Chart readers fall into two distinct categories when it comes to cross-market analysis. The first group focuses solely on the individual price chart because it believes that all market influences lie hidden in the candlesticks of that single view. The second group doesn't have quite so much faith in simple price patterns. It contends that market prediction ties together many unrelated forces, and that their ultimate success or failure depends on how these primary influences dominate the overall trend during the specific times that their trades are held.

All in all, this second group has a much firmer grip on trading reality. Most times, market direction is only as strong as the leadership that guides it. Individual stocks tend to follow the leader even if their chart patterns carry a contrary bias. The unfortunate truth is that pretty patterns won't stop price from heading in the "wrong" direction when broad market influences take over.

We tend to migrate toward the single chart theory because it makes our trade preparation a lot easier. Why study 5 or 10 charts when you can look at just one? We also recognize that trying to interpret cross-markets isn't child's play. It takes a lot of skill to sort out all of the different forces, how they interact, and which ones will take control at any given point in time.

It's a Big World, After All

Traders must digest a vast amount of cross-market information to reach simple conclusions about opportunity and risk. The first thing you need to do is determine whether local or world conditions will more likely guide the short-term price action. World conditions take control infrequently, but can exert a major influence when they do. The Asian meltdown in 1998 offers a great example of this type of cross-market leadership.

The broad interplay between debt, currencies and commodities can dramatically affect the US equity markets. These major forces trigger arbitrage between index futures and debt that can move stock prices quickly. Fortunately major shifts between these universal markets tend to occur slowly. You can often prepare for their impact through a few well-chosen news articles or a weekly index chart analysis.

Simple arbitrage generates primary influence during quiet periods but broad issues may rise to the surface at any time and shock American markets. Always defend active positions by staying informed and planning a safe exit in the case of an emergency. Avoid overnight holds during very volatile periods and think contrary at all times. The best trading opportunity may come right after the crowd jumps for the exits.

Local influences dominate trading considerations most of the time. Stay informed. Today's excitement won't move tomorrow's markets. Learn to see the big picture and anticipate leadership through the media hype. Fortunately, markets have a self-fulfilling mechanism that pushes the most emotional issues right to the top of the trading heap. Try to identify proxies for these issues in the indices, futures or even individual stocks that reflect the short-term mood.

The markets constantly seek leadership. In the absence of larger forces, that role can shift at any time from the S&P futures to Nasdaq to the Dow-30 Industrials. A major sector, such as semiconductors, can quickly move into the limelight and carry other markets higher or lower with little warning. These fluctuations may or may not affect your individual positions but your risk decreases when you pay attention to the guiding forces at work each day.

Troubles in Asia and the collapse of LTCM trigger violent movement in the credit markets. Bonds and equities are tied together through a natural inverse relationship. For example, when one goes up, there is a tendency for the other to go down. But it often takes specific market conditions, such as those in 1998, to awaken its great influence.

TICK Oscillation

TICK measures the transaction flow running through an individual market. The classic TICK indicator captures in real time the number of stocks whose last trade represents an uptick vs. a downtick. The NYSE TICK provides a highly predictive indicator for all American stock activity. Specifically, Nasdaq traders can avoid that exchange's TICK information and use the NYSE version instead to watch the flow of buying and selling within the broader markets..

Follow the TICK through real-time quotes and keep an active chart that illustrates recent historical activity. TICK routinely forms trendlines and parallel channels that reveal complex intraday support-resistance. This oscillating behavior also tends to reverse at recent horizontal extremes that set natural limits on buying and selling activity. Start TICK analysis by drawing lines and channels that define the recent action. Then extend these lines and watch how they align to intraday reversals, breakouts and price congestion.

TICK identifies natural entry and exit zones. TICK may surge when channels or trendlines break, and just like individual stocks, it often pulls back quickly to test new support before the breakout pushes further. Align position entry with expected TICK behavior. Use oscillating reversals and breakouts as cross-verification. Also prepare to terminate a trade without price verification when TICK flashes important contrary information.

Watch TICK readings at important market turning points. In past years, strong reversals began when the indicator struck extreme +1000 or -1000 levels. These natural overbought-oversold boundaries persisted for years. But modern markets exhibit greater volatility than in the past. TICK readings from +1500 through -1500 now occur during severe conditions. You can still apply the older limits when estimating market turns on a relative basis. But always seek cross-verification through index chart patterns for larger-scale reversals.

The most effective TICK charts match the nature of the intraday markets. Try 5-minute or 15-minute data with 2-3 days of market action or a 60-minute chart with 5-10 days of history. Use candles in place of price bars. TICK charts print many predictive Doji and Hammer reversals.

Indices & Sectors

Perform stage analysis on the major indices to identify leaders and laggards. Are they rangebound or trending? Are oscillators rising or falling? Do they converge or diverge? Each index has characteristics that affect and distort daily results. Take the time to learn their construction and how individual stock movement can generate lopsided information.

Follow those indices and measurements that impact daily decision-making. Nasdaq Composite, Nasdaq-100, SP-500 and the Dow Industrials provide most of the data required to understand short-term market direction. Apply modern Dow Theory that looks for convergence-divergence between these four indices. Which is outperforming and which is underperforming? Keep in mind that an index sitting near major support or resistance is more likely to draw attention than the one caught in the middle of its range.

The index leader-laggard relationships define most current market conditions. When Nasdaq leads the blue chips up or down, it signals a retail-driven technology phase with volatile price change. The dominance of the SP-500 or Dow points to a flight to safety, with big money moving the markets. This often signals a period of lower volatility and a high probability that a sideways price pattern will develop.

Nasdaq has several quirks unfriendly to traders even though it attracts most retail attention. Three separate sub-sectors comprise this dominant market: behemoth mega-techs, middle technology/service and a large universe of small caps. Evaluate Nasdaq price action after inspecting the current performance of each sub sector. Frequently, the largest Nasdaq stocks will account for most price change in the index.

Lethargy in the large cap stocks may mask small cap rallies or selloffs. Mega-techs trade like small indices and often require little external analysis. But positions in thinner Nasdaq issues can depend on the right sub-sector acting in a supportive manner. So watch a small cap index, such as the Russell-2000, in order to filter out these index distortions.

Keep one eye on the semiconductor sector at all times. This volatile group leads many Nasdaq selloffs and short covering rallies, especially when the markets lack direction from other common leadership.

Futures

The E-Mini contracts for the SP-500 and Nasdaq-100 have expanded retail awareness of the futures markets. Now many equity traders won't make short-term buying or selling decisions without first peeking at these market leaders. Even longer-term traders often consider the influence of the futures markets before entering their equity positions. The reason is simple: a sudden futures selloff will have an immediate impact on stock prices.

Keep futures data on your real-time screen if you are an active trader. Start by replacing the SP-500 cash quotes with the E-Mini contract. Then add the Nasdaq-100 E-Mini and watch how most liquid technology stocks respond to its considerable influence. This interplay reveals a very short time interval in which you can enter or exit an equity position just before it reacts to the contract. This can save a substantial loss or add to an already profitable position.

The futures markets have a higher percentage of professional traders than the stock markets. This induces a variety of conflicting strategies at almost every major price level. You can see this conflict on the intraday charts where quick fading movement follows many wide range bars. This often gives an odd porcupine appearance to the flow of price movement.

You can use this phenomenon in two ways when it appears. First, apply it as a noise filter for execution of equity positions. Real breakouts and breakdowns will thrust past these fade points, while false moves terminate at them. Pay close attention and learn to stand aside when others get caught in these small price ripples. Second, the porcupine fade focuses timing for very short-term equity scalping strategies. Use the long price bars to signal entry in the opposite direction. Then watch closely for the fade on the next bar, and exit the trade into it.

Sudden price shifts and rangebound conditions often characterize the S&P E-Mini futures contract. Use the short-term reversals to time quick day trades but always keep an eye out for sudden breakout movement that will ramp the contract to a new price level quickly.