Every Monday at Patterns & Profits, I take a sky-high snapshot of the markets to show you exactly what I’m seeing – and what to expect in the week ahead.
There’s so much to keep tabs on – the S&P, the Dow, the Nasdaq, gold, oil, bellwether stocks like the Magnificent 7 (to say nothing of the other 8,000 optionable stocks in the market), earnings, employment numbers, interest rates and the Fed’s running commentary…
But the truth is – 90% of the chatter around the financial markets is simply noise.
So the question is: How do you cut through the noise and focus ONLY on what matters?
In my more than three decades as a trader, I have boiled the financial markets down to just five things that I look at every day.
These are what I call the Five Points of the Market – the five asset classes that drive the markets every single day:
- Stocks
- Bonds
- Commodities
- Currencies
- Crypto
Now, this is incredibly broad. And it might sound like a lot to keep up with.
You’re not wrong! In fact, these five asset classes represent, essentially, the entire global economy.
The $93 trillion stock market… The $133 trillion bond market… The $2.5 trillion crypto market… You get the idea.
But each asset class can be tracked by looking at a single benchmark and applying just a few basic trading concepts to how you interpret the data.
Today, I want to make sure you have all the information you need to follow along with each video, week in and week out.
I’ll tell you the market benchmarks I track every single day – and reveal the five core things I look at on every chart.
Let’s get started…
The Five Market Benchmarks I Analyze Every Day
As I said, I keep tabs on the market by watching the five most powerful asset classes: Stocks, Bonds, Commodities, Currencies, and Crypto.
But those markets are vast, complex, and worth trillions.
So I use some of the biggest, most liquid instruments to track these massive markets.
Stocks: SPDR S&P 500 ETF Trust (SPY)
The S&P 500 Index is the most-watched economic indicator in the world. The health of this group of stocks is seen as THE benchmark for the entire universe of over 8,000 stocks.
Now, I’m not REALLY interested in keeping an eye on 500 stocks everyday (I only really like 370 of the 500 stocks anyway)…
The SPY is an exchange-traded fund that tracks the performance of the S&P 500 Index – and it is the most liquid security in the financial market.
SPY gives me a picture of the overall stock market. In one glance, I can tell you short, medium- and long-term trends impacting the day’s trading (not to mention what to look out for in the coming days).
SPY is a great way to gauge the health of the overall stock market. Its liquidity makes it an easy way to buy or trade the market.
Analyzing SPY also reveals the market’s most powerful seasonal trends. November to April is the “best six months” seasonal pattern (with April being the strongest month for stocks overall). September, meanwhile, is the weakest month. These historical seasonal trends are important to consider against current market trends and data.
Bonds: iShares 20+ Year Treasury Bond ETF (TLT)
TLT is an exchange-traded fund that seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than 20 years.
This gives us an excellent snapshot of the $133 trillion bond market…
TLT is an economic indicator that can serve as a leading indicator for inflation outlook.
Longer-term bonds (like those with 20+ years until maturity) generate a yield curve – rates usually rise right along with the time horizon.
Long-term bond yield is reflective of future inflation, so it rises as TLT increases.
Commodities:SPDR Gold Shares (GLD) and United States Oil Fund LP (USO)
Now, I don’t need to keep an eye on the thousands of commodities that make up the $131 trillion commodities market.
That’s because things like cobalt, lumber, and coffee don’t really matter to the overall economic picture – and they certainly don’t influence traders’ decisions (unless you specialize in trading obscure cobalt futures).
So I keep my focus on the only commodities that really drive markets – gold and oil.
For gold, I track SPDR Gold Shares (GLD), an exchange-traded fund designed to track the price of gold. Rather than using derivatives to track gold, GLD is backed by actual physical gold, including 400-ounce London good delivery bars held in the HSBC Bank vault in London.
Why is the price of gold important? Well, gold is usually inversely correlated with the value of the U.S. dollar, and it’s considered a safe haven during market turbulence. Many market experts (myself included) will tell you that exposure to gold is still a great hedge for any portfolio.
If I’m seeing signs of trouble in the stock market, a rise in the price of gold (as reflected in GLD’s price) may indicate that traders are loading up ahead of a pullback or a correction.
Meanwhile, to track the oil market, I use the United States Oil Fund LP (USO). USO tracks the price of West Texas Intermediate (WTI) light, sweet crude oil by way of investing in futures contracts, and it can be a great short-term vehicle to trade oil.
Of course, when oil goes up, that could be a sign of increased demand due to economic expansion. Plummeting oil prices, meanwhile, can be indicative of an economic downturn.
Now, oil and gold both have seasonal patterns that crop up throughout the year, and we pay close attention to both.
Currencies: Invesco DB US Dollar Index Bullish Fund (UUP)
The U.S. dollar is the world’s reserve currency, and the most-watched currency in the world.
A strong dollar can have a negative correlation for stocks. Over the last several years, when the dollar has surged, stocks have fallen.
So I like to keep an eye on UUP for signs of a strengthening or weakening dollar to help inform my trading.
For example, if we’re in the middle of a seasonal bear pattern and the dollar is getting stronger, that could give me additional confirmation that a bearish stock or option trade is the way to go.
Likewise, if Money Calendar is predicting a bullish week, and we see weakness in the dollar, it may be time to go long…
Crypto: Bitcoin (BTC) and Ethereum (ETH)
Bitcoin (BTC) is the world’s first and largest cryptocurrency, representing 54% of the $2.5 trillion crypto market.
It’s the number one indicator of the health of the crypto market – when bitcoin is going up, bullish sentiment takes hold and spreads to thousands of smaller coins. When bitcoin is consolidating sideways, the entire market follows suit. When Bitcoin crashes, the market enters what we call a “Crypto Winter.”
You get the idea – if you want to successfully trade the crypto market, you’ve got to pay attention to bitcoin.
From time to time, we’ll also take a look at Ethereum (ETH)…
Because just like every other asset class I track, the crypto market is subject to seasonal patterns and regular cycles, just like stocks.
Money flows first into Bitcoin, then into Ethereum, then into smaller, more speculative alt coins.
So when Ethereum is outperforming Bitcoin, we like to track it because it can help us uncover those big, fast gains in the alt coin market, the kinds of coins I trade for 1000%+ gains.
The 5 Core Things I Use to Analyze a Chart
I have at least 5 things I look at, but note, I may not use all 5 all at the same time on one chart.
A reason for that is not every chart will have all of them working at the same time on it.
What you need to know is that the things I use to determine an action plan for, I will supply those on the charts when I send you an alert or a written, audio or video update.
So let me take a moment to walk you through each one as I use the chart for SPY to do so.
Support and Resistance (Price)
Support and Resistance are key psychological levels for stocks and ETFs. Support is a price floor – a price at which the stock tends to bounce without considerable bearish sentiment. Resistance is a ceiling, a price at which the stock tends to reverse and move lower without considerable bullish sentiment.
Support and Resistance (Moving Average)
Not only do I use a stock’s price to find support and resistance, but I use moving averages as well.
I use the Simple Moving Average (SMA) to help smooth out the price action over a certain period of time.
Most traders tend to favor a specific moving average or two (for example, the two most popular moving averages are the 50-day and the 200-day)
I don’t do that.
I use different SMAs depending on what I’m analyzing. Different stocks and ETFs will differently depending on what period of time you’re looking at, so I use the right SMA for the right security at the right time.
When a security is testing a SMA as support or resistance, I’ll highlight that on the chart, like you see below.
Trendline
This tells me the overall trend of the market over a specified period of time. This is critical because it tells me the dominant trend, helping to put the current short-term action into perspective. Including the long-term trendline also allows me to plot Fibonacci retracement levels (more on this below).
Fibonacci Retracement Levels
Fibonacci retracement levels are additional psychological price points for traders derived from a mathematical sequence developed by the 13th century Italian mathematician Leonardo of Pisa, more widely known as Fibonacci.
Without getting too far into the weeds, here’s what you need to know…
Fibonacci retracements are plotted by drawing a trend line between two extreme points. A series of six horizontal lines are drawn intersecting the trend line at the Fibonacci levels of 0.0%, 23.6%, 38.2%, 50%, 61.8%, and 100%.
These levels tend to correspond with additional levels of support and resistance between those two extreme points on the trendline.
Take a look – you can see that the price tends to consolidate around these key levels, which can give us additional information about where the price might be heading next.
The three levels I use in my charting with Fibs is 38.2%, 50% and 61.8%.
Note that the 50% level is not part of the Fibonacci sequence, but because it’s a very popular level in the world of technical analysis, many software programs will include the 50% level in their Fibonacci charting tools.
Implied Volatility
The red line on the chart is Implied Volatility. Put simply, Implied volatility is the market’s forecast of a likely movement in a security’s price. The higher the IV, the higher the likelihood of a move.
IV is critical to options pricing (which dictates whether we want to be buyers or sellers, as well as which specific options to target), and also in determining sentiment, or how the markets “feel” about where a stock’s price might be headed next.
Putting It All Together
Here is a chart of SPY that includes all of the 5 core things I look at when analyzing a chart…
Every extra line on that chart is designed to give me a sense of where a given security’s price is headed next.
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Support and Resistance (Price) – This gives me a reliable price floor and ceiling, and a range within which the stock is likely to trade.
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Support and Resistance (Moving Average) – Securities can also test support and resistance at the level of its simple moving average, giving us another floor/ceiling to keep in mind.
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The Trendline tells me the overall long-term trend, bearish or bullish, and helps with determining the direction of a stock’s next move.
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Fibonacci retracements give me additional psychological levels to monitor beyond support and resistance…
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Implied volatility tells me how likely a stock is to make a move based on the market’s forecast.
Together, I can use these lines to figure out the next logical move.
One more thing to keep in mind…
Some weeks, I’ll throw in a new indicator, just to give you a different look at the markets – and keep your education going.
And that’s exactly what I’m going to do today. This week, I’m taking a look at the markets by way of Keltner Channels – and I’ll teach you everything you need to know.
And don’t worry – I’ll still be talking about Support and Resistance, Fibonacci retracements, and volatility.
Just click below to watch now!
Good trading,
Tom Gentile
America’s Pattern Trader