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There was some trepidation in the markets last week. But I stayed safe because of a powerful market indicator.
It might be the most important indicator a day trader can pay attention to. But you have to know how to use it.
The stock market is a dangerous place. If you use this tool incorrectly, bad things can happen. But if you listen to my instructions, you can learn a lot faster…
Premarket Scans
If you’ve been checking my morning watchlists, this won’t be news. There hasn’t been much to get excited about.
It’s not that worrisome. Sometimes the market’s hot and sometimes it’s not. Just like the weather. Sometimes it rains and sometimes it shines.
The important part is knowing what kind of market you’re in. Lucky for us traders, there are a lot of ways to do that.
Current Events
It should be no surprise that national and global news influence the markets. Part of being an effective day trader means staying up to date.
You don’t have to dedicate a ton of time to it. But at the very least, you should get in the habit of checking…
- National financial news
- Global financial news
- Global overall news
Take a peek every morning.
History
This is why it’s so important to watch the markets every day. If stocks have been running with catalysts recently, you’re probably in a hot market.
The opposite is also true.
But if you decide to open a charting software on a random Tuesday in December, how are you supposed to know?
Part of the reason why day trading is so difficult is because of the dedication level. You have to show up every day. Otherwise, you’ll miss out.
There hasn’t been a ton of action lately, but here’s what I’m looking for…
- News with legs. Added value to the company, not some random BS.
- Potential lockdown plays. Masks, biotech stocks, vaccines, etc.
- Crypto. This includes bitcoin, NFTs, and altcoins.
- EV stocks. This may be the longest-running sector ever. The industry is officially changing. I don’t think it’ll slow down anytime soon.
But there’s one indicator that stands out most in my mind…
The Overall Market
Give yourself a pat on the back if you guessed it. The overall market is the best indicator of whether you’re in a hot market.
I know that sounds simple. But the evidence speaks for itself. Remember that three out of four stocks follow the market.
The best way to measure the market is to follow popular exchange-traded funds (ETFs). These are financial assets that track certain aspects of the market, as well as the market as a whole.
The main ETF I follow is the S&P 500 ETF (NYSE: SPY). It tracks the performance of 500 big businesses listed on the U.S. exchanges.
Check out the chart below. See the breakout over $450? The price tried to spike over $470 but it came crashing back down.
SPY chart 6-month, 1-day candles (Source: StocksToTrade)
Now it’s testing the $450 level. Time will tell if it holds.
Pullbacks like this are normal for the market. There isn’t much need to worry. But it’s something you need to pay attention to. As a day trader, I’m always wary when the overall market is down.
Sykes always says, “trading isn’t scary if you trade scared.” Honestly, it can be nerve-racking either way. But there’s a lot of truth in his words.
How to Use It
When the market’s on a strong run, it might be time to get more aggressive with long positions. But always be wary of a change in direction.
The market will always ebb and flow. If you can get in tune with it, you’ll be a better trader.
Quick Update
The delivery date of my fourth child has moved back to this coming Friday. So this may be my final week as a father of three! I’m very excited, but I think life might get a little hectic for a bit.
I’ll do my best to keep cranking out content for you. Don’t worry, TWD will always be here. And if you’re looking for more instruction, check out my Trading Accelerator. That’s where my most dedicated students are.
Make sure to check your inbox on December 8 for the next newsletter.
In the meantime, Keep studying. This is such an important time to be trading! Take advantage of it.
Use your time wisely,
Roland Wolf
Editor, The Wolf’s Den
