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By Chris Rowe - Creator: Technical Analysis Millionaire
On many Tuesdays (the day I write for The Tycoon Report), before the article, I will list one or two "test your knowledge" technical analysis questions and after the article I'll list the answers. I hope you find this fun and I hope it helps you make more trading profits. Sometimes small bites can have a huge impact.Technical Analysis Question of the week:
1. The Air Transport sector almost always turns down ...
a. Before market peaks
b. In tandem with stock market peaks
c. After stock market peaks
2. Why?
******
The market seems to be in free fall!
But wait a minute -- it's actually just about 7% below its 2007 all time high! A sell-off here is actually pretty darn healthy. Bulls should be happy about it. If the bull run is going to continue, then the market has to shake out the weak traders (as they are quick to sell at the first sign of trouble, thus interrupting bull rallies).
Have the bulls lost control?
No. Not yet.
Remember, we use technical analysis the way the driver of a car uses headlights. It's not about trying to predict what will happen several miles down the road. It's about being able to see and navigate what's here and what's in the near future. Headlights give us plenty of time to see what's coming, and maneuver.
What we know is that the demand side has not officially lost control of the stock market yet.
You can look at the Tycoon Reports I wrote in recent weeks and see what signs of a potential top I've described. I've said to keep a close watch on Apple Inc. because it has a big influence on the major stock market averages. A falling Apple can pull the averages down and spook investors.
And Apple has since put in the RSI "negative divergence" and sell signal I discussed with you, and it broke through a key support level yesterday. It's one of the main reasons you're seeing the major averages dropping lately.
Sure, you'll read that the market is dropping because the International Monetary Fund cut growth forecasts... that there's more talk of a downgrade of U.S. debt... or that people are worried about earnings season. But the trick is to watch the heaviest weighted stocks that I mentioned in my September 18th article "5 Stocks That Forecast Market Reversals". THEY are what's causing the major indices to drop.
If you have a sense for what their price charts are telling you is most likely to happen next, then you'll have a sense for what the major averages are about to do.
SEPARATE THE INTERNALS FROM THE EXTERNALS
Everything you've read so far would be considered "kid stuff" by my students. Those who have gone through my "Technical Analysis Millionaire" course also understand what might be the single most important key to understanding the stock market: The difference between the "external market" and the "internal market".
The concept is quite simple, actually.
Stocks like Apple, IBM, Microsoft, Exxon, Chevron, etc. have a major influence on the MAJOR AVERAGES like the S&P 500 or the NASDAQ. In fact, if these stocks experience sharp declines while the vast majority of stocks experience sharp advances, the major averages would still probably be down sharply.
To further your understanding, consider the fact that there are 500 stocks in the S&P 500. The top 100 stocks -- that's the top 1/5 -- have an approximate 65% weighting (influence) in the S&P 500. The remaining 400 stocks -- the bottom 4/5 -- have a 35% weighting.
The "external markets" are those major averages which give different stocks different weightings. And the point I want to make here is this: So far, the major averages have declined as a result of some of the bigger stocks declining. But SO FAR the decline in the major averages is somewhat misleading.
When we look at all stocks on the NYSE or the NASDAQ we see that the majority of stocks are holding pretty strong. The major averages are, thus far, painting a picture that's a bit uglier than it really is under the surface.
And even though Apple Inc. did break a key support level, it seems like it's trying to put in a bullish reversal for the day. If it closes at or near the opening price, it's a set up for a bullish reversal right at that key level. We would, of course, want to see confirmation tomorrow, in the form of a strong day. If that happens, the major averages may start acting like the "internal market" again and start pushing higher.
Watch the big stocks closely so that you know what the rest of the world is about to think.
Watch the internal market so that you know what's REALLY happening, that most of the world, for some reason, fails to pay enough attention to.
If you don't know how to see the market clearly, be sure to sign up for my Technical Analysis Millionaire home study course when it becomes available again. In the meantime, I'll continue to update you in The Tycoon Report every Tuesday.
Cheers!
Answer (to TA question from above the article):
1. A (before stock market peaks)
2. Because they are sensitive to interest rates and energy prices -- both of which tend to rise at the end of the business cycle.
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An internationally respected authority on options, 9-year Wall Street veteran, and co-founder of Institute for Individual Investors, Chris Rowe spun out profitable trades for his Trend Rider members for 7 years, ending with his retirement in 2012. While most professionals consider an options trader who is right on 3 of 10 trades to be very good, Chris was right on the majority of his trades! Now, through his weekly "Technical Tuesday" Tycoon Report articles, Chris Rowe helps hundreds of thousands of investors across the globe, demonstrating the benefits they'll realize by taking a dispassionate, business-like approach to both stock and options trading. In his thorough and detailed, yet easy and accessible courses, you'll learn directly from Chris how incredibly easy it is to consistently make money - in bull markets, bear markets and flat markets - when you use a proven system for trading success. |
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