With the resolution of the year-end “Fiscal Cliff”, we saw a relief rally gap up in the broad markets this past couple of weeks. Now, developing a followup strategy to capitalize on subsequent moves in January is a good idea for active traders, as we look for broad-market and sector-specific trading opportunities in the weeks ahead.
Trading Key Support and Resistance Levels in the NASDAQ and S&P
In our last article, we correctly identified near-term resistance at 3030 and 3110 in the NASDAQ composite chart Figure1 [NASDAQ]. Now that we’ve broken clear of that, setting new support and resistance trading ranges is a good idea. Initial resistance is now at 3140, and support at 3070, as seen in that chart.
From a swing trading standpoint, it’s a good idea to wait until the markets get over 3140 for new longs, or below 3070 for new shorts, and stand clear of the current gap-up consolidation region. Intraday traders can look for immediate opportunities in stocks andthat have at least a one-point prior day’s trading range, taking out new multi-day highs or lows, during opening range breakouts and breakdowns.
Sector Trading Strategies: Trading within Strongest Sectors
A professional trading strategy involves focusing trading activity on stocks within the strongest sectors. These are sectors that have stronger charts than the underlying markets. For example in Figure 2 [Pharmaceutical Index (DRG)], the most-recent sector index action is much stronger than the NASDAQ composite chart.
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When looking for what stocks and ETFs make for the best trading opportunities, it’s helpful to start by scanning through the various sector charts (for example, semiconductors, retailers, pharmaceutical, banking, and other sectors) to see which is the strongest. Then, identifying the strongest charts within the strongest sectors gives traders an added advantage of trading the best relative-strength plays, on new breakout entries.
New Year’s Trading Post-Fiscal Cliff in 2013: Sector Trading
As part of a personal trading plan in 2013, it’s a good idea to make sector index scanning a regular routine, so that traders can compare various sector index charts to see which are strongest. This can also help traders avoid false breakouts, which often occur as a result of trading stocks in weaker underlying sectors.
By doing a top-down professional scan of the broad market, then it’s individual sectors, traders can develop a trading plan that is designed to capitalize on observed strength in individual sectors as they break out to new highs, faster than the broad market and other sectors do.
This is also particularly useful in January/February trading, as institutional traders start building their portfolios and adjust their holdings at the start of each new year, for re-balancing. By keeping an eye on the sector charts, traders can detect where the institutional money flow is headed, and do short-term swing and day trades to capitalize on this money flow. In this example we saw strength in the pharmaceutical sector index. Looking at other sector charts, traders can see which ones are “leading the pack” in terms of taking out new highs during the upcoming weeks ahead.
Trading Related Stocks in Strong Sectors: Correlation Breakouts
A good example of a strong stock in the biotechnology sector is Figure 3 [Celgene (CELG)]; as you can see it had a very sharp long breakout in recent days. Being aware of stocks within strong-moving sectors (and related sectors) can help identify potential trading opportunities ahead of time.
There’s a relatively strong correlation between the biotech and pharmaceutical sectors, as you can see by comparing the sector index charts of these two sectors. When one sector moves strongly, it’s often wise to look for related moves in stocks that are in a highly-correlated sector as well, since they often move together.
With the “fiscal cliff” behind us, and the markets poised for new trading volatility in 2013, it’s an ideal time to develop a sensible, strategic trading plan that capitalizes on strong breakouts and price-action moves during this upcoming trading year ahead.
Ken Calhoun is a trading professional who has traded millions of dollars of equities since the 1990s, and is the producer of multiple award-winning trading courses and video-based training systems for active traders. He is a UCLA alumnus and is the founder of TradeMastery.com and DaytradingUniversity.com, popular online educational sites that reach tens of thousands of active traders worldwide.