The “Big 4” Market Indicators

08/11/2011 3:30 pm EST

Focus: STRATEGIES

Jackie Ann Patterson

Author, Truth About ETF Rotation

Every trader should monitor four important indicators to get a feel for the overall "health" and mood of the markets, says Jackie Ann Patterson, who explains what to watch for.

No matter what type of trader you are, short term or a long-term investor, it’s probably a good idea to get a good, round view of the market before you get started.

Our guest today, Jackie Ann Patterson, is here to talk to us about that. So Jackie, how do I get an overall look at the market to get a feel for what’s going on?

Well I think it’s really important to look at four broad areas. One of them is the situation, the economic fundamentals, as well as the technical trend.

A second area is the swing; the market will oscillate back and forth around whatever the major trend is, and it’s important to know where you are in that and where you are overall in the calendar.

I think the third thing, of course, is the sentiment. Looking at things like the put/call ratio, or just how bullish is everyone out there; I think that’s very important.

I’ve also found it important to look underneath that, at what I call the “sincerity” of the traders, and try and get another level of insight to find out how much behind that sentiment they really are.

Alright, so am I looking at basically just a chart of the Dow or the S&P 500? Is that where I should start?

I think that’s a good place to start, and I think that there’s just a lot of information available, both in terms of charts and indicators, and also Web sites that carry a lot of data, and sometimes you need to go digging.

For example, to really get at the sincerity, I look at the divergences and I count divergences across the market.
To do that, I needed to write my own software and do runs and really dig out that data, so that would be the one extreme, and I think there’s a lot of other information that is more readily available.

I think a lot of people turn on CNBC in the morning and they start to get a vibe for how the market is feeling, but often times the media can really overswing it—either bearish or bullish—and you may get kind of a skewed sense of how the market is going.

Should I avoid that, or is it just one thing to consider? What should I do there?

Well, I think that’s partly a matter of personal preference and experience and how people go about learning things. If learning by listening is important, and by watching somebody say it, then that might become a very important source of input.

But with the caveats that you mentioned is that they will tend, being media, they will need a story, will tend to overhype it, and will want it to be a true story, so it might be something that’s already happened, rather than trying to peer forward through the mist and discern what’s the best guess going forward.

Those days that you have some things showing one direction, but you have another saying another; what am I to do then?

I think there’s a whole lot of that in the market. You know, it’s maybe waiting for those moments of great clarity—that’s probably the most important thing—and be patient with the times when there’s a lot of conflicting information, because that will happen most of the time.

But I think it’s important to still look at it and important to get a feel for how things are playing together and how the story is unfolding. Stay on top of the information at regular intervals; that’s the best way not to be blindsided.

I would take it that it just takes some time. How long did it take for you to get kind of confident in your skills and abilities to put this all together?

Well, it’s taken years to develop the kind of systems, and it’s still ongoing. I still find new things that I like to look at or that add value.

I think that it does take a period of years to develop the system and the routine, and then it can take an hour, maybe two hours, at most, on a weekly basis, for me to look at this information.

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