Today's Quote: “There is no more miserable human being than one in whom nothing is habitual but indecision” - William James.

There are several good books out there about trading that should be on every trader’s must read list. If you were forced to choose one and only one, the only possible pick would be “Tools and Tactics for the Master Day Trader”. We are going to run a series of excerpts from the best selling book for the next series of lessons. Now in the words of the master trader himself, Oliver L. Velez…

SECRET #6: ALL MAJOR STOCK MARKET AVERAGES LIE

Every serious market player should be aware of the fact that major stock market indices, such as the Dow Jones Industrial Average (DJIA), the S&P 500 Index (SPX), and the NASDAQ Composite Index (NASDQ), are very often inaccurate gauges of what is really happening behind the scenes. This fact is true, despite the enormous day-to-day focus they receive by the media. We certainly don't mean to suggest that these popular indices have no value at all. But the master trader, particularly the short-term one, knows he needs a sharper, more accurate picture than these broad averages are capable of delivering. We have witnessed market periods during which the SPX was off by only 12 percent, while the average stock trading on the NYSE was down some 36 percent. We have experienced pockets of time during which the NASDAQ 100 Index (NDX) was in negative territory by some 18 percent, while the average NASDAQ traded stock was off by a whopping 46 percent. The technical rule of thumb is that any decline greater than 20 percent signals a bear market crash. The numbers just stated show clearly that it is possible for the market to actually be in the tight grip of a viscous bear market while externally painting a much rosier picture to the world. This is living proof that major stock market averages do not always tell the truth about the overall market's condition. More often than one might expect, they flat out lie to the general public, and the master trader is forever bent on exposing their lies. How are they allowed to lie, you ask? These broad based gauges can lie because stalwarts like Proctor & Gamble (PG), Merck (MRK), Microsoft (MSFT), Dell Computer (DELL), and the like dominate them. These large stocks are so heavily weighted in most averages that they often skew the numbers to one side in a very big way. The astute trader of today must be able to go "inside" of the market for a true read, to take an x-ray, if you will. Looking on the surface no longer cuts it. Relying exclusively on the most touted averages cannot be done, if today's traders want an accurate picture of the market's health. Today, the trader must know how to look deeper.

How the Master Trader Looks Deep Within

As short-term day traders who hold positions for minutes at a time on the short end to days on the long end, we've found it incredibly important to have a crystal-clear view of the current state of the broader market. As we've mentioned before, the major stock market averages do not and cannot provide that accurate view. So we rely on other technical items that zero in on the internal goings-on that give us our edge. One such technical indicator is the New York Stock Exchange TICK indicator ($TICK). This excellent intraday market gauge measures the number of NYSE stocks trading on an up tick versus the number currently trading on a down tick. If, for instance, the TICK reading is a +400, we know that the stocks currently trading on an up tick (being bought) outnumber those trading on a down tick (being sold) by 400. In other words, there is a lot more buying then selling taking place. If the TICK reading is -400, the reverse is true. Now, here's where this can be important. Let's say the DJIA is down some 120 points (negative), but the NYSE TICK is steadily rising and has crossed the +600 area. Would you be biased to the "sell side" or the "buy side?" If you were one of our in-house trading students, you'd be eagerly looking to position yourself in long (buy side) plays. While high-paid news anchors would be talking about the blood bath stocks are taking, your internal read would have you looking on the rosier side of things. This is just one indicator that helps the master day trader take accurate reads on the market, which in turn leads to accurate trading decisions. Other internal gauges used by our trading students are the NYSE TRIN indicator ($TRIN), better known as the ARMS Index, the S&P futures contract, the Utility Index, and U.S. bonds. All of these gauges help our master traders maintain an edge that most players only dream they could have. Looking deep within is an art that many fail to master, but only the trader capable of deciphering what is real (the truth) and what is not (a lie) will move to the high lands of trading accuracy. We accomplish a lot of this for the subscribers to our services, but it is a priceless ability all should work diligently to have for themselves.