October 2, 2019

It takes institutions weeks/months to build a position and also to break down a position. When they sniff higher risk down the road – either recession or higher rates – growth stocks are usually the first they sell due to the richer earnings multiples.

Since institutions cannot easily move in and out of holdings as we can, they seek to hold a position for a year or two on average. So they must plan to rotate out of riskier and into safer sectors/stocks well in advance of the risk they foresee 6-12 months down the road.

To review the thought process, the above was first evident in the six-day selloff of July-August. As stated a number of times in the Twitter posts, the health of a mkt is best judged not by the selloff but by the ensuing rally. In the aftermath of this six-day selloff, the ensuing growth stock rally narrowed, with our Watch List shrinking from 70 names to 48.

This, along with the rally being substantially choppier with more distribution than the post-May correction rally of June/July, had us in a cautious position ever since, with fewer ideas on the Focus List.

The above appeared in a series of Twitter posts Tuesday.

Otherwise, the market is extended to the downside and neither provides inverse ETF setups nor short setups of individual titles. The sole short idea in Tuesday’s Focus List for Wednesday’s session, Marriott International (MAR), gapped at the opening, along with most everything else. Thus, it did not offer either a trade-through entry or a back-door entry.

In Bill O'Neil's first book, he spoke of 3-5 distribution days over 1 to 2 weeks as being a sign of caution when analyzing the indices. When I last spoke with him in ’11, he said that over the years, this no longer held true, and that more distribution days were warranted (I think he mentioned six, if not more) before raising the caution flag.

I still use the 3-5 days over 1-2 weeks as a general guide. I never maintain a running count over the past four weeks as some do who use these things mechanically. At present, there are 5 d-days in the last 1-2 weeks.

In sum, cash is king. The game plan will seek to capitalize on inverse index ETFs and growth stock setups on the short side.

Q&A

Q: Hey Kevin, I really loved your video on day trading the NQ, thanks for sharing.

When you say you risk 1% per trade, are you saying that if you take a day trade, and your account is $100K, you will risk up to $1000 on each time you venture out on a day trade. So I would divide the $1000 by $20 per point (50) and then divide over the ATR (say 5) and that would tell me how many contracts I would trade per "outing" (which would be 10 in this case)? Am I understanding that correctly?

A: You are welcome. I am pleased that you gleaned something of practical value from the video. In answer to your question, yes, your calculation is correct.

I do it slightly differently, but with the same result. Using the numbers in your example, once I determine price sets up, I will look at ATR. If ATR = 5 points at the moment, I then multiply 5 by $20 (each NQ point = $20) to equal $100. This is my per-contract dollar risk for the trade. I then divide $100 into $1,000 (my 1% account risk) which = 10 contracts.

Using the ATR indicator at the bottom of my screen allows me to make the above calculation for contract size in two seconds. In trading a fast TF such as an M2 or M3, sometimes one does not have much time to calc the lot size, as the completion of the signal bar can happen quickly. This is one advantage of using ATR for s/l placement.

The other is that, since volatility is constantly changing throughout the session, the ATR tells me whether there is enough volatility to trade it. Conversely, it also tells me the maximum volatility my TF can handle on a highly volatile day. E.g, if ATR tells me my M2 TF contains too much risk, I will drop down to M1.

For me personally, while I no longer trade ES, on most days ES can be traded on M3, but not M2 because the bars become too noisy. But NQ can easily handle M2 without it becoming too noisy, though M1 does have too much noise on most days.

Lastly, by trading M2 on the NQ, I see 30 bars per hour vs. the 12 bars per hour that the widely-watched M5 offers. This means I see 2.5 times more setups with M2 than M3. This can mean the difference between getting one’s business done in the opening two hours or having to come back for the final 1-1.5 hours or even trading the entire 6.5 hours of the day.

Q: (From the same subscriber) Thanks Kevin. I liked your ATR approach and tried it with the micro-NQ today. I made enough to pay for the next year of the Marder Report premium. Thanks again! In this kind of environment, scalping futures is one of the few ways to make money.

A: Nice work! I prefer the new Micro E-mini Nasdaq (MNQ) b/c it allows one to manage risk better than the NQ, allowing one to put up less equity for each trade, though liquidity is not as good. Both NQ and MNQ are about 50% more volatile than the ES (E-mini S&P). It is the difference between trading SPY and QQQ – one has much more juice than the other.

FYI, I do not intend to make day trading a part of the service, though I may comment on it from time to time in the videos for premium subscribers. The service will maintain its focus on breakouts for the position trader and pullbacks for the swing and position trader.

Kevin Marder

For intraday ideas and analysis: https://twitter.com/mardermarket

Unless otherwise noted, charts created using TradeStation. ©TradeStation Technologies, 2001-2019. All rights reserved.

The views contained herein represent those of Marder Investment Advisors Corp. At the time of this writing, of the stocks mentioned in this report, Marder Investment Advisors Corp., Kevin Marder, or an affiliate thereof held no positions, though positions are subject to change at any time and without notice. Estimate data provided by Thomson Reuters. Expected earnings release dates provided by EarningsWhispers.