Many years ago, I began a journey seeking a methodology that would suit my style of trading. I was tired of being misled by the financial media and equally frustrated with my investment decision process. What started as a new year resolution, back in 2000, has changed very little to date. This blog post will discuss how you might do the same, in five parts.
Systemizing My Trading – Part One
Follow the money.
Common sense dictates that money flow is the name of the game, so we developed a workflow that identifies money entering and leaving the markets. Given institutions have the incentive to protect their assets, watching what they do can give us insight into their risk appetite. When they start selling so should we. When they start buying we want to ride their coattails.
One important truth I learned a long time ago. Be careful thinking the market is telling you something in isolation. You have to look at everything. Forex, the bond market, commodities, and equities. – Tony Dwyer
The ARCA Institutional Index (XII) highlights the 75 stocks most commonly held in institutions’ core portfolios. Watch for signs of distribution, or the appearance of red sticks, as the indices trade near all-time highs. Red sticks bad. Green sticks good.
We know that the equity markets will not top in one day, therefore a change of character on this chart of XII will stand out. Recently we’ve changed from green sticks to blue sticks on this Elder Impulse System chart.
Blue sticks after green; stocks are consolidating recent gains.
We also point to price action remaining between standard deviation one the dark area and the standard deviation two outer Bollinger Bands. A close inside standard deviation one is a caution signal, especially if it’s a red stick. Two red sticks is a sell signal. Take more risk off the table.
Basically, the Elder Impulse System illustrates whether institutions are bullish or bearish. Currently, institutions show no signs of selling in mass. The market is trending.
SKEW – Are They Hedging?
Sound judgment dictates if fund managers start hedging we should take notice. SKEW helps us identify when institutions are defensive. If they are still bullish and seek protection they will start buying puts, gold, bonds or other assets to balance their risk exposure.
SKEW is a measure of out of the money (OTM) puts being bought and sold. A sustained and rising trend is a warning sign. Persistent closes above 135 trigger our workflow > reduce risk.
Taken together, XII and SKEW tell us institutions are not selling in masse.
In part two, we will cover another asset that helps us sleep at night.
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Happy Trading,
Vinny
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Our content is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional investment advisor in connection with, or independently research and verify, any information that you find on our Website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. Trades and or positions listed and taken from the watchlist are my own and should not be considered “advice” to enter any particular position or asset.
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Live broadcasts are educational in their content. Proper risk management is considered on every trade or asset mentioned.
*** Stocks highlighted are for information purposes only and should not be considered as advice to purchase or to sell mentioned securities.
As always, the use of technical and fundamental analysis is encouraged in order to fine-tune entry and exit points to average seasonal trends.
These mentions are stocks that we may or may not decide to trade as outlined in the watchlist. Always use a stop.