Seven Reasons Why The Trend Is Your Friend

I will often joke about market technical analysis.

Daytraders often live and die by minute-by-minute moves and magical voodoo terms. Technical analysis is no more the holy grail than buy-and-hold investing. The presumption that the tail waggs the dog is dangerous and not grounded in any scientific evidence. Yet, my experience says it's of as much value as fundamental analysis in helping you determine if a stock could rise or fall. Above is the most recent analysis of the S&P Trend line which can help one reduce risk and increase profit opportunities. The idea is simple. Know when to plant seeds. Know when to harvest profits.

I was trained in Modern Portfolio Theory (MPT) in my business BBA program in the 70's.

Naturally at a University you'll learn what is believed to be the best researched and scientific based thinking of the time. Most often based upon utilizing mathematics to identify correlations and relationships in search of the holy grail of reducing ones risk while increasing the probability of maximizing your returns. So, all the Professors contributing to the knowledge of MPT, were strong mathematicians not past professional money managers.

The founding fathers of MPT, people like: Harry Markowitz Nobel Prize in Economics, 1990. Diversification reduces risk. The Role of Stocks James Tobin Nobel Prize in Economics, 1981 Single-Factor Asset Pricing Risk/Return Model. William Sharpe, Nobel 1990 Prize in Economics, for Capital Asset Pricing Model. Efficient Markets Hypothesis, Eugene F. Fama, University of Chicago. Fama was first to get access to using a Mainframe IBM computer to analysis massive amounts of historical data that had been collect in print.

Fama's, extensive research on stock price patterns was the foundation for Efficient Markets Hypothesis, which asserts that prices reflect values and information accurately and quickly. This was among the easiest of concepts to grasp. Yet, to this day this is the most misunderstood theory. Often those with no formal investment training such as journalist, will imply Fama's theory means the market must always be rational.

But the most valuable concept that I learned outside of the class room in real life money mangement pertaining both to the market and individual stocks was how to spot a simple trend and capitalize on that trend.

We spend a great deal of time trying to spot stocks heading in the right trend, or direction. Careful attention needs to be given to the support and resistance lines. These lines are also called trend lines.

Here are seven reasons why the trend can be your friend in investing:

1. These lines draw the general trend, or direction, the stock is heading. They’re not used for daily tracking, they’re more of a longer-term direction that the stock, mutual fund or commodity is heading. If you are using a longer term approach, the trend is what you really want to know, not necessarily the day to day wiggles in a stock.

2. Often times, the trend line will give you guidance in a stock for years, not just weeks or months. But these support and resistance lines are often bumpers, or guardrails, along the way. Stocks often drift toward their support or resistance lines and then bounce back in the opposite direction.

3. If you can pick off a stock you find attractive as it is bounces off the support line, it could be a terrific time to buy. The reason is you have a strong, logical place for your stop point...just under the support line, which is really close by. This helps minimize the amount you have at risk.

4. Some of the best winners come from stocks that are purchased just as the stock breaks through overhead resistance and forms new patterns. Holding the stock until it breaks support line (which might be possibly many months, or even years later) can really help your overall performance!

5. The reasons behind why a stock jumps through a brick wall are often not clearly visible. The reasons for the move may emerge days or weeks (or even a year!) down the road. But when a stock or a mutual fund breaks through the trend line, either up or down, it’s important news.

6. If a stock or mutual fund we are following breaks through it’s overhead resistance, we have a high level of confidence that the stock will continue to climb upward.

7. Lastly, if the support line of your mutual fund or your stock is broken, beware! This is a very clear signal we should consider selling a portion (or maybe even the entire) position. Breaking the support line is the ultimate sign that supply is now clearly in command. Your principal is now at risk.

Bullish Momentum or Bearish Mojo ?

Bearish triple Ms? Doje? Bearish flag? Bearish Cross? Bearish Reversal Candlestick Patterns? Advance on low volume bull trap? Say all the mojo vodoo you want, but the market exploded open today moving up 100 plus points within the first 15 minutes today.

After a year of listening to people say buy-and-hold and passive investing and EMT is dead...those who did nothing but stick with a passive index fund, are the real market gurus. I've listen to high paid money managers and CNBC "experts", say the market would turn south for months once it hit 8,500...then 9,500 for sure was the top...and now were at 10,500. Hay, I thought 9,800 was tops. I too was expecting a little 5% pull back, that never came in the index. Lots of stocks have pulled back but the market index has continued to climb higher.

Gold and commodities explode up today. No idea why the 180 reversal from last Fridays stronger dollar. India must be passing out free glasses of Champane to Americans visiting their country, as their new stock pile of gold rise in value.

Triple shorts and double short ETFs got clobbered today regardless of low volume. So should we change our thinking? Dow 11,000 now? Well,today was great for index investors but I saw a ton of selling during the first 30 minutes with many prices falling thereafter. So, lets listen to Ron explain this from his market technicals point of view. He explains why he's staying short and bearish near-term on the market.


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DOW Hits 10,400 What's Next ?

Now that the Market hit a new high 10 days ago what next?

What next? Dow 11,000? or 9,800? Well, after listening to all the newly minted market wizards on Seeking Alpha.com make continuous market crash perdictions, since the mother-of-all-bounces (in our lifetime) began, they final stopped about two weeks ago as the market was agin hitting new highs. Now that they stopped I'm ready to get very defensive. No as, I've said before, I see no 20% correction for certain in the next few weeks. Getting defensive, for me, means selling the stocks and sectors that have risen the most and rotating into stocks with perdictable earnings and good dividends that have not enjoyed a big market advance. And if there were a 5% correction you can bet I'd be looking to buy unless we had new negative economic data, in addition to our serious unemployment problem. Remember unemployment is a a very serious problem but if companies are expected to earn more resulting from these lay-offs and if the future economy is expected to get better then stocks can continue to slowly rise or go sideways as they did in 1983-84 and 1991-92 even as unemployment was high. But lets just consider whats more likely for the next few weeks.


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So, to help me confirm or reject my guess I'm calling in advice from the Voodoo Chartist as us EMT boys like to joke about. I'm not one to get excited about minute by minute market technical's and charts. But I do make major portfolio shifts in allocation between sectors, industries and cash based upon my technical advisors in addition to fundamental analyst recommendations.

When one chooses a technical advisor I recommend one be chosen based upon their knowledge of fundamentals, market history and knowledge of how portfolio managers think too. I'm going to share with you Ron Walker ( one of my advisors ), a man who's ego is in check and is worth your listening time. Now given the market has had its greatest move up since the 1930's I'm worried the markets now ready for another minor 3 maybe 5% pull-back similar to the last two.


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Another technical advisor I follow Carter Worth, of Oppenheimer Fund Management has also advised me a correction is now the most likely near term outlook. And we've said all along that the market seemed insistent on going back up to the pre-Lehman bankruptcy level of last September. We've hit those levels. Based upon his training and experience Carter says, "that's the wall we'll not climb above for some time now." He believes a correction is due. Does it mean we must have a sharp correction? No. It can be a slow back and forth but continuous drip down into December. Even if we have no correction now, I'd bet it would come in January when large investors choose to take capital gains for all of 2009 profits, on their 2010 tax return, simply by waiting to sell on January 1st 2010. Most likely the big winners in commodities related stocks will sold. But let's not start speculating beyond the next few weeks.

Last week I saw the fertilizers companies and telecom companies rise while oil drillers like my favorite RIG were extra weak. I've sold my fertilizer play IPI and oil tanker shipper FRO. I'll look to buy it back below $25, I hope. I'm holding my DRYS due to the rising BDI rate rising. I'd be looking to buy more RIG below $82. Metals like X and AA can be bought on any noticeable drop. Large banks and insurance companies like BAC, WFC, C, STI, GE, PRU, MET and HIG seem on very firm ground and in little risk of falling down more than 6-10% compared to other jumbo winners in 2009. I'd be looking to buy BAC, GE or HIG on any noticeable pull back. I also notice that some of my favorite defensive plays with excellent yields continued rising as other socks weakened last week. Finally boring defensive stocks like WMT, MO, LLY, PE, VZ and CHL (I hold positions it all four stocks) moved up. These stocks may finally be in a mini-break-out mode which makes them a safe play to hold (even in a correction) as one takes other short positions ( as Ron describes ) or moves to 50%+ cash levels ( which I am ).


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These videos are more for individuals with some good basic understanding of technical analysis. It's for those who want an in-depth market analysis and opinion on if the market is more likely to move down or up in the next two weeks.

Special Note: The average individual needs to spend more time developing a long-term savings and investing plan instead of a market trading plan. Market timing and market trading and daytrading is a very time consuming activity. Those selling monthly subscription services will always tell you "passive index" or "monthly dollar cost averging plans" or "buy and hold" is dead. Yet, many traders make less money than a simple buy and hold passive investing strategy. The down side of daytrading is rarely discussed. What does it cost you to be spending 8 hours a day five days a week on market trading?