by George Angell

A market does not exist in a vacuum. There are always complementary indicators, markets, and news events that influence how a single futures market behaves. Indeed, there are often so many of these, the problem becomes how best to sort out the abundance of information rather than a dearth of news. The key is knowing how to interpret the many facets that go into the supply and demand equation.

Every market technician will tell you he has favorite confirming indicators. More telling perhaps is that these indicators will change from time to time. And I’m certain you will know the reason. They stop working. So analyst A will be a proponent of on-balance-volume and analyst B will be a proponent of, say, divergence techniques and, down the road, they will switch pet indicators. Certain analysts have even made careers of embracing specific indicators. I must confess a fondness for Taylor’s work and time and price studies. There were times when I used to carry around huge multi-colored Gann charts. But like most believers, I grew wary of that strategy one day, and moved on to the cycle pattern approach. One of my favorite quotes is about intolerance and talking behind people’s backs. But it applies to market analysts as well. It goes like this:

“There is so much good in the worst of us, and so much bad in the best of us, that it hardly becomes any of us to talk about the rest of us.”

I don’t recall who originally said this, but it reflects my sentiments concerning market analysts and their theories. Frankly, I don’t care if you rely on tea leaves, if it works. There is so much emphasis placed on secrecy and not letting anyone know some formula or technique or strategy actually is. Having said this, I certainly wouldn’t want somebody publishing my LSS numbers on the Internet. People who purchase proprietary software should know that the information is privileged. But you simply cannot crunch numbers and come up with the correct answer every time.

Because successful futures trading requires such an incredible blend of brains, talent, courage and money, I wasn’t surprised when a seven-figure-a-year S&P pit trader explained to me once: “I don’t mind sharing my trading secrets. I don’t think anyone can duplicate what I do anyway.”

The place to start looking for the confirmation of a pattern is futures price action. Of all the indicators available to you, this is the most valuable. For many, the fundamentals and trying to glean price direction from news reports determines their slant on the market. And they have a point. Long-term, the market will conform to the dictates of supply and demand. But when it comes to trading the market short-term, the technical – and really, the psychological – factors are much more influential. For this reason, you have to learn to look at price as the sum total of opinion on the market at one moment in time.

There are two approaches to using price to determine future market direction. One, you can simply guess and hope that you are correct. Two, you can use price to tell you which way the market is headed. 

The first approach is fraught with difficulty. Your guess is often mistaken. The second, while not always easy, can be misleading unless you know what to look for.

Be Patient and Selective

A word of caution: to be consistently successful in finding sound patterns, you must be selective. This means you will not find a readily identifiable pattern every day. Moreover, you must be patient. On average, if you can find three good patterns per week, you will be well rewarded. 

Why this warning? Trading patterns are notoriously deceptive. While some patterns will emerge everyday, you are doing yourself a disservice to think you can identify it quickly enough in order to capitalize on the situation.

The day’s pattern is often telegraphed by initial price action. Take the case of a sharp selloff when the Dow ends the day off 50 or 60 points. What is likely to occur on the following day? Typically, you are likely to have a continuation of the selloff in the initial first hour of trading. That is understandable, since traders (especially unsophisticated stock traders) have had an opportunity to digest the news. They don’t want to be aboard a sinking ship. So they jump overboard. Once their reckless selling at the bottom culminates, however, the market is free to rise as the inevitable buy day pattern kicks in. This is precisely why you want to be thinking with your head and not panicking with your emotions when you trade. Although you will occasionally get back-to-back declining markets, the probabilities favor the Buy-Sell-Short Sell Day pattern. The market is taken lower to create the buying opportunities for the smart money. So what else is new.