Taking a look at different indexes in the stock market helps us make decisions on how we might trade. I like to look at the broad market because big changes in the stock market are caused by the flow of institutional money, also referred to as “smart money.”
Institutions tend to buy sectors rather than smaller stocks, so it is important to see how the market is impacted by those trades. Today we’re going to compare a few different indexes to gain some insight into how we might trade this week.
First, let’s look at the Dow Jones. It doesn’t look at the market quite as broadly as some other indexes, but many people still use it as a gauge. There are subtle differences between the Dow Jones and the Broad Market, although they generally appear very similar.
This week, the Dow shows several lower lows and lower highs, whereas the Broad Market has some double bottoms and triple bottoms. The Dow is less resilient in comparison.
One of the indexes that has led the market in the last few years is the Russell 2000. It has led the market because it has broken to new highs before the S&P and the Dow Jones have. This week, Russell 2000 and the Dow look quite similar. The only real difference to note is that the Russell 2000 has a lower high.
Comparing each of these indexes helps us see if anyone is really leading the market. Currently, it doesn’t appear that anyone is.
A few weeks ago, predicting the market was fairly straightforward. In the last couple of weeks the market has been more of a mishmash. When the market looks like this, many traders will find a channel between support and resistance to trade in. They buy when it is low in hopes that they can catch it on the upswing.
I often try to put my entries above resistance or below support if I’m going short. We would want to go long if the market were to break into some new highs.
It is important to be aware that when the market begins to consolidate, as the indexes show this week, it generally means it will soon break. Within this mishmash, it is helpful look at the market from a bigger picture perspective in order to know if it is bearish or bullish.
Looking at the market indexes from a weekly perspective shows that it is slightly bullish.
The key to trading in a mishmash like we have this week is to put in some trade both ways. I will likely stick to my standby: I’ll have some entries, targets and exits on the upside where I’ll have minimal potential loss; and I’ll have some entries, targets and exits on the downside where I can keep my losses to a minimum.
We’ll keep an eye on the news and see if this market can gain new highs or drop below some support or resistance points in the coming weeks.