Precourse
Module 1 – How to Track Price Action on Ichimoku Charts
Module 2 – Finding Support and Resistance
Module 3 – Reading the Charts
Postcourse

Interpret the Market Environment by Looking at the Market and Sector

An issue, particularly a stock, does not exist in the vacuum of its own chart. It might be helpful to look at the overall market as well as the sector of the stock.

Which would you rather buy, 

a stock that is trending up when its sector is trending up at the same time the whole market is trending up.
or
a stock that is trending up when its sector is trending down at the same time the whole market is trending down.

I know it seems obvious but it’s easy to focus on just the stock and not consider the entire market environment.

 

Let’s take what we have learned from the lesson on Trend Possibilities and apply it to looking for stocks that are trending in the same direction as their sector and the market.

 

For this practice, we will be using VTI, Vanguards Total Stock Market Index Fund ETF. You could just as easily use DIA, SPY, or QQQ instead. Many use SPY or the S&P 500 index for measuring broad market strength or weakness because it’s the benchmark index that institutions measure the market by.

 

As an example, let’s review the current environment for Disney. 

First, we’ll look at VTI for the total stock market then XLY for the sector.

The current market is in a strong bullish phase indicated by first the weekly, then the daily charts showing a widening Kumo in the future. 

For this exercise, we’ll just look at the price and the Kumo, focusing on the long-term trend. 

 

VTI Weekly – Long-Term Trend Bullish


VTI Daily – Long-Term Trend Bullish

 

Next, let’s review the weekly and daily for XLY, State Street’s ETF for consumer services (discretionary cyclical) sector to which Disney belongs. 

XLY Weekly – Long-Term Trend Bullish


XLY Daily – Long-Term Trend Bullish
Notice the smaller future Kumo and the triple top.


Now, let’s look at Disney on the weekly and daily. 

DIS Weekly – Long-Term Trend Bullish


DIS Daily – Long-Term Trend Bullish

In this case, we can see that DIS is moving in the same direction as its sector which is also moving in the same direction as the overall market. If your trading plan indicated that you could initiate a trade to the bullish side, the environment agrees with the trading plan.

 

Now let’s look at the State Street Global Advisors energy sector SPDR ETF, XLE.

XLE Weekly – Long-Term Trend Bearish
We can see at this time, the energy sector is moving opposite to the overall market. Shown is a bearish future Kumo.

 

XLE Daily – Long-Term Trend Neutral
While there is a small green future Kumo, there are also three future Kumo twists indicating a consolidating, trendless market.

If your trading plan located an energy stock, even if it was moving with the overall market, it would be contrary to its sector. In this case, an energy sector trade would not be congruent with the environment of the overall market.

If you want to get into more detail, you can track the short, medium, and long-term trends. This, of course, is not something you have to do, but if you do create it, you’ll know what is going on in the environment of your trade.

You can use a chart like the one below to track the Market – Sector – Stock trends.

Market Environment
 Weekly MarketDaily MarketWeekly SectorDaily SectorWeekly StockDaily Stock
Short Trend      
Medium Trend      
Long Trend      

Short Trend – Tenkan-sen to Kijun-sen
Medium Trend – Price to Kikun-sen
Long Trend – Price to Cloud

 

Let’s fill in the Environment chart for Gilead Sciences from July of 2016.

Market Environment
 Weekly MarketDaily MarketWeekly SectorDaily SectorWeekly StockDaily Stock
Short TrendBullishBullishBullishBullishBearishBullish
Medium TrendBullishBullishBullishBullishBearishBullish
Long TrendBullishBullishBullishBullishBearishNeutral

As we’ll see in the charts below, the weekly stock chart is the only bearish part of this market environment. 

If everything else fits with your trading plan, this market environment is very bullish and you could take the trade.

It’s January 19, 2012, and Netflix looks like it wants to do a Kumo Breakout. Let’s check its market environment.

Market Environment
 Weekly MarketDaily MarketWeekly SectorDaily SectorWeekly StockDaily Stock
Short TrendBullishBullishBullishBullishBearishBullish
Medium TrendBullishBullishBullishBullishBearishBullish
Long TrendNeutralBullishBullishBullishBearishNeutral
 
A little more ready but still overall bullish.

It’s January 8, 2019, and you just heard about some good news with the Malaysian market. How would you check its environment? First, for the overall market, we’ll use VXUS which is Vanguard Total International Stock Index Fund ETF that is x U.S., it does not have any United States stocks in its makeup. We’ll use EEM for the “sector.” EEM is the iShares Emerging Markets ETF.

Market Environment
  Weekly Market Daily Market Weekly Sector Daily Sector Weekly Stock Daily Stock
Short Trend Bearish Bearish Bearish Bearish Bearish Bullish
Medium Trend Bearish Bearish Bearish Bearish Bearish Bullish
Long Trend Bearish Bearish Bearish Bearish Bearish Bearish
 
The market environment for EWM, the Malaysia ETF is very bearish.


On March 30, 2011, we have VTI with a Kumo Breakout. You’ve had your eye on NEE, would now be a good time, according to the market environment, to get into a trade?

Market Environment
  Weekly Market Daily Market Weekly Sector Daily Sector Weekly Stock Daily Stock
Short Trend Bullish Bullish Bullish Bearish Bullish Bearish
Medium Trend Bullish Bullish Bullish Bullish Bullish Bullish
Long Trend Bullish Bullish Bullish Neutral Bullish Bullish

Delta Air Lines has been consolidating and it’s just pulled back to the top of the Cloud. You are wondering if it will bounce off or continue to fall into the Cloud. Checking the market environment you find the daily sector and market are entirely bearish having just broken under their Clouds. You decide to wait for a better opportunity.

Market Environment
  Weekly Market Daily Market Weekly Sector Daily Sector Weekly Stock Daily Stock
Short Trend Bullish Bearish Bullish Bearish Bullish Bullish
Medium Trend Bullish Bearish Bullish Bearish Bullish Bearish
Long Trend Bullish Bearish Bullish Bearish Bullish Neutral

It’s important to consider the environment of any trade if you plan on trading with the trend. You find the environment by looking at the issues sector and what is going on with the overall market.

The charting platform used for this analysis is provided by Charles Schwab and is called TOS or ThinkorSwim.