumes! Besides price, volume is the most important technical indicator you can use to determine the true strength or weakness of an index or stock. 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 accurately predict price movement as much as volume. Actually, there are many professional, profitable traders who base their entire analysis purely on price and volume without ever looking at a single chart.
Volume is such an important indicator because volume leads price. Rarely will you ever see a sustained breakout or breakdown without a correspondingly sharp increase in volume. Have you ever bought a breakout in an index or stock that you thought was a "no-brainer" because all the technicals looked good but the breakout failed anyway? Chances are that the volume did not confirm the breakout by not seeing a correspondingly higher spike in volume. The same thing often happens on the downside. Selloffs and breaks of support often do not follow-through if the volume does not simultaneously increase.
When analyzing volume, we are more interested in how much volume an index or the total market is trading relative to itself, NOT just how much volume it trades in absolute terms. For example, we don't care whether a sector HOLDR (such as SMH) normally trades 1 million shares per day or 3 million shares per day. What really matters is how does today's volume compare with its average daily volume? If the index you are trading has an average daily volume of only 300,000 shares, but has already traded 400,000 shares by 11:00 am EST, that indicates very high volume RELATIVE TO ITSELF and it will probably end up trading two to three times its average daily volume. Therefore, if we are saying in the ETF Real-Time Room that a particular ETF or the broad market is showing high volume, we are stating that it is showing strong volume RELATIVE to its own average daily volume; we are NOT referring to an absolute number.
Because volume leads price, thin market volume tends to create choppy markets and causes trends to reverse easily. If you have been actively trading during the past several weeks, you may have noticed how often the intraday trends reversed and how choppy the market has been in general. This can simply be attributed to the seasonal decrease in market volume. The lack of follow-through 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. 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. The rally leading up to the September 19 highs lacked an increase in conviction and showed decreasing volume compared with the previous rallies. That is why the selloff in the subsequent week erased an entire month of gains. Overall, it is usually not a good risk to enter new positions when the total market volume is very thin.
On the other hand, average or heavy volume often causes trends to form and enables the market to follow-through. Even if a small group of sellers jump into the market during a high volume uptrending day, the uptrend will usually continue because there are enough buyers to absorb the selling volume. If you have ever watched an ETF trend up the entire day without even a minor pullback even when the market was weak, chances are that the underlying components of the ETF were probably trading on very high volume that day, enabling the ETF to maintain its price even when sellers stepped in. The same thing is true of downtrending indexes in that the downtrend is more likely to continue if the selloff if on heavy, or at least average, volume. It indicates there are enough sellers to continue the downward momentum even if some buyers step in.
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 NYSE total market volume, along with the moving averages discussed above:
While daily charts are great for studying volume over a several day to one-week period, they do not work very well for assessing intraday volume. Instead, we simply switch to an intraday chart, usually a 15-minute period, and simply compare volume based on the time of day. We do this by measuring the volume after a specified number of bars, with each bar representing 15 minutes. For example, if it is 10:30 am EST, we would simply look at the total volume after the first 4 fifteen minute bars and compare with the volume of the first 4 fifteen minute bars of the previous day. That will give you an early indication as to whether or not volume is on track to exceed the previous day's volume. By using this intraday volume analysis early each morning, you can often predict how high or low the volume will come in each day. Note, however, that we do not use moving averages on our intraday volume charts. The 15-minute intraday chart of the NYSE volume below illustrates this concept:
By diverting more of your attention to closely monitoring total market volume each day, you will begin determining which conditions are most ideal to increase your share size and which periods indicate a reduction is necessary. The lighter than average volume over the past week has prompted us to reduce the quantity of new trades, as well as our average position sizes. However, when volume begins increasing again (most likely after earnings are digested next week), we will gradually become more aggressive depending on overall market conditions.
Remember that volume leads price and moves both to the upside and downside are rarely sustained without volume. If you formulate a plan to actively begin monitoring volume on an intraday and daily basis, you should begin seeing increased accuracy with your chart patterns.