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It happens with fair regularity. For example, it happened again here, overnight. This was on June 5, 2008. This is the trading day for June 5, 2008, in which the Dow Jones Industrial Average was up 217 points. You can see, in the overnight trading, that there was quite a large movement up here. There was a sharp downward movement, but it didn’t get much traction.
There was no extreme large green bars or red bars in here. It did pop up, right at the beginning of the trading session. You didn’t have a long bar there, because it opened up very high already. If you had connected these dots, you would have seen an extremely large green bar here.
Because the bio orders were already entered before the market opened, it simply opened at this level, much higher. This is a huge gap in the prices. People were buying the QQQs on the open here. If you knew that, you would have had the chance, in the first 5 minutes or so, to establish a long position on this long red bar, or at least waited until this green bar.
You would have been able to establish a long position, and that is exactly what I did, when I did my three-legged box for that day, on June 5. I established a long position here, and then rode it up until here. I then locked in my profits with my three-legged box. It did go up a little bit higher, but at least I got my profits locked in, at that point.
This is a pretty good indicator for determining what market direction is going to be in the pre-market, before the market actually opens. It does give you an opportunity to establish some positions, prior to the actual large up-move.
Here, again, it sold off a little bit. Then it started coming back up a little bit, and it just followed that trend. You can get some erratic movement like this. When it starts to trade down, there are no large bars in here, so it’s not as predictive and helpful when it comes to predicting movement in the overnight session for the day. You really want to see those large bars. When you see those large bars, it’s a great opportunity to either go long or go short.
Here is a good example. The market opened up in the pre-market. This is pre-market trading. We had this huge green bar here. We did have a little bit of a selling-off before the market opened, but if you had seen this long green bar, and you had a gap open before trading started, you could have been looking at that point for a position to open on the upside.
You had about 5 or 10 minutes to establish a long position. I use this in conjunction with these two charts. In other words, if I saw the open very strong, the number of advancing issues was very strong, the volume was extremely strong, then I would go in and look at where I could establish a long position here, then I would ride this one out.
That’s how I use this. I use all three in conjunction with each other. I make sure that volume, price, and the number of advancing and declining issues are agreeing with each other. Then I bring volume into the mix. If all three agree with each other, then there is a high probability – now remember, you can never predict price. You have no idea what is going to happen. But it gives you a high probability environment in which you can take either a long or a short position.
Those are my three main indicators. I think you’re going to find these to be extremely helpful for your short-term trading. I use these when trying to establish an iron condor. Sometimes I use them for my calendar trades, for my money every month trades. What it does, it gives me an idea – if there is a lot of selling pressure in the market, I’ll wait for things to stabilize before initiating my iron condor, or my calendar spreads.
When the market is extremely volatile, you may end up paying a much higher price for those spreads. I don’t want to pay a higher price. I want to pay a good price. I want to pay a fair price. If I am collecting premium, I want to collect as much premium as I can, in a stable environment.
That’s how I use those. They have been absolutely terrific indicators for me. Those are the only indicators that I use. Besides the support and resistance points, there isn’t very much that is complicated about my system at all. It is extremely effective. Looking for flags, identifying those support and resistance points.
You can see here, on today’s trading – we came down to this resistance point that I had established here, and actually it was this little point right here that helped me establish this resistance line. Now, it looks like we have traded down to it, and it has bounced back up during the day. We’ll see if that holds, but it could be a significant support point for the market.
More often than not, support and resistance and identifying flag patterns, definitely work more often than they don’t work. It would be in your best interest to study these videos again, go over the very simple types of technical analysis that I do.
It’s very simple. Once you get used to doing support and resistance points, identifying flags, and then using volume and the difference between the advancing and declining issues, and the difference between the up-volume and the down-volume, you’re using real-time indicators, based on market internals.
Price, I don’t trust. To me, price is not trustworthy. I can look at a price, and I can say, “It looks strong, it looks weak.” I have no idea. That’s why I say that you can never predict price. You can take a look at the VIX. Adding the VIX to your arsenal just increased your odds of success by about 90%. The VIX will give you a very clear sentiment on what market participants are focusing on. If they’re focusing on fear, or if they are focusing on stability.
Just looking at the VIX, in addition to your stock charts, is going to add a huge amount of confidence to your trading. Then, when you get proficient, go ahead and add the other indicators – the up-volume and the down-volume. You will find that using those in conjunction with the VIX is going to be a tremendous help to your trading.
Like I said, we can never predict price, but what we can do is give ourselves the highest-probability events possible, in order to determine what the probability of future market direction is going to be.
With that, I will leave you. If you have any questions, don’t be afraid to email me. Don’t feel like you’re bothering me, or anything. I really like to talk about this stuff, and I’m really into it. All you have to do is send me an email, and I would love to discuss this with you.
I’m not saying that this is the only way to trade. I’m not saying this is the only thing you need to do in order to be successful. But it is definitely something that I think you should look at, and add to your trading arsenal. It’s based on real-time movement in the markets. It’s not based on any lagging indicators. I tend to trust it more, especially the volume indicator that I showed you.
With that, I wish you all the best. Trade with confidence.