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Can You Outperform the S&P 500?

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TLT Relative StrengthThe benchmark that most money managers are measured against is the S&P 500. It’s common knowledge that most do not outperform it. Amazing that after all the schooling, study, computer analysis and research … most professionals still do not outperform that simple index.

Many have therefore recommended that investors abandon all hope of trying to beat it and simply invest in a fund that tracks the index.

Is there any hope of beating it?

Well, there’s always hope!

Here’s one approach you can try. While there are certainly no guarantees that this will result in outperforming the S&P 500, it’s a very direct approach toward that goal.

Using a line chart, plot the S&P and have it reference the left axis. Then one at a time, add other markets or stocks you’re considering (use the right axis for them) while keeping the S&P on the chart as a constant. Then look at how they compare.

You can even create an indicator that measures the difference between the two markets and plot it at the bottom.

You’re looking for a market that has been under performing the S&P (moving down while the S&P is moving up).

Draw a trend line along the top of the indicator measuring the difference between the two markets. Watch for that trend line to be broken.

The trend line being broken on the indicator is a signal that the market you’re analyzing may be starting to outperform the S&P 500. Certainly there’s no guarantee that it will continue to do so, but when this technique works it can get you in near the beginning of a market rotation.

The chart above shows a current example of TLT compared with the S&P 500 right now.

An important caveat: Just because the indicator trend line is broken, does not mean you should automatically buy. Both markets could be moving DOWN and the trend line can broken if the relative strength changes in down trending markets!

Therefore always look at the chart of the market you’re looking to buy for a valid entry signal … and always put in and keep your stops!

Fibonacci Extensions

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Fibonacci ExtensionsEveryone and his parakeet uses Fibonacci retracements in their trading.

But there’s another Fibonacci tool that is equally valuable, if not more so. It isn’t as widely used by traders … and that can be an advantage for you. Using tools that other don’t can give you an edge.

That “other” tool is Fibonacci EXTENSIONS.

Rather than drawing levels “behind” the market, it draws them in “front” of the market.

In other words, if the market is moving up and making new highs, Fib retraces will draw levels BELOW the current price. Fib extensions will draw levels ABOVE the current price.

It’s a great tool for establishing profit targets.

You need 3 points, and the basic technique is to plot it off a Low, and High and a Higher Low (or for down trends – a High, a Low and a Lower High).

It’s especially significant to draw them at turning points in the market: When the market is putting in it’s first Higher Low or first Lower High.

I ALWAYS draw these levels. They’re that important.

Try it yourself and let the market prove it to you too.

Why Traders Should Play Video Games

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Last week for my birthday I received a PS3 (Playstation 3 Video Game console for those who live on a planet other than Earth).

It’s very cool.

Of course, then I needed the latest 1080p TV to play it on. So I bought that today … 56 beautiful inches of DLP.

Then, you don’t want to invest all that money, only to have your experience ruined by a sub par sound system. So I invested in a nice Sony surround sound system as well.

Gosh, you’d think I was 12.

But I rationalized that this is an investment in my trading career.

I’m sure the IRS will agree, right?

Don’t worry, I’m not even trying to write it off. It’s just my own way or rationalizing the outrageous investment.

But there is a little kernel of truth to it, and it is this …

For traders, day traders especially, my experience has been that our #1 challenge is over trading.

Since we love to trade, we want to put on trades all the time! After all, it’s fun to trade, not to sit and stare at a monitor.

And so we start to trade the market as though it’s a video game.

That’s a one-way ticket to “game over.”

The market isn’t doing anything significant very often, so there aren’t good low-risk trades to be had frequently.

The way that I, in my eternal immaturity, have decided to deal with that psychological impulse to treat the market like a video game … is to actually play video games and get the urge out of my system that way.

Plus, my kids love them and so it’s a great bonding experience when I play with my kids (yes, I know, more rationalization).

Actually I started doing this several years ago when I bought my first XBox. And guess what. As lame as it may sound … it actually works for me!

I get my adrenaline rush through the video games and therefore don’t have that “need” from the markets any more.

This article isn’t really about video games. It’s about the psychology of trading.

If you find yourself over trading, then simply ask what other activity you could do to satisfy your need for “action.”

Most traders are aware of this problem and so they attempt to suppress the need. That’s the wrong approach because they’re just putting a lid on a boiling pot.

Instead of fighting it, indulge it, but redirect the energy and get the need fulfilled in another way that won’t be financially detrimental.

What activity would you enjoy to indulge your need for an adrenaline rush? Add it to your schedule and you just may find your trading improves!

Have fun, play games and never grow up. Except when it comes to trading: Then it’s time to be mature, be patient and let the amateurs churn their accounts while you wisely wait and trade only the very best opportunities.

Fed Holds the Course

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S&PThe markets moved up this afternoon after the Fed announced it would not raise interest rates.

This continues the “Mega-Trend” in the S&P 500 daily chart we’ve been watching in my Video Newsletter.

Momentum has been coming out of the market, even as prices have been edging higher.

Our short-term momentum indicator (MOM) has held the zero line as our long-term momentum indicator (DAD) has been moving down.

MOM is moving back up now as is the Cycle Indicator posturing the market to attempt a break the most recent high.