Recently I received one big question from multiple members as the market rallied up and then contracted…
“Ragh, If I’m looking at the Dow, are there shorts in the broader average? Or where can I focus on weakness in the Dow?”
Well I have a simple technique (that’s already on most charts) that helps me identify this answer quickly.
Here’s a hint — it’s the trade flags.
Let’s look at the process here…
STEP ONE: The Dow, As a Whole
First off, what are these trade flags I’m talking about?
Well a little further down I’ve created a video walking you step-by-step through this entire process I’m writing about, AND I highlighted where these flags are specifically.
Back to my point, Gang… these trade flags, or ‘labels’ as they’re sometimes called, are a much handier, easier way to look at the structure of the 8, 13, 21 exponential moving averages.
Why do I care about these specific EMAs?
These are the settings for the propulsion dots and the 34 EMA wave (my core indicators).
When looking at these flags, it’s also important to note that the Dow is definitely in chop.
Here’s the video where I highlight how to identify these flags (just click on the image below):
You’ll want to watch this before you read the rest of the article, as I refer to the colors (red, yellow, green) that the flags show frequently.
STEP TWO: What the Colors of the Trading Flags Tell Us
When looking at your chart, in the top left hand corner, you’ll see those trade flags. For example, it may show something like “8:13:21 Bearish Wave: S/W”. Then the “8:13:21 Bearish” will be in red, while the “Wave: S/W” will be in yellow.
What’s this mean?
Well the portion that’s in red in the example above, gauges momentum and sentiment. While the portion that’s in yellow, gauges the trend (that’s where the wave helps out).
I’m going to continue using this example because it’s currently what we’re seeing in /YM, Gang.
So if I’ve got an 8, 13, 21 sentiment that’s bearish AND a momentum that’s bearish (because they’re both red), BUT the wave is yellow and tells me the overall movement is sideways…
What does this mean for us, as traders?
In a sideways market, I don’t feel I have a great edge… until we actually reach the ‘edge’. If there’s yellow, I’m hesitant, Gang. In fact, we talk about how in distribution markets, your advantage is at the edge.
However, in a trending market this conversation would be different — but we aren’t in a trending market right now. I’ll revisit this when that changes.
Now since we aren’t in a trending market, based on what we’ve seen during the last three sessions, we could be perhaps moving lower. You can identify this by taking a look at the recent rally and exhaustion (that I talked about at the very beginning). We’ve been unable to breakthrough that resistance…
So perhaps that sends the market lower.
If that’s the case, where should traders focus?
STEP THREE: The Answer to the Question
To find the answer, it’s as simple as looking at the trading flags.
You want to look at the double reds as a priority.
So that would mean looking at the trading flags that have BOTH the 8:13:21 EMAs and the Wave highlighted in red. Then you could focus on the red, yellows (like the /YM example above). Then finally, you could look at the yellow yellows.
But any flags in red should be your initial priority — which indicates the 8:13:21 EMAs are bearish. Which will then line up nicely, as its overall trend will also be bearish.
So who exactly has a double red right now, Gang?
UNH is a great example, as it’s within the Dow futures and is extremely bearish.
You could also look at MMM. Now it doesn’t have the same structure as UNH, but there’s still opportunity to short bounces when the flag is double red.
Similarly to Visa (V). Although, you should be more careful here because even though the 8:13:21 EMA is bearish, the overall sentiment is still sideways. So you can play it, just be mindful.
These are all identified by the trade flags, Gang.
Try them out next time you’re looking for a setup, and let me know how it goes!