Why Swing Traders Should Use Sector Analysis


Market analysis is in important part of our everyday activity. T3 Trained Traders (T3TT) are taught to use our renowned T3 Market Analysis techniques, which advocate a macro-to-micro approach. This means analyzing the market and internals first, then doing the same with the diverse sectors contained in your universe, and ultimately performing the same analysis on individual stocks. This ensures that you're trading in the same direction of the markets, and not against them.

One important part of this process is sector analysis. This analysis allows the T3TT to quickly identify potential trading opportunities in an individual sector of the economy. It's a well-known fact that institutions move their funds from one sector to the next rather than from an individual stock to another. This is called Sector Rotation. Sometimes, this rotation occurs because money is moving from assets perceived to be more risky (e.g. Tech Stocks) to assets perceived to be less so (e.g. Gold) and vice versa. But this rotation isn't always intended to be protective in nature. Institutions tend to have a “flavor of the month” approach, where they lock on a sector of interest, and direct all their efforts to invest their funds and sell their clients the idea of investing in such sectors. This creates an avalanche of funds getting into or out of any given sector, as most institutions will play the same game in order to avoid falling behind the “average” performance of its competitors.

This rotation effect caused by funds being allocated to or from any specific sector will create price movements that oftentimes will be presented as a Stage 2 (Uptrend) or a Stage 4 (Downtrend) in those sectors, as measured by the different sector indexes that exist, allowing for tradable opportunities for the educated T3TT. This is nothing new, as the “Sector Trading Tools and Tactics” we teach in our seminars let you trade in the same direction of most institutional traders and market makers.

Here are just but a few different ways in which a T3TT can use sector analysis:

As a means to quickly search for trading opportunities in stocks within the sector.

As a benchmark with which to measure Relative Strength and Weakness.

As a trading opportunity by using sector following securities.

Let's briefly delve into each of these categories.

Sector Analysis as a means to quickly search for trading opportunities in stocks within the sector.

One very simple and quick way in which the T3TT looks for and finds tradable opportunities is by looking at the several sector indexes in his/her “universe”. These indexes, being a basket of the different securities that conform to a given sector, will often show recognizable T3 Live Setups (taught in our seminars) that are formed because many stocks in that given sector have formed such patterns. Thus, a T3 Buy Setup (T3BS) on the daily chart of $BTK.X (Biotechnology Index) should produce several stocks in that sector that show similar price patterns. In this way, the T3TT can quickly focus on opportunity, by analyzing the macro list of sector indexes, and then finding the best setups within that sector.

Sector Analysis as a benchmark with which to measure Relative Strength and Weakness.

Within any given sector index, some securities will outperform the index and some will under-perform it. This is only natural, as you'll always have leaders and laggards in any sector. The T3TT uses “Relative Strength Analysis” to evaluate the performance of individual securities within any given sector, vs. their sector index, in order to determine which patterns present the best odds of a successful trade.

Sector Analysis as a trading opportunity by using sector following securities.

As a trader, you have several options to try to benefit from a sector move. One that is becoming more widely used is trading “Index Tracking” Securities. These securities (Holdrs, ETF's and I-Shares), traded mainly in the American Stock Exchange (AMEX), are trusts that hold a basket of stocks that mimic the sector index composition. Some of them are liquid enough even for Micro-Trading, even though most are better suited for swing and core trading. Trading these securities is an efficient way to do Core Trading, as it allows you to participate in any sector's potential multi-week move, while reducing the risk of any individual stock in that sector gapping down or moving against your position.

This is just a brief description of some of many ways in which an educated T3 Trained Trader can take advantage of Sector Analysis. Depending on your market niche and the tools and tactics described in your trading plan, you can use this analysis, through the knowledge imparted in our seminars, to look for opportunity, and take advantage of it in a professional way.