Trading Options: Using Technical Analysis to Design Winning Trades, + Website

CHAPTER 2

Sector Review Analysis

In this chapter we look at market sectors using many of the same tools that we used to identify the primary trend. We will also introduce the concept of relative strength as an additional tool, a concept that is different from the Relative Strength Index (RSI) discussed previously in Chapter 1. By the end of the chapter you should be armed with the skills to further refine the process of looking for good trading setups by identifying the strongest and weakest sectors in terms of their alignment with the trend. Through a combination of relative strength and trend analysis, it is possible to rank the sectors in terms of their short-term strength.

With the trend in the indexes determined, you can move directly to looking for stocks that have a good trading setup within that trend. This next step helps in narrowing the search, but it is not a requirement. It can be a major time-saver for the trader who is time constrained or an essential tool for the trader who is trading indexes and sectors. The process peels the onion one more level to look at the stock sector indexes, to see where there is strength and where there is weakness. By reviewing the charts of the market sectors, you can often accomplish this quickly. I use the Select Sector SPDR series, but there are other choices as well. The nine sectors (Basic Materials, Energy, Financials, Industrials, Technology, Consumer Staples, Utilities, Healthcare, and Consumer Discretionary) make up the entire ...