I started trading June 1st, 2011. I'm not posting here because I feel I've got answers, but because I have more questions than answers, and I'm interested in conversation and shared learning. I'm happy and interested to have someone tell me I'm wrong in a way that promotes learning for anyone that might read this. Flame wars or comments that sound like something my three year old would say will not be engaged.
The day trading screen I keep up for much of the day is set up with four charts: the S&P 500 index ($SPX), iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT), SPDR Gold ETF (NYSEARCA:GLD), and PowerShares US Dollar Index ETF (NYSEARCA:UUP). I call this setup my "overwatch" screen.
Why? Because my basic premise at the moment is that one can perceive the true bear vs. bull / fear vs. euphoria / defensive vs.aggressive state of the market by comparing action between the extremes of what is considered "safe" (bonds) and what entails more risk (the S&P).
I'm sure there are more and better symbols to compare for the stated task, and if so please tell me about them... I'm all ears.
Note that I set these charts up as five minute bar candlestick charts. I also set up double bollinger bands on all of them (1 vs 2 deviations, 20 period interval on both). I don't use the bands for trade signals per se, but more because they give a very fast assesment of where the momentum is at. If the action is staying between upper bands 1 and 2, or is above the 2nd upper band, we've got a good up-trend running... Vice versa - between the lower two bands and there's some good downward momentum. Below the bounds of the lowest band and we've got some strong down pressure in place - a trend is in present that will take some work to meaningfully reverse.
Again, these aren't trade rules in my approach - just visual indicators about where current momentum in a symbol lies.
Back to explaining the "overwatch" screen:
In theory TLT represents bear sentiment, fear, and defensiveness. SPX represents bull sentiment, euphoria, and aggressiveness. I consider UUP another 'safe haven' like TLT, but also consider it to be a pure play on how the US economy is judged against the rest of the world, and seems to be the ultimate safety play. GLD has also served as somewhat of a safe haven, but has the added funk of being heavily inflated, and thus what I would call a "speculative safe haven."
So, in terms of the risk spectrum, I see the bull to bear spread as follows: SPX, GLD, TLT, UUP.
In my (limited) understanding and (limited) experience, when SPX goes up, GLD, UUP, and most of all TLT, should go down. When there are divergences from this pattern, something is afoot. I assess this minute by minute by looking at daily percent gain / loss, and especially by where prices are at relative to the double bollinger bands that I've described. IE: if SPX is at the top of its band range, TLT should be at it's bottom band range. UUP and GLD add some magic to the mix.
So, some things I've noticed, based on actually watching the action:
When SPX and GLD move down in concert, expect the move in SPX to have some solid momentum. These two have been moving both up and down together very closely ( on the chart, not by percentage ) since the FOMC meeting annoucing Operation Twist, and I view that as a very sketchy thing. The only other time I saw this clearly was after the US budget bill was finally passed, and the market tanked.
If SPX, GLD, and TLT are headed down and UUP is headed up, this is straight-up liquidation. Big players are leaving the building. Look out below. Again, I've watched this happen in the recent past on a few rare occasions, and the results were the same. Not exactly a scientifc proof at two examples, but this happens rarely.
Finally, a few examples from today's (9/29/2011) action, wherein heavy reversals occured at least three times:
After the open run up / retracement on SPX, things fell into a more or less sideways pattern (starting about 11am). Around 1pm though, it was clear that TLT was running in its upper bollinger bands while SPX was still in the middle zone... effectively sideways. I saw this as a bearish sign... why were people beefing up to long term bonds when SPX wasn't falling? I took it to mean the market makers didn't believe the SPX levels were justified, even though the were well off their morning highs. Shortly thereafter a ~20 point selloff occurred in SPX.
After that selloff, SPX meandered around for a bit, ranging a maximum of 10 pts off its lows (~1140). TLT was peetering off a bit on its push higher as well... but from 3pm - 3:15, TLT suddenly dropped from its upper range band to its lower... and SPX was still just sitting in the same range. "Where's the money flowing to?" I asked myself... not UUP, not GLD... people are moving out of safety, but not headed towards risk... yet.
I put my money on the fact that safe funds were being freed up for riskier pursuits - SPX had fallen hard post 1pm, and we were in the last hour of trading - players now saw SPX as an opportune undervalued risk instead of just straight risk. By 3:20 it was on, and a ~20 point rally on the S&P led us into the close.
My entire goal is to observe where the money is flowing to... know when people are moving towards risk, know when they are moving towards safety, and know when they are simply leaving the building. Watching these symbols together, minute-by-minute, has certainly helped me identify patterns, and certainly taught me to recognize when things are going off the rails.
As a final note, I'll voice my concern over the fact that SPX and GLD have been moving in lockstep since the last FOMC meeting (again, not by percentage, but by chart pattern). It would be somewhat understandable for SLV, which has an industrial component, bit in my (again, limited) experience when GLD and SPX turn together, there is strangeness afoot.