By: Costas Bocelli — July 22, 2021
Short, Medium, Long: Which Trade Do You Prefer?
Whether you prefer short-term, intermediate-term, or long-term trades, technical indicators for spotting—and successfully profiting from—all those types of trades are right at your fingertips.
These tools of the trade are priceless.
In fact, every editor here at TMI relies on these very same indicators to identify trades for their paid services.
When used properly, the right indicators can make the difference between big losses and huge gains. You just need to know which to use, and what they’re telling you.
For clarification, long-term equals months to years. Intermediate-term equals weeks to months, and short-term equals days to weeks.
Let’s say you’re looking for long-term opportunities. For that, start with the New York Stock Exchange Bullish Percentage Index (NYSE BPI).
On our premium sector research platform, Sector Prophets Pro, you have access to the NYSE BPI plus BPI charts for all the other major market indices as well as the 45 sectors that make up our investing universe.
I’ll flash the NYSE BPI first, then explain what it’s saying about the broad market.
While it isn’t meant to dictate if you should buy or sell, it’s a great barometer of risk and will tell you whether to play offense or defense.
As you can see below, the NYSE BPI flipped from an X-column (bullish) to an O-column (bearish) on July 15.
(By the way, we have a free website devoted entirely to changes in the NYSE BPI. Go here to read the latest update.)
This latest reversal means the stock market should be considered weak over the short-term and that risk is to the downside (meaning, supply is in control).
It already had been considered weak over the longer term since March 5. On that day the NYSE BPI went on a point-and-figure Sell signal.
That’s when the O-column indicated by the red arrow got lower than the previous O-column.
After this most recent flip, the current O-column once again moved lower than the previous one. This tells us that more stocks are participating in this current down move than participated in the previous down move. This is a longer-term bearish indication.
You should begin taking a defensive stance whenever the BPI moves to O’s.
What should you do? To minimize losses, sell lagging positions (stocks that have been underperforming). Consider tightening your stop loss orders on long stock positions. Buy protective put options. Switch to buying stocks with low “betas” or low volatility.
Other ways to reduce risk are: buy “deep in-the-money call options” instead of stock. You can also buy ETFs (exchange traded funds) that are usually less volatile than stocks because they are a diversified basket of equities.
But when the NYSE BPI actually moves below 30% (the oversold or “washed out” region of the chart) most investors will feel so beaten up that they will pull their money out of the market (as opposed to simply selling some stocks and buying others in their place).
This is the time, though, to get ready to play offense again -- to buy.
Once the market approaches washed out, you’ll need to watch for the NYSE BPI to switch to X’s. At that point, your team (team bull) has the ball and it’s time to play “offense”.
You’ll look to make moves to profit from upside plays. If you are the type to play both the upside as well as the downside (with long stock positions and short stock positions), then you should be cautious about your short stock (bearish) positions.
You can also use sector breadth to determine risk. Sectors can often move contrary to the broader market, so it’s worth exploring individual industry groups as well.
To see what sectors are bullish or bearish, take a look at the image below.
This is the view US Industry Bell Curve during trading on Wednesday. The Bell Curve one of the premium tools you get with Sector Prophets Pro. It shows the breadth of the market at a glance.
Red boxes indicate sectors where Supply is in control, and the blue ones show sectors where Demand is in control.
As you can see, Latin America is the solitary blue box in a sea of red sectors.
If you’re an intermediate-term trader, you should consult the %30-Week Moving Average. This shows the percentage of stocks within a given universe that are trading above their 30-week (or 150-day) moving average.
Check out where stocks in the Metals Non-Ferrous sector stand with respect to their 30-week MA.
The chart is in a falling column of O’s and on a Sell signal.
So if you’re a medium-term trader, this shows you the sector is weak.
We can drill down even further and look at individual stocks and ETFs within the Metals Non-Ferrous sector as well.
For example, you can see from the below chart that Freeport-McMoRan Inc. (FCX) is below the %30-week (or, 150-day) MA so this stock is one of those in the sector universe contributing to this indicator in a falling column of O’s with supply in control.
On the other hand, if we look at the Software sector, for example, it’s just shifted directions into a rising column of X’s.
And as you can from the below chart, this is an example of a Sector good for an intermediate trade.
As for short-term trades, you’ll want to focus on the %10 Week (or 50-day) breadth indicator.
This is the most sensitive of the breadth indicators. Stocks and sectors will move above or below this shorter-term timeframe early and ahead of the 30-week MAs and BPIs.
Sectors are short-term positive when their %10-Week Moving Average is in a rising column of X's. With so much volatility in today’s market, we’re seeing big daily moves on the upside and downside so it’s best to consult other indicators as well.
One way to anticipate a short-term move is to look for sector groups reaching washed out levels (oversold below 30% reading on the 10-week MA charts). Oil Services, below, is an example.
You can watch for a reversal up, with the early sign of demand returning and a potentially short-term bullish opportunity setting up.
At this point, institutions have covered their short positions (stock which had been sold short has been bought back), so those institutions that previously were betting on the market’s decline are no longer willing to establish new, short positions (for the most part), thus eliminating a lot of the selling pressure.
Just keep in mind that the most important thing to consider when looking for trades is to determine what fits your style. Don’t pick a strategy—or position for that matter—that makes you uncomfortable.
Here’s to being yourself,
Editor, True Market Insiders