The index is the driver

[ktee]

I trade stocks in the manner of a system penned by Dave Trends, under the guise of New Breed trading. It is early days and although I am trading at a profit, there are several months/years to go by before I would qualify the system as successful for me. Having said that, I’m damned excited…!

One of the principles of this style of trading is that stock selection is a secondary issue. What drives our entry/exit into stocks is the intraday patterns of the Nasdaq index. Intraday in the sense that we are short term market timers (5 – 10 days) as opposed to day traders. And it may be several days or even weeks before a suitable set up appears (on the index chart) to initiate entry.

I am forever amazed how little discussion there is on the influence the index has on the decision making process of traders. Simply put, regardless of how effective your stock selection is, would it not increase probability of success if you chose to enter the trade during a positive point in the index?

[Forum Mgmnt]

I concur that there is probably more fruit to be gained looking at timing based on the index than through more than rudimentary selection processes.

The stock market moves to the beat of the indexes, you end up fighting an uphill battle if you are long something when the index is breaking.

We haven't done as much actual testing on this as I'd like but it remains the single most promising area of research based on my subjective analysis.

[billpritjr]

Throwing in my own two cents here-

Think of the overall index as the river, and the stocks as boats on that river. The idea is to pick the fastest/strongest boat, which is moving in the same direction as the river. Then ride that boat (trend follow) until it slows down and/or changes direction.

Think of technical analysis as being an overhead photo of the river.

The boats with the biggest wakes, the ones obviously overtaking other ones, and boats that are best suited for this section of the river, say a speedboat in the narrow portion, versus a barge (sector selection: ABCD stocks are showing strength this week, versus XYZ stocks, that sector is dead....), etc. You want to pick the absolute best boat for the conditions of the river. Imagine yourself in an airplane, and saying "that boat is fast, look at it go"

Think of fundamental analysis as studying each boats engine size, hull shape, etc. By the time you are done, the river has turned or the boats are at a new bend.

In my trading, I keep track of the S&P 500, NASDAQ, and Dow Jones Indexes to maintain a feel of the market's trend and behavior.

I also keep track of the CBOE Gold Index, the US Dollar Index, and the price of Crude Oil, as further "intelligence gathering" efforts with my trading.

I learned this via book learning (Stan Weinstein is one that stands out strongly) and also by doing, which means losing and gaining money.

Generally speaking, even the strongest boats have a hard time going against the river, so just "go with the flow" (the trend). In SOME cases I have shorted stocks when the overall market was up, only when my technical analysis indicated possible short plays were a good idea, COUPLED with severe bad news with the company, such as (no joke) CFO committed suicide, FBI subpoenas served, etc. If my TA says "short", PLUS I have the above bad news, well, I will likely short the stock, regardless of overall market trend. Again, my TA must say "short this one" first.

Some would classify sector selection as fundamentalism, we could write a book on that argument , I advocate choosing the most powerful stocks, in the strongest sector/industries. I do this via charts (Small cap index, Dow Jones Airline Index, Nasdaq 100 index) and check the behavior of the indexes to get a feel for whats happening.

In any event, dont fight the river!

see ya

BILL