Tuesday, 13 September 2011
I had a birthday over the weekend and I was fortunate enough to have my father travel 1,200 miles to be here with me. We caught up on so much… We learned more about each other even after all these years.
He’s extremely bright and always seemed to have the right answers growing up. One of the things I learned about my father this weekend is that he’s not as complicated as I thought he was. I always thought my father had some intricate process that took countless hours for every decision he made.
The reality is, many of the problems he faced came down to a simple, pragmatic decision-making process that allowed him to do what “felt” right. Sure he has been wrong from time to time, but overall he has managed to create a good life for himself without overthinking or overstressing over every last thing.
But there’s one thing he has been stressed about, and for good reason… The stock market.
Many “home gamers” (investors like you) often have difficulty finding the “trend” let alone timing the markets perfectly. We hear things like, “The trend is your friend,” and are expected to just know how to do that. (My father actually brought up that saying.)
But what the heck does that saying even mean and more importantly how in the world do you know what the trend even is at any given moment?
Quantifying Market Trends
Right now the only market trend seems to be confusion, which is not easy to follow and usually doesn’t make you any money.
Like my father, I try to reduce things to their simplest terms. Today, I am going to offer you three simple ways to spot a market trend. These three things will help guide you in your investment decisions.
It’s a super simple yet powerful system.
If you followed these guidelines in the Nasdaq 100 (NDX) over the past five years, you would have been up 153% as opposed to a buy-and-hold investor who would have been up barely 30% in the same time period.
Market trends come in different time frames. The guidelines I am going to show you today are for the longer-term investor. If you’re the type who buys and sells stocks in seconds, minutes, or in a day or two, these guidelines are not for you.
Those of you who hold positions for a month or more, you should see a dramatic change in your results.
Step One — Moving Averages
I have shown you the power of moving averages in the past. When you know what to look for, they can be powerful tools. Taking a quick glance at the moving averages will let you know if you are in a bullish or bearish trend.
The first step in determining market trends is to look at a DAILY chart (going back at least a year) and place 50- and 100-day simple moving averages on the chart.
It should look something like this:
The 50-day SMA (in orange on the chart) is what I call the trigger and the 100-day SMA (in blue) is the trend.
When the 50-day is above the 100-day and the stock price is above the 50-day, then the trend is bullish and you should remain long. When the 50-day crosses below the 100-day AND the stock is below the 50, the trend is bearish and you should sell your longs and get short.
The arrows on the NDX chart show you how this works with the entry and exit points as well as the trend.
Step Two – Peaks and Valleys
Next you want to determine if the trend is weakening or strengthening. Focus on a daily chart going back no more than six months. Find the current trend using the first step and see when it started. Then look at the peaks and valleys. In a bearish trend, you should see lower peaks and lower valleys. This is an indication that the trend is continuing.
In a bullish trend, you should see higher peaks and higher valleys.
Draw lines like I have done on the chart below to help you. Can you see the current trend with lower peaks and lower valleys?
This is a clear indication that we are currently in a bearish trend, my friends.
Step Three — Look and Listen
Step three is the most difficult. While the first two steps can give you a measurable trend, step three can be the early indicator of a change in trend.
When you turn on the evening news or read the headlines, try to find a general consensus of emotion. If the bulk of articles and stories seem pessimistic or cautious, then the news trend is bearish.
If the charts look bearish, but you see an emergence of hope, optimism and consumer confidence around the world, then you might want to begin to look for bullish opportunities as the trend may be reversing.
You see, the best traders and investors in the world aren’t just good at analyzing charts, financials and statistics. The best of the best can read people and spot trends as they are evolving.
While steps one and two can help you identify which way the market is trending, step three can help you predict where it is going.
As an independent, self-directed investor, it is your job to be smart about where you put your money. Don’t ignore the signals. If you look out your window and things seem bad, they probably are.
Right now the world is facing some serious adversity. While the human spirit is strong and nations have overcome worse obstacles, right now is not the time to get overly bullish. In the S&P 500, we saw the 50-day moving average cross below the 100-day moving average in early July.
The market trend remains bearish and until the world begins to believe otherwise… Expect it to continue. Stay flat to slightly bearish in the broad stock market.
Publisher’s Note: Jared just recorded a webinar called “3 Keys to Safely Making 30% in a Highly Volatile Market.” In what has quickly become one of our hottest videos, our guru lays out yet another way to take advantage of this volatile market. If you have not watched it yet, see it now.
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Other Related Topics: Jared Levy , Market Analysis , Market Trends , Moving Average , Options Strategy Weekly , Stock Market
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