Yesterday was an excellent example of this edge. On Tuesday I noticed that the Transports Sector was slamming into resistance. This meant that on Wednesday it would either find strength and break through OR as it has done in the past it would fall back and prices in the transports would go lower. There was some bad economic data pre-market on Wednesday so the probability at that point would be that Transports would be weak. Since trading is all about probabilities, I'm just trying to get the probabilities on my side -- I am not trying to make predictions.
So what do I do with this information to make money?
Since Airlines are one of the weakest component of transports, they are an easy target to trade to the downside. An early entry (based on some sort of entry rules) on Wednesday morning to an Airline like UAUA would have been a nice intraday trade. For those with rules that support it, the trade may also become more profitable if held overnight.
On Tuesday there were 3 industry sectors that were all hitting resistance:
- Transports
- Homebuilders
- Software
As mentioned, with the bad economic data, (including bad housing numbers) the 3 sectors slide along with the rest of the market and resistance held.
ORCL reported after the bell today and although profits were up, they missed revenue targets and the stock slide 7% in after-hours trading. It's likely that this news will continue to weigh on the software sector so keep you're eyes open for other opportunities in that sector.
What else do I see?
Biotech has been extremely strong lately, but it is also getting close to resistance. If Biotech continues to move up it will likely hit that resistance in the next few days. It will then either break through or fall down so be prepared for both.
As Biotech gets closer to resistance (on daily charts) keep your eyes on the sector charts for Internet, Software and Semiconductors. These 4 sectors are heavily weighted in the NDX and if all 4 are weak or strong it will generally been seen in the NDX movement. The NDX has seen some strength recently as the Biotechs, Software and Internet have all been moving up in the last few days. If Software and Biotechs weaken it will likely have a negative effect on the Nasdaq. The wild card is the Semi-conductors, but there are languishing at 5 year lows and with the current weak economics they may hang out there for a while.
That being said, the market is great at defying logic, so watch for the Semi-conductors to rally when you least expect it. This could create a spark
for the Nasdaq too.
I also watch Cisco CSCO as a good barometer of what the market thinks about "Business Spending." The rational there is that if business is good they are buying more equipment and if not they're keeping the cash in their wallets. CSCO trades in penny increments even on single Calls and Puts, so it's a very efficient market to trade.
Transportation Sector:
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