Trends: By now you should know that while in a trend, the 5MA is your point of reference. Where the stock/futures is in relation to the 5MA is your only point of concern ON A DAILY CHART! Everything I will teach you will relate to the current market environment, not what the market did a year ago or 2 weeks ago. When trading intraday, the 5min chart of the Nasdaq Composite is how you are going to identify the current trend. We will go into this next.
5min Chart of Nasdaq Composite: How do you use this chart? Working with this chart will define you as a trader. Every trend in the broad market starts with a bottoming process, followed by volatility, and then what I call "the 5MA" test. The market first bottoms, you are not concerned with the bottoming process, but what is of concern to you is when the Nasdaq bottoms, then wiggles around, and finally hops on its 5 period MA and starts a trend. When this trend starts it usually ends at the close of the day, since, sentiment can change the following day. Look at a chart of the Nasdaq comp on Friday (6/5). If you look at how the stock opened (gap up) and noticed where the 5MA was in relation to price, you would have noticed that once the composite hit its 5MA it hugged it and rode it up all the way to the close. In the meantime, you had some volatility and the 20MA served as support to knock it back up above the 5MA (at around 12pm ET). What this means is that when a stock opens up for trading you have to be aware of the 5MA and where this moving average is in relation to the opening price. Look at Wednesday's session. The gap down open, but the 5MA is far away from the open, overhead, and the composite moves towards the 5MA, 20MA, and 40MA. The 40MA is the pivot that sends the stock back to new lows. More to come SE
So, by now you should be used to looking at a 5min chart of the Nasdaq Composite intraday, and if you have software that can draw a line on the previous day's close then all the better. If not, just know where the close is. This 5min chart with MA's=5,20,40 will be the chart that your eyes will look at 89% of the trading day. Read that last sentence again. Use the daily chart of the QQQ's to see overall trend. This can be done by observing where the QQQ's trade with respect to the 5MA. All you are concerned with at this point is WHAT IS THE MAX VALUE THAT MY STOCK CAN/HAS DIVERGE(D) AWAY FROM THE 5MA? This usually is a value based on a trendline channel. Lets go over this in detail. Look at a chart of QQQ's (daily). Any recent downtrend that you look at will obey a trendline channel. It looks as though the highs and lows of each day are "trapped" in a channel, with the 5MA serving as a ceiling for that UPPER channel. So, now all you have to do is draw a trendline (when you have spotted a trend) below the lows of several candlesticks and the 5MA will guide you all the way down the trend. If your stock trades above the 5MA you will short and when it trades below your lower trendline you will cover (NOT BUY TO GO LONG). I hope that everyone has a basic knowledge of candlestick charting. Although any chart that represents high/low/open/close can be used. Now, we are still speaking of being in a trend, we haven't yet learned how to spot a top or a bottom (although you have learned that bottoms and tops can't be spotted until after they have formed, I will prove to you that you can anticipate a bottom and a top, BOTH) Anyone remember the mid March highs? Well, at the bottom (start of that move) there was a very important candlestick/gap combination that gave you a heads up on the bottom (an NO it was not the doji)(doji=open and close are equal). And the top was formed with a gap down day and a screaming rally into the afternoon and a very discrete sell-off into the close. The next morning the market gapped down and never looked back. It trapped all the scared, bullish traders into a capitulating top. More on these last two paragraphs later, but for now try and figure out how your favorite instrument of trading diverges away from the 5MA. Figure out how many dollars/cents MAXIMUM it CAN move away from the 5MA before it snaps back. And notice the moving averages that act as a pivot (when your stock hits this moving average, usuall the 20,40, it reverses and continues its trend) Also, take a look at a slow stochastic (on bigcharts.com) and see where your stochastic is in relation to the maximum divergence. Anyone use Esignal? What platforms do most traders use?
-------------------------------------------------------------------------------- Originally posted by easyrider 6 of one, half dozen of another. NQ and $compq move in lockstep as far as I am able to discern. I have even stopped watching the comp chart as I have not noticed any consistent lead/lag relationship. -------------------------------------------------------------------------------- If that is the case, then why don't you take a look at the DEC 01 highs on the QQQ's and then look at the JAN 02 attempted highs on the QQQ's. Then take a look at the same CORRELATING highs on the composite in those same months. What you will notice is that the composite made new highs in JAN 02 (breaking the DEC 01 highs) and the QQQ's failed to make those same highs in JAN 02, leading the market lower. SE Same goes for this past June. QQQ's broke Sept lows yet the composite failed to brake those same lows. In the following weeks the QQQ's led the market lower.
How a trend starts: Obviously you have to be able to spot a bottom as it is taking shape. The way that a bottom gives itself away is the INCREASE IN VOLATILITY IN QQQ'S. This is the "whipping" action that is seen in the QQQ's before a powerful up-day is displayed (usually with a gap up and early morning volatility, intraday). Let me clarify one thing=I am not saying that when you take a position in a bottom, that you are going to buy THE bottom (down to the very last cent). I am simply saying that a long postion will be taken using the volatility that the bottom displays. However volitile a bottom can be there exists only two variations of a bottom (in the QQQ's)...We have to be clear on the term bottom- a bottom gives rise to an immediate rally into the 20,40 period moving averages breaking these averages and eventually going higher. That is a bottom, in my book. The two variations of a bottom are: 1. Lows and highs on candlestick charts push back to a FLATLINED 5MA. Stochastics at or below 20. OR 2. A test of previous four day close, sell-off into/below the 5MA, and a gap up above 5MA. These are the only bottoms that the QQQ's can display. This is such, since the QQQ's are such a liquid instrument. So far this is what all bottoms look like and until it changes this is the method of choice for profitable traders.
I will be going over the importance of the 5 period MA and showing you, visually, how important this average is. Then I will go over Offsetting Moving Averages and how they can help in intraday techniques. For now, look at the attachment and see how the Sept lows kept snapping back to the 5MA. Notice the volatility. Also, notice when the 5 is violated to the upside how the qqq's obey the 5MA and ride it up. The attachment is a Daily chart of the qqq's with a 5,20,40MA's and bollinger bands (don't worry about this yet). Just observe the 5MA and I will see you tomorrow. http://www.elitetrader.com/vb/attachment.php?s=&postid=86900
I will recap everything so no one has to go back to the other thread. You can start from this post. I will try to keep everything very simple and don't try to read to hard into it. Please refer to the QQQ's for the following Trends: Daily Chart This is the charts that is going to help you identify your long immediate trend. On this charts you should have a 5 period moving average (5MA), a 20MA, and a 40MA (later we will set up a 222MA and learn how to offset these averages). While in a trend you are concerned with the 5 period moving average (5MA). As the qqq's are declining, with the trend, the 5MA will be above all the candlestick highs and serve as a ceiling and prevent the qqq's from going higher. If the qqq's are in a downtrend your chart will look like this: http://www.elitetrader.com/vb/attachment.php?s=&postid=87051 Daily Chart Uptrends: For uptrends, your daily chart will show the 5MA below the qqq's and serve as a "floor" to catch the qqq's as it declines. See attachment. http://www.elitetrader.com/vb/attachment.php?s=&postid=87058
The 5ma All trends that obey the 5ma are very strong trends Generally, a stock will come off of a bottom and test the 5ma. What this means is that the CLOSING PRICES will be AT OR VERY NEAR A FLAT 5ma (see pic2.gif). Once stocks bread the 5ma to the upside you need to see consistent testing of the 5ma as the trend accelerates. So a stock (qqq's) will bottom out, test a FLAT 5ma, break the 5ma to the upside, and ride the 5ma up with the trend (consistently testing the 5ma as trend progresses). When a stock hits a top and reverses the series of events is exactly the same as a bottom reversal, only mirrored. This process starts with a topping formation, a violation of the 5MA to the downside, a test of the 5MA, and then continuation of downtrend with the 5MA acting as a "ceiling" not allowing the qqq's to break it. See attached file. http://www.elitetrader.com/vb/attachment.php?s=&postid=87082
The 20MA/40MA If a trend is strong it will obey the 5MA. Once a trend starts to get weak, the qqq's will start violating the 5MA and making a run for the 20MA and subsequently the 40MA. There is no need to get out of a long/short position when this phenomenon occurs. You simply wait for a test of the 20MA and then a snap back to the 5MA. The trend should continue with the 5MA acting as support/resistance. So the 20MA and the 40MA act as support for the qqq's if the 5MA is above the 20MA, the 20MA is above the 40MA, and all MA's are moving up. The angle at which the MA's are increasing is very important. Generally, the greater the angle, the longer the trend. And if the qqq's are in a decline and you are shorting, the 5MA will be below the 20MA, the 20MA will be below the 40MA, and all MA's will be declining. Again, you will want to notice the angle of the declining MA's.
Intraday Trends Intraday trends follow the same rules as daily trends except that they are much easier to deal with. Every day starts with a new attitude and a previous day's action CANNOT serve as the next day's sentiment. Your charts will tell you what to do. All intraday charts follow the 5MA, 20MA, and the 40MA, religiously. When I say "religiously" I am speaking of days when there will be an up/down day. Sideways markets are a little harder to work with, but require a different strategy. If you notice today's action in the Nasdaq Composite (on a 5min chart) you can see that the comp opened up below all moving averages, made a run for the 5MA/20MA (and subsequently the highs of yesterday), and reversed to the downside. This reversal was guided by the 5MA and the 20MA. These two moving averages prevent the composite from going higher. The previous session was similar to today's session (only in reverse) in that a gap up opening pushed the composite higher and the 5MA/20MA supported the comp all the way up to a strong close. These are just basic details that I want to point out and there are many factors that influence an intraday/daily trend reversal. We will go over these factors later on. http://www.elitetrader.com/vb/attachment.php?s=&postid=87111