c04 JWBT016-Busby September 30, 2008 13:48 Printer: Yet to come
52 A FOUNDATION FOR SUCCESS
Seven Sisters
1.S&P 500 futures (ES)
2.Dow 30 futures (YM)
3.Nasdaq 100 futures (NQ)
4.Dax futures (FDAX)
5.Gold futures (GL)
6.Oil futures (CL)
7.Bond futures (US)I keep track of the futures indexes because I consider them to be a
good reflection of the aggregate attitudes of traders about the overall con-
dition of the markets and the prospects for the future. It is my belief that
futures contracts are market leaders and will guide me in the right direc-
tion. Tracking the Seven Sisters is a simple way to organize data and get a
worldview. Of course, I also trade these products.
In addition to the futures equity indexes, I keep an eye on gold, oil, and
bond futures. I watch gold because it plays a unique role in the markets.
Gold is an international currency. When traders and investors around the
globe fear that inflation is eating away the value of their cash or stock port-
folio, they frequently look to gold. Also, historically, gold has been viewed
as a safe haven in times of turmoil and crisis. Because emotion plays such a
big role in investing and trading, when market participants become fearful,
they flock to gold and precious metals for security. If gold sharply rises,
it means that traders have lost faith in other investments and are plowing
cash into precious metals. That is, the confidence level of investors is being
undercut. When this occurs, the U.S. dollar is also likely to be weak. There-
fore, during times when gold is moving up, stocks are often moving down.
For all of those reasons, I watch the price of gold and use it as an inverse
indicator. Gold and precious metals add another dimension of analysis to
my trading decisions. Additionally, I also trade gold.
Another commodity that I track, especially in this market, is oil. Oil
is vital for the growth and continued functioning of our economy and our
way of life. In fact, the United States is the world’s biggest consumer of
oil. However, China is becoming another huge petroleum market. When oil
prices rise too high, the entire economy feels the pinch because it becomes
costlier to produce goods and to transport them. When consumers have
to pay more at the pump, cash is siphoned from the economy and there is
less to spend for consumer goods like automobiles, clothes, and houses.
With so much turmoil in the Middle East and in other oil-producing areas,
prices may jump quickly when supplies are threatened. As a rule, when oil
prices are deemed to reach a point where they are costing the economy