Profiting From TradingMarkets: How To Use The Market Bias Page

TradingMarkets' Market Bias Indicators are used to identify a potential directional bias in the overall market, for the upcoming 1-3 trading days. While not a mechanical trading system, these signals help the trader stay alert to shifts in sentiment which can bring about short-time market reversals. Astute traders can use them to index trading vehicles such as the S&P futures, QQQs or E-minis. In addition, they can be used to improve the timing of entries into individual stocks, to establish positions that are in sync with the overall short-term trend of the market.

Years of research and testing have gone into designing these market-timing indicators, in order to give traders an “edge” in the markets. As discussed in Connors On Advanced Trading Strategies, Trading Connors VIX Reversals and Dave Landry’s Swing Trading, their proper use requires an understanding of what having an “edge” on the markets is:

Basically, when one of the Market Bias indictors issues an alert, it is telling you that the market has a better than 50% chance of making a short-term move in the direction indicated.

With this alert in place, the trader now has an “edge” on the markets. This does not necessarily equate to a viable trading opportunity, however. Making that determination is up to the trader's discretion. But whatever trading setup you do identify, knowing that the overall market has the potential to favor a certain direction gives you an edge.

To increase your chances of succeeding in the markets, TradingMarkets provides several different Market Bias Indicators which issue alerts collectively. The more indicators pointing in the same direction, the more likely the move will happen. Of course, not every indicator is right all the time, and in some situations, the markets will move contrary to these alerts.

The indicators can be used for any style of trading. Each signal is designed to forecast the market direction, until it signals otherwise. Swing traders can use the momentum to better time their entries and exits, while daytraders can better predict the next day's momentum. Using stocks from the Proprietary Momentum List and Proprietary Implosion List will also increase your edge. Having a solid money management system is also a crucial aspect of success with the indicators, although that’s a topic for another lesson. For a deeper understanding of the workings of each Market Bias Indicator, just click on the links below.

Indicators Defined

The VIX is a measure of the consensus estimate of future volatility, based on "at-the-money" quotes of OEX index options. This is basically a measure of sentiment, with low VIX readings reflecting complacency and high VIX readings reflecting fear in the markets. Low VIX readings typically occur when the market is rising, and high VIX readings typically occur when the market is falling. The signals given by TM are discussed thoroughly in the book Trading Connors VIX Reversals by Larry Connors and Greg Che.

Connors VIX Reversal I CVR I

Connors VIX Reversal II CVR II

Connors VIX Reversal III CVR III

Connors VIX Reversal V CVR V

Connors VIX Reversal VI CVR VI

The McClellan Oscillator is a popular instrument that measures breadth by taking the number of advancing issues, less the number of declining issues, and subtracting the 39-day EMA from the 19-day EMA of net advances. When the 19-day EMA has crossed above the 39-day EMA, advancing issues have gained the upper hand. Conversely, when the 19-day EMA has gone below the 39-day EMA, declining issues are in command. For the Market Bias page, an up arrow signifies a McClellan reading of -100, which is oversold, and a down arrow signifies an oversold condition with a reading of +100.

The Connors-Hayward Advance/Decline Trading Pattern, CHADTP, is a proprietary indicator that measures the NYSE's advancing/declining issues, to identify short- to intermediate-term overbought and oversold conditions in the stock market and the S&P 500 futures. When the CHADTP is above +400, the market is overbought; when the CHADTP is below -400, it is oversold. Possible reversals are indicated when the indicator ticks down when it is overbought or ticks up when it is oversold.

The TRIN is the short-term NYSE Trading Index, generated by combining advancing and declining stocks with volume. Readings under 1.00 signify a strong market; readings above 1.00 signify a weak market. A TRIN-Thrust day (a change of .30 or more) signifies the likelihood of some market follow-through the next day. An up-move of .30 or more indicates the market has a downward bias for the upcoming day; a down-move of .30 or more signifies an upward bias for the upcoming day. TRIN Thrusts are not to be used as a stand-alone indicator. They should be combined with another indicator (or indicators) that also points to a move in the same direction.

The TradingMarkets.com Momentum Index Indicator uses a proprietary mathematical formula to create an unweighted basket of the strongest stocks -- those the "smart money" is moving into. These stocks tend to front-run the overall market by a day or less. This means if the overall market is down for the day and the TMI closes higher, there is a better-than-average chance the overall market will be higher the next day. Conversely, if the overall market is up for the day and the TMI closes lower, there is a better-than-average chance the overall market will be lower the next day.

Examples

*All charts use the following symbols: 1 = Buy Signal, -1 = Sell Signal, 0 = Exit Position.

The accompanying rules are from the book Trading Connors VIX Reversals by Larry Connors and Greg Che.

In the first example, we have a CVR I signal marking buy and sell points on the S&P 500 Index.

As you can see, the signals alerted us to shifts in the market that were potential entry points. Some of the signals obviously worked better than others, though the edge here is evident. The original design of this signal was tested and recommended with these rules:

For Buys (Reverse for Sells)

1. Today the VIX must make a five-day high.

2. Today the close of the VIX must be below the open.

3. If Rules 1 and 2 are met, buy the S&Ps (or the market) on the close of today. This will have to be done at the same time Rule 2 is met in the last few minutes of trading.

4. Hold the position at least 1-3 days.

Though the original design was for swing traders, daytraders can easily incorporate these signals into a strategy by anticipating potential market direction.

In the second example, we have a CVR II signal.

Here we see choppier price action following the signals, which reinforces the importance of stop losses. These signals are from the same time period of the first example, yet are signaling different entries. The advantage of having different VIX signals generated is that it can take advantage of different market climates. Any indicator can outperform or under-perform the others at any time, so it is important to tune into all of them to try to get as clear a picture as possible. Multiple signals in the same direction increase the chances of that move. The rules for CVR II signals were designed with the following recommendations:

1. Take a five-period RSI of the closing VIX.

2a. When the five-period RSI gets to 70 or above, it signifies the VIX is overbought and the market is oversold.

2b. When the five-period RSI of the VIX gets to 30 or below, it signifies that the VIX is oversold and the market is overbought.

3. When a daily RSI reading above 70 is followed by a downtick in RSI, buy the market that day on the close. When an RSI reading below 30 is followed by an uptick in RSI, sell the market that day on the close.

4. Exit 2-3 trading days later (or use some type of trailing-stop exit).

In the third example, we have a CVR III signal.

As you can see in the chart above, the indicators are providing desirable entries. Again, a good money management system can make all the difference in your level of success with these indicators. When you exploit an edge on the market, you must also be disciplined enough to exit the trade when your stop-loss has been hit. The rules for these signals were recommended with the following:

For Buys (Reverse for Sells):

1. Today the low of the VIX must be above its 10-day moving average.

2. Today the VIX must close at least 10% above its 10-day moving average.

3. If rules 1 and 2 are met, buy the market at the close.

4. Exit (on the close) the day the VIX trades (intraday) below yesterday’s 10-day moving average (reversion to the mean), or exit within 2-4 days.

In our fourth example, we have a CVR VI signal.

The signals here are demonstrating entry points that are once again setting up profitable moves. Does this work all the time? No. The first -1 sell signal in this example was reinforced with other CVR signals cited in the examples above. The signals may not all trigger on the same day, but by looking at the Market Bias Indicators page every day, you will get a good feel for what's going on as the signals come in. The rules for the CVR VI were recommended with the following:

For Buys (Reverse for Sells):

1. The VIX must make a new 20-period high two out of the past three days.

2. When this occurs, buy the market on the close.

3. Exit in 2-3 days.

Summary

Good money management is essential with any trading methodology. Reliable as these signals may be, trading off Market Bias page alerts is no different. Remember that these alerts are designed to give you an edge. We cannot emphasize enough that multiple signals provide even better odds than individual ones. While this edge can give you an advantage when it is factored into your trading decisions, no system is perfect. For best results, you must adjust numerous factors such position size, entry levels, stop placement, etc.