- 2001: Volume 10, No. 4 "High Five": Using Indexes as Indicators

I want to share with you a very unique approach to staying on the right side of the market when you are daytrading the S&P 500 futures. I call the approach the "High Five." It is a group of important indicators which, when synthesized together, becomes vital to calling market direction. The best part is the method follows the KISS approach to the markets—"Keep It Simple Scalper," and is so effective that you can watch it work tomorrow along side of your current, primary trading tools. In addition to the "High Five" indicators, I want to review the 10-Day "Pit Bull" moving average, named after Marty Schwartz and his unique way of calculating this important market directional reading tool. Marty Scwartz is the author of the book Pit Bull and swears by this moving average saying in his book that it is one of his favorite indicators. I have been using these indicators successfully for years and we follow them daily on our website, www.DayTradersACTion.com.

The "High Five" are the NASDAQ Composite Index, the $TRIN, the $VIX, the $TICK and MER (Merrill Lynch Stock). Together these five indicators can be used to paint a clearer picture of market direction for the day session. When they all point in the same direction you would be ill advised to fade them and when they give a mixed picture you can often save time and money by staying flat. The best way to view them is in conjunction with a particular market action. Lets use as an example a bullish opening after a previous, rather average, bullish day where the Dow closed up about 55 points, the NAZDAQ composite index was up around 35 points and the S&P 500 futures were up eight handles on the close from the previous sessions closing price. On the next trading day you perhaps are feeling bearish overall but with a solid close the previous day and a higher open today you are concerned about getting short too soon. This is where the "High Five" come to the rescue. Remember this is an example only. It takes many trading days of watching these indicators in action and in relation to this example along with both similar and opposite setups. However, if you watch the "High Five" in tomorrows session you’ll quickly see what I mean. In our example, the market has now opened Gap Up 5 handles and is rallying with the Dow up another 40 points but the "High Five" signals caution! Heres how. When you see the $TRIN above 1.10 , the $VIX moving above 60, the $TICKS up 500 to 700 and MER is flat to lower, not only will it be very difficult for the market to rally much further, but the odds are excellent that getting short under these conditions is where you want to be. Now keep in mind that this type of reading must be synthesized to paint an overall picture and will take some practice and keen attention to details of the movements of the DOW and S&P 500 in relation to these indicators. A mega-bearish or what I call "bear ugly" tape using the above indicators is as follows: the overall market is lower with a heavy feeling of downside pressure. You see the $TRIN at 1.20 or higher, $VIX up 1.00 or more, $TICKS down 500 and stretching lower on each drop of the market, MER down 2.50 or more, and NAZ composite index down 50 or more, you can often just get short on any reflex rallies and hold short, because the S&P 500 and the rest of the market is most likely going down. On the bullish side with the market rallying or starting to rally when you see the NAZ composite index up 40 or more, $TRIN below .70, $VIX down 1.00 or more, $TICKS up 200 to 500 (particularly after a previous down tick day) and MER doing very nicely being up 2.00 to 4.00, then get long on any pullbacks because the market is probably going higher. A quick note on MER—this little indicator is pure magic. I learned about it from a former floor trader who "moved upstairs" and he convinced me to check it out. I’ve used it for years and I have seen it work in the markets. Don’t take MER lightly. If MER is down 3.00 or more, but not on any special news about the company—just day-to-day trading—the overall market is going to have a hard time rallying. Watch it for a week and see. Then e-mail me to thank me for the tip. If the overall market is flat to down after a couple of hours into the session but MER is up three dollars, they are going to have a problem taking the market down significantly further and we will probably get some kind of rally. It is that powerful, but don’t ask me why—just watch it tomorrow and see for yourself. If the market is trying to rally but MER is flat to down 1.00, its going to be choppy on the upside. Does it work every day? Of course not. Is it a very handy indicator in relation to the whole picture? Yes! Often when I’m long or short the S&P 500 and something doesn’t feel right with my position, I go look at MER and may flatten out a position on the basis of MER alone. If you take notes on the "High Five" indicators and keep them on your desk tomorrow, carefully watching the nuances I’ve described, I think you will be pleasantly intrigued to say the least.

Now on to another old reliable—the 10-day "Pit Bull" moving average. If you are an S&P 500 trader and haven’t read Pit Bull by Marty Schwartz then log on to CRB's bookstore at www.Invest-Store.com/CRBtrader and order it now. Marty is the real thing when it comes to trading and being a former marine tells it like it is. My favorite part of the book (other than the 10-Day moving average I’m about to describe) is his advice to traders who are stuck in a mental rut to get on top of their desk, look up at the ceiling and start screaming like a lunatic. I wonder what the trader psychologists think of that method! You want to listen to a guy that really trades the S&P 500, has made millions from it, and tells you one of his all time favorite indicators. This brings us to the next part of our discussion—staying on the right side of the markets when daytrading. Mr. Schwartz calculates the 10-day moving average by hand every day taking the last 10 days of the current S&P 500 future price and dividing by 10. You keep a running chart of it by taking the current 10 Day "Pit Bull" number that you calculated yesterday, multiplying it by 10, then adding today’s closing S&P 500 futures price to that figure. You then count back 10 days starting with yesterday’s S&P 500 close and subtract that number from the total. You then divide that figure by 10 and round up or down to the nearest .10. Now you have the 10 Day "Pit Bull" moving average for today’s trading action. It is not the same as the conventional 10-day moving average or exponential moving average that can be quickly tapped into a computer. This is not to say a computer can’t calculate it but Marty does it by hand and recommends doing it by hand. That’s good enough for me! The guy has made millions trading the S&P 500 and you may not want to fade that advice. Besides, it keeps you on your math toes. To use this 10-Day moving average, you want to view the market as bearish below the number and bullish above. Again, KISS. I have used this moving average number, calculated Marty’s way, since reading his book years ago and it is astounding to say the least. I’ve added my own methodology of trading with it after observing this number for years, watching it like a hawk while in the market, and paying dearly for trying to fade it. Here’s what I do now—take the number and consider bullish above and bearish below as a general "read" on the markets. When the S&P 500 futures price gets close to it (within 15 handles) I note on my daily trading homework "Caution—10 Day ‘Pit Bull’ moving average—crossover." That’s the key word—crossover. If the market had been bearish but has now rallied up to that number, you are going to see some amazing things happen. If the overall market is in a bullish trend, its going to blow through that number to the upside and probably leave it behind in the dust. You obviously want to be long at or even ( ideally) before that number if you are convinced we are going higher. If the market is unsure or genuinely bearish, you are going to see the area around that number look like a thick wall of resistance to the upside. If you reverse the previously explained scenario, then the number works the same way on the downside. If we have been bullish but the market is faltering or showing some internal weakness and the S&P 500 futures drop down to the 10-Day "Pit Bull" moving average number, there will be some serious attention on that number by a lot of astute traders and your attention should be there too, especially if you are long. Just as in the upside resistance scenario, if the market is not genuinely bearish as it moves lower, it may hit the "Pit Bull" 10-day moving average within five or 10 handles, come back and cross over it again remaining bullish. What I’m demonstrating here is that you can use this indicator tomorrow by calculating it tonight and get a good picture of which side of the market you want to be on. When you see it starting to crossover, take some extra time with your own personal trading homework to determine if we are going into a trend change and consider that you may want to hit that trend on or before the 10-day "Pit Bull" moving average plows through that special number leaving traders on the wrong side of it in the dust.

I hope some or all of these ideas have been valuable for your trading introspection. Carefully watch them daily in different market scenarios and you may find that they will become an important part of your trading arsenal.

Mohan is an educator and daily commentator on the S&P 500 futures for Day Traders Action Inc. He can be reached via the website www.DayTradersACTion.com.