Page 187 - THE MARKET WHISPERER

THE MARKET WHISPERER 18 3

SMART I do not always check the sector or industry before taking
MONEY a trade. Stocks belonging to a marginal sector are not
checked.

A good proportion of the stocks we trade will belong to one of four
main industries: banking, technology, semiconductors, and biotech. On
the screen which displays the two most important market indices, I also
allocate space to relatively small charts showing five-minute candles for
three of these industries: banking, biotech, and semiconductors. Of course
there are many more sectors, from stocks related to aircraft and flight to
the production of paper, but the impact of those sectors on the market is
negligible, therefore I do not allot them screen space.

Exercise in Comprehension:
On the daily chart, Southwest Airlines’ (LUV) stock shows a nice

pattern while trending up, and you wish to buy for a range of several days
(remember that several days is called “swing”). You’re waiting for the best
possible conditions.

When the trading session opens, you notice that the market is rising
strongly and the Oil & Gas sector is rising even more strongly than the
market. You check the reason and discover that fuel prices are rising. An
immediate outcome of rising fuel prices is a drop in Airline sector stocks
which are highly dependent on fuel costs. Conclusion: today is not the right
day to buy Airlines sector stocks.

On days when the market is trending up, the associated question
is which sectors also rose, which of them rose more strongly than the
market, and which dropped despite the market’s move. On a day of highs,
we can assume that between 70% to 90% of the sectors are also rising.
On the other hand, as noted earlier, some sectors will almost always move
in opposite directions to each other, such as the contradictory movement
of the Airline sector to the Oil & Gas sector, because of the strong impact
of fuel prices on airline profitability. When the market index drops, for
example, the price of gold will almost always rise. When the price of gold
goes up, the Mining sector will also rise. We see that gold and mining
companies often move in opposition to market direction. On a day of sharp
upward movement in the market, would you want to bury your money
in a stock belonging to a dropping sector? Of course not. So, check sector
direction before entering the market.