A Peek at How a Pro Trader Works

More from Ten Stock Trader editor Greg Diamond... The only thing that matters in investing... Greg's favorite technical-analysis indicators... The most important piece of all... A 'rare, historic' move coming in early 2024...

Editor's note: Yesterday, we introduced you to Ten Stock Trader editor Greg Diamond, his journey from Wall Street to working at Stansberry Research, the unique way he analyzes the market, and a series of prescient market calls Greg has made the last few years – like nailing the "top" in early 2022, then the "bottom" last October...

We also said Greg will be sharing his latest outlook on the "rare, historic" market move he sees coming in early 2024, and more, in a new free video event next Tuesday, November 14... You can sign up right here, and you'll get a pair of free bonuses when you do.

Today, I (Corey McLaughlin) want to share another essay from Greg. This one details more about his technical-analysis approach and discusses several of his favorite indicators and patterns he uses to find the best trading opportunities in the market each day.

Throughout this essay, he uses real-life examples from a key turning point in the markets several years ago when he launched his Ten Stock Trader service, which shows you how his analysis can work in various market environments...

Greg shares exactly how he used technical analysis to forecast big moves for stocks in 2017 and early 2018. And, importantly, he describes how he manages risk – which is perhaps the most critical thing for any investor to understand but frequently goes overlooked.

Take some time to read through this entire essay. It includes not only knowledge from Greg but also market wisdom from one of his trading idols. And if nothing else, I think you'll have a better understanding of what technical analysis really is after reading today's Digest.

I will be honest...

It took me a while to grasp technical analysis, too.

But time and time again, I've witnessed the incredible power of understanding what is happening now... just like my former boss told me.

One of my goals in Ten Stock Trader is to educate subscribers on this incredible value.

I want you to see much more than the trend lines and patterns, and understand that we are studying the behavior of market participants... We are learning from history.

There's nothing wrong with wanting to know WHY a certain stock will move... But I am much more concerned with WHEN that stock will move and WHAT the price will do (i.e., how much it will go up or down).

And think about what really matters in investing – WHEN you buy and WHEN you sell. The WHY is less important when it comes down to the goal of investing...

Did you make or lose money?

That's all that matters.

Perhaps the greatest value technical analysis provides is that it is both a trading strategy and a risk-management system wrapped into one.

Today, I'll explain this strategy and system in more detail...

I'm highlighting several of my favorite technical indicators and patterns that I use often in Ten Stock Trader.

There are hundreds of technical terms and uses out there. The indicators I'm discussing below are what I have found to be the most useful. As I said, I use them frequently. Make sure to familiarize yourself with this list.

If you're confused by any of the information I mention below, don't worry. I walk subscribers through everything in detail when the time comes.

This is most likely a brand-new way to look at the market for most people, so it's going to take some time to get used to. But once you understand the basics, I promise you'll begin to see the market in an entirely new way.

Let's get started...

First up is price divergence...

I look for price divergence across major indexes. This is a common focus in my weekly updates and in my live feed. When one index makes a new cycle low (or high) while another doesn't, this creates divergences.

That's usually a sign of a reversal on the horizon. It can be tricky to spot this pattern, but it's a valuable analysis to understand. A massive divergence occurred just before a crash in February 2018. Take a look...

Notice the divergence between the Dow Jones Transportation Average and the Dow Jones Industrial Average. You can see that the Transports' lows (the red trend lines) are much lower than the Dow's lows (the green trend lines).

You can also see that these lows in the Dow trended up ("higher lows") while the lows in the Transports trended down ("lower lows").

This is a divergence between the two indexes. Notice how the divergence in both instances above resulted in a big move as both indexes shot higher.

Next up, let's look at moving averages...

Moving averages are constructed by taking an average of a time series over a given period. The 50-, 100-, and 200-day moving averages ("DMAs") are widely followed averages to determine support and resistance points.

Many trading systems are geared around these averages in some capacity.

In early 2018, the 200-DMA of the S&P 500 Index was at a big support level (meaning the S&P 500 hadn't dipped far below it in a while). You can clearly see it in the chart below...

Now, let's talk about price symmetry...

The market tends to trade in equal legs or movements, especially in corrective patterns.

Specifically, in a bull market, a correction usually has three legs, where the length of the first leg is equal to the third leg. Here is a perfect example of price symmetry from the S&P 500 in 2017...

Notice the first leg in each pattern is about the same size as the third leg. Also, notice how after the third leg was complete, the market rallied.

Spotting price symmetry is important.

The relative strength index ("RSI") measures the momentum of a stock's price...

It uses a scale from 0 to 100.

A reading of 30 tends to be at or near oversold levels, and a reading of 70 tends to be at or approaching overbought levels. You can see the RSI and how it hit the 30 level at the bottom of this chart in the S&P 500 in 2018. And then, prices rallied thereafter...

Similar to price divergence is RSI divergence...

This metric looks for differences between the price of an asset and its RSI level. It can signal buyers losing momentum on the upside, or sellers losing momentum on the downside...

Look at the circled points on both the chart and RSI indicator in the bottom panel. See how the trend in price is rising while the same points on the RSI are declining?

This is divergence – and it was a warning sign of buyers losing momentum. Look how prices fell for another two months in 2017 after this signal triggered.

One of my favorite trading strategies is ratio analysis...

I'm constantly looking for the biggest trends in play as they relate to other asset classes or sectors of the stock market.

As a trader, I want to own what goes up and sell short what goes down. Within the domestic equity markets, certain sectors behave differently given the current environment. Sector-ratio analysis cuts through the weeds of individual companies and graphically shows what sectors are outperforming the overall market.

Take this example of the Technology Select Sector SPDR Fund (XLK) versus the iShares U.S. Real Estate Fund (IYR) from a few years ago...

This chart reveals that buying XLK and selling short IYR would be a great trade. These are the types of trades we will continually analyze and work into our portfolio.

Another example of ratio analysis is used on different asset classes...

This chart shows what would have happened if you bought gold and sold stocks a few years ago. In other words, you would have lost a fortune.

This is ratio analysis at its best. It signals the best trends relative to other asset classes to allocate to your portfolio – and, more important, the assets or sectors to avoid.

This type of analysis is also fantastic at signaling a change in correlations between asset classes – a critical component to understanding major shifts in economic trends.

One of the biggest aspects of technical analysis that gets overlooked is time...

As I noted yesterday, the history of the market repeats, usually in cycles.

Finding those cycles can be difficult, but using time as a roadmap for what to expect is critical for successful investing.

I've spent 20 years studying the history of the market and extrapolating the data to better understand when to expect a market move. These cycles aren't just something to watch... they're inflection points to trade.

The cycles are based on the work of technical-analysis pioneer W.D. Gann. I track these cycles all year, but the key is to understand the larger cycle in play and then use the shorter cycles to pinpoint turning points within each month. It is not an exact science – nothing in the market is.

But combining the technical indicators above with time-cycle analysis can be a very powerful combination... I believe another such turning point will be coming to the market in early 2024.

I can sum up my approach to trading with this quote...

It's from one of the most successful hedge-fund managers alive. Famed investor Stanley Druckenmiller once said diversification is a dirty word. "Put all your eggs in one basket and watch the basket very carefully," he said.

That quote profoundly changed my thinking on investing and portfolio management.

I attended an exclusive, invitation-only conference at Goldman Sachs, where Druckenmiller and former President George W. Bush were the main speakers.

I want to emphasize how important this idea is... that being too diversified and having too many baskets with too many eggs in them can wreak havoc on performance.

In my experience, more positions means more problems.

That's why I'll only recommend a limited number of positions at any one time in Ten Stock Trader. This allows me to focus my energy and attention, and it keeps things simple.

And finally, I saved the most important piece for last...

I'm talking about position sizing and risk management.

The instructions for each trade in Ten Stock Trader are based on a percentage of your portfolio... For example, if I say buy a 1% position in XYZ stock and you have allocated $100,000 to Ten Stock Trader, then you would buy $1,000 worth of XYZ stock for that trade.

I will always indicate the percentage allocation on every trade. It's up to you whether you want to allocate more or less, but I like to look out for novice traders.

I want you to see how the pros trade... Hit singles and doubles first, while learning the strategies and the right way to trade. Then, if you want to trade bigger, you can.

Some folks have a higher risk appetite, more capital to work with, more experience, or a combination of all three... so they can trade bigger than my position-size recommendations.

But I'll always recommend what someone just starting out should do. It's the right thing to do. It's what I would want if I were in your shoes.

Never risk your entire portfolio on one trade. Ever. Period. This is the No. 1 reason why investors go broke.

Editor's note: As I mentioned, Greg believes another big turning point for the markets is coming in early 2024... and he's already looking ahead and getting prepared for it. Be sure to join him next Tuesday, November 14, during his free video event to hear all the details.

Greg will also share more about his trading strategy and how subscribers could have enjoyed 36 different "doubles" using his recommendations since he left Wall Street behind to join our company in 2017.

This goes for bull and bear markets like in 2020 when Greg recommended 11 doubles as stocks were moving higher through the early part of the year... then saw indicators that worried him and booked a 250% winner in six days during the COVID-19 crash that March.

Without giving too much away, I can tell you Greg believes this event he's calling for will similarly shock most investors... but can also be potentially lucrative if you can see it coming and manage your risk in the right way.

For these reasons and more, Greg is sharing his latest market outlook with anyone who will listen, much like he did at the start of 2022 when he was calling for a market "top" when few saw a bear market coming.

This event is totally free. We just ask that you register in advance so you don't miss anything. When you do, you'll also get access to a free report titled "3 Stocks to Trade Right Now," plus free access to an AI-level investing tool developed by a true Wall Street legend.

Click here to sign up right now.

New 52-week highs (as of 11/8/23): Adobe (ADBE), Cintas (CTAS), CyberArk Software (CYBR), Eli Lilly (LLY), Microsoft (MSFT), Motorola Solutions (MSI), Roper Technologies (ROP), and Trane Technologies (TT).

What do you think about Greg's technical-analysis strategies? Have you tried them? If so, let us know how you did at feedback@stansberryresearch.com.

Best,

Greg Diamond, CMT
Baltimore, Maryland
November 9, 2023