Wednesday, February 15, 2012

February 15, 2012 - Indices (S&P, DJ-30, Russell)

As many technical traders will tell you from their personal experiences, it is not a good idea to trade against the market. One of the first things I do when I wake up is check the S&P 500, Dow Jones and Russell 2000 Index. If all of them are in an uptrend, I will look to buy long, but if any of them are in a downtrend I will tread lightly. The first thing you must do before going on is to decide for yourself what constitutes an uptrend, a downtrend and a trading range. For me, I consider the index to be in an uptrend when it is above its 30-day moving average, and the 30-day. For a downtrend, the opposite is true. But, with all blanket statements, there are many different exceptions to this statement.
  1. If the overall market is in a downtrend (the 30-day is above the stock price), there can be secondary uptrends (using secondary indicators like stochastics, the MACD histogram and a 10-day moving average)
  2. If the overall market is in an uptrend, there can be corrections (a secondary downtrend).
  3. If the overall market is in a trading range (it has a definitive support level and definitive resistance level), their are both secondary uptrends and downtrends.
Everyone makes money in an uptrend (bull market). For example, look at the 90's. You could have chosen any stock and you would have had a gain upwards of 20%. If you got lucky, your gains could have looked like Mitt Romney's. There is barely any skill to stock picking in an uptrend, because everything will go up.

The real difference is what you do in the secondary trends, and more importantly in the downtrends. Most people hold their portfolio no matter what. In the 2008 financial crisis, people lost half their wealth, yet most didn't get rid of any stocks. If the market (DJ-30, SP-500) goes up 8% in a week (like last year), no one even thinks of selling. Even though patterns show that the market will drop in almost all weeks following a week of gains as high as 8%, everyone holds. Yes, it takes time, energy, and commission costs, but if you sold at the top of the 8%, and then bought the same exact stocks at the end of the week when it corrected 5%, you would have made an extra 5%.

In order to give examples of secondary trends, below I have pasted the S&P-500 weekly AND daily charts. When looking at longer trends, the weekly chart is best because it fluctuates less than the daily chart. When looking at secondary trends, daily charts are the best option. In all of my past posts, I have been dealing with secondary trends in the individual stocks.

The SP-500 weekly chart above gives us a good look at the main trends over the last 9 years. From 2003-2008 the stock price was above the 30-week moving average which was above the 50-week moving average. Therefore, for these years the market was in an uptrend. From 2008-Early 2009 the market was obviously in a downtrend, shown by the 50-week MA being above the 30-week which was above the stock price. For the next year there was an uptrend, followed by a trading range for 3 months. In September of 2010 the market broke through the trading range and another uptrend started again until the summer of 2011. Now lets look at the daily chart for the period from March 2010-December 2011:

The Daily chart confirms the weekly chart uptrends mostly. The Daily chart has a couple of opportunities that the weekly chart doesn't have, like during the 2010 trading range and 2011 trading range, but there aren't huge gains lost due to not looking at secondary trends. On the other hand, during the 2003-2008 uptrend, there are. Daily Charts only go back 500 bars on most sites, so we'll have to look at a weekly chart more closely to understand what could have been done.


In a zoomed in weekly chart we can see that there are periods of 6-10 bars that are decreasing. Considering that this is a weekly chart, that would be 30-50 bars on a daily chart decreasing, which is more than enough time for a secondary trend. Take for example The short term downtrend that started in 2004 Directly above "JAS" (July, August, September). There were 40 days here were the market was correcting (decreasing) because of how fast the market went up. If using the daily charts, this secondary downtrend would be easily discovered and you would have been able to etiher short stocks or sell your long positions and re-buy at a lower point.

No comments:

Post a Comment