Growing up in Florida, I remember my Dad waking me up in the early hours of the day so we could catch the right tide. The key to success was being at the right place at the right time for the current tide.
The incoming tide would cover the shallow areas bringing in all good things; nutrients, crabs, bait fish, followed by the larger fish looking for a bite. When timed right, you could fill up your cooler in a fairly short time.
Trading the stock market is no different. Looking at the past few weeks, we’ve been experiencing a dead tide, where the market chugs sideways and the currents are at a stand still. This is the time you want to head back to the dock and grab a beer.
For the indexes, use the 4ema as your tidal indicator. When the market is trading under the 4ema it’s an outgoing tide, when the market is trading over the 4ema it’s an incoming tide. You can review market timing models for more information on measuring market breadth.
Looking at the chart above, you can see tides switch in March. The market was moving sideways and then made a decisive move downward. After a healthy correction the tide turned and money started flowing back in pushing it higher.
In last week’s post “Chop Fest 2011”, we looked at the Slow STO indicator. A move below 20 on this would offer some over sold opportunities. This signal must be accompanied with a breadth thrust from StockBee’s daily indicator ( Stocks Up 4% or Greater ). We’re looking for a day with 300 or more stocks up 4% or more before moving back into the market.
For StockBee members, the 10 day ratio on the market monitor is another useful tool.
Many of the low float, high earnings, high momentum type stocks will move 10 to 20% in just a few days. With this in mind, look for a move below 1 as the market corrects and then look for entries as it begins to move back up. The new leaders emerge early. This allows you to catch them as they are breaking out in the first few days of a new move.
Looking at the table, you can see two thrust days on 3/18 and 3/21. The 10 day ratio dropped to .53 and then started moving back up to .75.
Another tool you can use is the Bullish Percent Index. CKBergin over at StockBee got me hooked on this P&F based indicator. The Bullish Percent Index is bullish when the daily value crosses over the ten day moving average.
In the end, we’re looking for a way to know when the market tides switch from outgoing to incoming. On the incoming tide, we can catch some significant moves off newly formed bases on the highest quality stocks out there.
With this post you have some tools to read the tides of the market, now it’s up to you to find the best places to fish and land a few big ones on the market’s next move.