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An informative piece by Mohan, which appeared on the Bridge CRB Trader, a news bimonthly, published by Bridge/CRB
High Five: Using Indices as Indicators
by Mohan
I want to share with you a very unique approach to staying on the right side of the market when you are daytrading the SP500 futures. I call the approach the "High Five". It is a group of important indicators which when synthesized together, becomes vital to calling market direction. The best part is the method follows the KISS approach to the markets... you know, "Keep It Simple Scalper", and is so effective that you can watch it work tomorrow along side of your current, primary trading tools. In addition to the "High Five" indicators, I want to review the 10-Day "Pit Bull" moving average, named after Marty Schwartz and his unique way of calculating this important market directional reading tool. Marty Schwartz is the author of the book "Pit Bull" and swears by this moving average saying in his book that it is one of his favorite indicators. I have been using these indicators successfully for years and we follow them daily on our web site, dayTradersACTion.com

The "High Five" are the NASDAQ Composite Index, the $TRIN, the $VIX, the $TICK and MER (Merrill Lynch Stock). Together these five indicators can be used to paint a clearer picture of market direction for the day session. When they all point in the same direction, you will be ill advised to fade them and when they give a mixed picture you can often save time and money by staying flat. The best way to view them is in conjunction with a particular market action. Let's use as an example a bullish opening after a previous, rather average, bullish day where the Dow closed up about 55 bucks, the NASDAQ composite index was up around +35 points and the SP500 futures were up 8 handles on the close from the previous session's closing price. On the next trading day you perhaps are feeling bearish overall but with a solid close the previous day and a higher open today, you are concerned about getting short too soon. This is where the "High Five" come to the rescue. Remember this is an example only. It takes many trading days of watching these indicators in action and in relation to this example along with both similar and opposite setups. However, if you watch the "High Five" in tomorrow's session, you'll see quickly what I mean. So in our example, the market has now opened Gap Up 5 handles and is rallying with the Dow up another 40 bucks but the "High Five" signals caution! Here's how. When you see the $TRIN above 1.10, the $VIX moving above +60, the $TICKS up+500 to +700 and MER is flat to lower, not only will it be very difficult for the market to rally much further, but the stakes are excellent that getting short under these conditions is where you want to be. Now keep in mind that this type of reading must be synthesized to paint an overall picture and will take some practice and keen attention to details of the movements of the DOW and S&P500 in relation to these indicators.

A Mega Bearish or what I call BEAR UGLY tape using the above indicators is as follows: The overall market is lower with a heavy feeling of downside pressure. You see the $TRIN 1.20 or higher, $VIX +1.00 or higher, $TICKS down -500 and stretching lower on each drop of the market, MER down -2.50 or lower, and the NASDAQ composite index down -50 or more, you can often just get short on any reflex rallies and hold short, because the S&P500 and the rest of the market are most likely going down. On the bullish side with the market rallying or starting to rally when you see the NAZ composite index up +40 or more, $TRIN below70, $VIX-1.00 or lower, $TICKS up +200-500 (particularly after a previous down tick day) and MER doing very nice being up +2.00 to +4.00, then get long on any pullbacks because the market is most likely going higher. A quick note on MER (Merrill Lynch stock). This little indicator is pure magic. I learned it from a former floor trader who "moved upstairs" and he convinced me to check it out. I've used it for years and I never promised him I'd keep it secret, so no oaths violated here by telling you what I learned and have seen work in the markets. Don't take MER lightly. If MER is down -3.00 or more, but not on any special news about the company, just day-to-day trading, the overall market is going to have a hard time rallying. Watch it for a week and see. Then email me to thank me for the tip. If the overall market is flat to down after a couple of hours into the session but MER is up 3 bucks, they are going to have a problem taking the market down significantly further and in fact we will probably get some kind of rally. It is that powerful, but don't ask me why...just watch it tomorrow and see for yourself. If the market is trying to rally but MER is flat to -1.00 lower, it's going to be choppy on the upside. Does it work every day? Of course not. Is it a very handy indicator in relation to the whole picture? You betcha! Often when I'm long or short the S&P500 and something doesn't feel right with my position, I go look at MER and often may flatten out a position on the basis of MER alone. If you take notes on the "High Five" indicators and keep them on your desk tomorrow, carefully watching the nuances I've described, I think you will be pleasantly intrigued to say the least.

Now on to another old reliable, the 10-day "Pit Bull" moving average. If you are an SP500 trader and haven't read "Pit Bull" by Marty Schwartz then log on to Bridge Traders bookstore at www.futuresource.com and order it now. Marty is the real thing when it comes to trading and being a former marine tells it like it is. My favorite part of the book (other than the 10 Day Moving average I'm about to describe) is when he advises traders who are stuck in a mental rut to get on the top of their desk, look up at the ceiling and start screaming like a lunatic. I wonder what the trader psychologists think of that method! You want to listen to a guy that really trades the SP500, has made millions from it, and tells you one of his all time favorite indicators. This brings us to the next very relevant part of our discussion on staying on the right side of the markets when day trading. Mr. Schwartz calculates the 10-day moving average by hand every day (according to the book) by taking the last 10 days of the current SP500 future price and dividing by 10. You keep a running chart of it by taking the current 10 Day "Pit Bull" number that you calculated yesterday, multiplying it by 10, then adding today's closing SP500 futures price to that figure. You then count back 10 days starting with yesterdays SP500 close and subtract that number from the total. You then divide that figure by 10 and round up or down to the nearest10 Now you have the 10 Day "Pit Bull " moving average for today's trading action. It is not the same as the conventional 10 day moving average or exponential moving average that can be quickly tapped into a computer. This is not to say a computer can't calculate it but Marty does it by hand and recommends doing it by hand. That's good enough for me! The guy has made millions trading the SP500 and you may not want to fade that advice. Besides, it keeps you on your math toes. To use this 10 Day MA, you want to view the market as Bearish below the number and bullish above. Again, Keep It Simple Scalper. I have used this MA number, calculated Marty's way, since reading his book years ago and it is astounding to say the least. I've added my own methodology of trading with it after observing this number for years, watching it like a hawk while in the market, and paying dearly for trying to fade it. Here's what I do now. You take the number and consider bullish above and bearish below as a general "read" on the markets. When the SP500 futures price gets close to it (within 15 handles) I note on my daily trading homework "Caution...10 Day Pit Bull MA...CROSSOVER". That's the key word...CROSSOVER. If the market has been bearish but has now rallied up to that number you are going to see some amazing things happen. If the overall market is in a bullish trend it's going to blow through that number to the upside and probably leave it behind in the dust. You obviously want to be long at or even (ideally) before that number if you are convinced we are going higher and of course, if you have the guts. If the market is unsure or genuinely bearish, you are going to see the area around that number look like a thick wall of resistance to the upside. If you reverse the previously explained scenario then the number works the same way on the downside. If we have been bullish but the market is faltering or showing some internal weakness and the SP500 futures drop down to the 10 Day "Pit Bull" moving average number, there will be some serious attention on that number by a lot of astute traders and your attention should be there too, especially if you are long. Just as in the upside resistance scenario, if the market is not genuinely bearish as it moves lower, it may hit the "pit bull" 10 day moving average, hover within 5 or 10 handles come back and cross over it again remaining bullish. What I'm demonstrating here is that you can use this indicator tomorrow by calculating it tonight and get a good picture of which side of the market you want to be on. When you see it starting to "Crossover", take some extra time with your own personal trading homework to determine if we are going into a trend change and consider that you may want to hit that trend on or before the 10 Day "Pit Bull" moving average plows through that special number leaving traders on the wrong side of it in the dust.

I hope some or all of these ideas have been valuable for your trading introspection. Carefully watch them daily in different market scenarios and you may find that they will become an important part of your trading arsenal.

Mohan is an educator and daily commentator on the SP500 futures for Day Traders Action Inc. He can be reached via the web site www.DayTradersACTion.com

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