Since markets today are often interconnected, it’s important to look at the big picture. You can’t really trade one market or indicator in isolation. There are four outside markets or indicators that I think traders active in stocks or stock index futures should watch right now. I’m not referring specifically to technical analysis indicators; that is the subject of another article.

CBOE Volatility Index (VIX)
The CBOE Volatility Index is based on real-time prices of options on the S&P 500 index, listed on the Chicago Board Options Exchange, and is designed to reflect investors’ consensus view of future (30-day) expected stock market volatility. The press often refers to the VIX as the “fear index” or “fear gauge” as it commonly reflects the trepidation investors feel about the stock market at a given time. There are futures available on this index available for trading through the CBOE Financial Futures Exchange.

I recommend equity and index traders watch the VIX for clues in market trend shifts. High levels in the VIX tend to occur when sharp drops in the stock market occur, or when there are expectations of a sharp drop ahead. When investors are nervous about the market and want to hedge their portfolios with options, option premiums will typically increase (VIX pricing reflects a weighted blend of prices for options on the S&P 500 index).

The current price of the VIX is in the mid-20s, which is a normal level. The VIX offers a view of market sentiment at any given time. When the VIX starts to move above 30, it could be a harbinger the S&P 500 will decline.

Goldman Sachs (Ticker: GS)
Goldman Sachs is a huge participant in a variety of markets, and its trading activity and analyst comments do at times influence the markets. Of course, Goldman may not be correct in its forecasts, but many traders and investors do pay attention to them. Shares of Goldman Sachs are part of the S&P 500 index. Goldman has been in the news recently, and I have noticed that its stock has acted as a harbinger of a broader move in the index.

Tracking moves in the big, widely followed stocks that are making news at any given time (such as Goldman Sachs) can be a good way to determine overall investor sentiment. Today, Goldman Sachs may be “hot;” in the future it may be another big-cap stock that takes the spotlight and help you make a better decision in your trading.

Mini Russell = TF
The Russell 1000 Index is a recognized benchmark measuring the performance of the large and mid-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index and includes approximately 1,000 of the largest securities, based on a combination of their market cap and current index membership.

The Russell 1000 represents approximately 92 percent of the U.S. equity market. Mini-Russell 1000 Index futures are available for trading on the ICE U.S. futures exchange electronic platform 22 hours a day.

I have noticed that for whatever reason, the Mini-Russell has been making moves in advance of the other indexes. So when I’m formulating trades for my clients in the S&P 500, I watch the Mini-Russell for directional clues. Watch the E-mini Nasdaq futures too for confirmation. If you trade the CME E-mini Nasdaq contract, watch the big stocks in that index making news, such as Apple and Google.

These indicators aren’t foolproof, and can change. My point is that you have to be nimble as a trader, and pay attention to current market trends. If you are only watching the S&P 500, you will miss out on some valuable perspective. If the S&P is moving up but the Nasdaq and/or Russell are heading lower, or perhaps the VIX is moving up, you are getting mixed signals. If you have a long position, you might consider getting out before you have to take a hit. If you want to establish a new long position, you might want to wait for confirmation.

200-Day Moving Average
This is an important indicator that most market technicians watch, and even if you aren’t familiar with all the nuances of technical analysis, I recommend you familiarize yourself with this one. Most all major trading platforms can calculate this for you. The 200-day moving average is a long-term moving average that is calculated by taking the closing price for a particular market for the past 200 days, adding them, then dividing by 200.

The 200-day moving average can be calculated in any market—an individual stock, stock index, commodity, interest rate product, or currency.  Each new day the oldest price is dropped, and the newest one is added in. When the market’s price is trading below the 200-day moving average, it’s considered bearish, and above, bullish. A healthy bull market will generally see a rising 200-day moving average. This level can also help determine appropriate trade entry and exit points.

The chart below shows the 200-day moving average for the E-mini S&P 500. On June 21, 2010, the S&P 500 futures were rising, and made a higher high on June 21 than the prior session. Then on July 22, the market declined (making a lower low) and closed below the 200-day moving average, which is a classically bearish signal. That day, the Russell made the move first, and we saw the VIX move above 30. So we had signals lining up on the bearish side for the S&P. The next few days brought a new monthly low, and the market traded down to 1,000. Then, the decline stalled and a short-term bottom formed.

 

 

When you trade the S&P 500, you are really trading a bit of many markets. Understand what makes it move. That applies to any market you trade. Read between the lines…watch for indicators that might give you an edge.

Richard Ilczysyn is a Senior Market Strategist with Lind-Waldock. He can be reached at 800-605-0095 or via email at rliczyszyn@lind-waldock.com. You can follow Richard on Twitter at www.twitter.com/LWRIlczyszyn.

Futures trading involves substantial risk of loss and is not suitable for all investors.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

© 2010 MF Global Holdings Ltd. All Rights Reserved.

Futures Brokers, Commodity Brokers and Online Futures Trading. 141 West Jackson Boulevard, Suite 1400-A, Chicago, IL 60604.