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In the last issue of the Trading Tutors Newsletter, Chief Editor Tom Scollon offered some interesting insights into how he weights one sector to another. This was important information for readers because it gave a quick snapshot of how a professional trader approaches sector analysis.
One of the big takeaways of this newsletter is an inside look at how other traders see the markets that they participate in. There is a recurring theme: good traders stick to markets that have an established trend. They’ve learned what all good traders know: If you keep trying to trade sideways markets you will not make any real money. So the question is, are you trading in a sideways market or a trending market?
Chart-1 illustrates activity in the Financials Sector since its natal date of 22 June 2001. This was our winter equinox, which is a very important date. The Financial Sector chart meets the criteria of a trending market, so we can set about seeing just what kind of trend it is.
Chart 1 – Financial Sector Weekly Bar Chart
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What has been set up above is based on the ProfitSource ABC Pressure Point Tool, which has been customised to show extensions in price above the limiting 200% level as defaulted. This allows us to see that the first Range Out rule is still giving strong results in both Bull and Bear markets when the trend changes. This chart also gives us a big picture view and can be used to determine the markets position. We see double tops around October and November 2007, which could mean more trouble for the financials markets.
Chart 2 Financial Sector Daily Bar Chart
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Chart 2 focuses in on the more recent price action for this sector. The financials sector has gone into a sideways to slightly upward trending bias, another sign of trouble. At the moment the sellers seem to have the upper hand and are rushing in to overpower any upwards move. Any attempt at a bull rally is short lived. At around the 7000 point level we will see if the bulls can be reinvigorated. They will need to bring more buyers with them to convince me that the financials sector is heading back up.
If we are looking to history as an indicator of what’s to come for world financial sectors, students would be wise to study the 1907-1908 period in the US market. On 15 October 1907 major banks failed due to the same situation as we are in today. Of course, that was 100 years ago, and there are more protections in place these days. Still, it is a history lesson worth noting.
Keeping the Dream Alive
David Dixon
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