Be Aware of Your Surroundings

11/25/2008 11:33 am EST

Focus: STRATEGIES

Tom Busby

Founder and CEO, DTI

How can one decipher all of the information available in the market and be on the right side? It seems to me that the solution to this question is not in making a decision based on media reported information, but rather, making a decision based on market reported information.

The market will respond to the news and tell you whether it was good or bad. When the market responds to news, there is generally an initial rapid up or down movement, a retracement, and then either reversal or follow-through. The follow-up question is “How do I make decisions based off the market’s response?” The answer: Trade the numbers through framing the market. There is a reason that people say markets are interconnected. Market nearsightedness is a handicap for the uneducated.

Those who “study” one stock, one bond, one index, one currency, etc., never see the picture painted in its entirety. This would be much like an artist sketching a beautiful valley overlain with turn of the century homes and a flowing river, but leaving out the snow capped mountains in the distance. Having knowledge of the US overnight market, as well as overseas markets such as the Hang Seng, Nikkei, Dax, and EuroStoxx, the index markets predominately made up of massive companies that decide the fate of the economy on a quarterly basis are what is missing from the picture.

Knowing where the futures index markets have been may not give compelling evidence as to where they are going, but it does give traders a significant edge on where they may stop or accelerate. Having knowledge of the numbers prevents one from being impaired and removes guesswork and over-speculation.

Notice the chart below:

chart

The horizontal blue line represents the Globex (overnight) open of the e-mini S&P. Without going into too much detail, 850 is obviously a pivot area based off of the US overnight session. Once the market decided to stay above that area this morning, we saw some extended highs from the overnight session. Notice that on this particular afternoon, however, once the S&P broke below that Globex open, the market did not turn. It is important to know the fluctuation points of the overnight market to time entry as well as identify what vehicle to trade.

Related Articles on STRATEGIES