Stock Market Trends April 2008

By: Hans_Wagner

To make money and beat the market it is important to follow the trend. When you follow the trend the market's underlying forces work for you. Simply said, but how do you identify the trend so you can follow it?

I believe it is best to begin with the big picture in mind and then work our way down to weekly and then daily views of the charts. You will notice that the chart and the value of the indicators change as we move from a monthly to a weekly and then a daily chart. This is a normal part of the technical analysis.

Let's start with the long term view of the S&P 500. The Relative Strength Index (RSI) seems to be a good indicator of the cyclical bull and bear markets. In addition, the 78 week Exponential Moving Average (EMA) acts as support in a bull market and resistance in a bear market. 

In January we fell into a bear market as the RSI dropped below 50, the index fell through the rising trend line and the 78 week exponential moving average and MACD crossed below zero. This is consistent with the fundamentals of a weakening economy, and likely a recession. It is best to remain nimble during times like this.

The first support level looks to be just above the 1200 level. However, we can expect to retest the 78 week exponential moving average at some time in the future.

The weekly S&P 500 below was in a bullish ascending triangle that broke to the down side. Support is now at the 200 day moving average. RSI below 50 indicates a down trend.

MACD broke down through the 9 week moving average, a sell sign. Also we saw negative divergence on the MACD where the indicator shows a down trend and the price has not yet fallen. This was another sign of the weaknesses in the market we recently experienced. We are likely to see a rebound in the next few weeks up to the rising trend line or even the 50 week moving average.

The daily S&P 500 chart below shows a declining channel. If this channel holds then I expect the market to move down to test the recent lows. On the other hand, if the index breaks through the dotted line, then look for the S&P 500 to test the 1400 level and the 200 EMA.

RSI is above 50 indicating an up trend. The MACD gave a buy signal indicating a move up that is continuing. The Slow Stochastics signaled a move down when it fell through 80. This indicator is often early and a bit whippy, so it is likely to move back up again. 

In bear markets it is best to be nimble and/or use risk protection such as trailing stops, protective put options and even covered call options.

Given this perspective, it is important to be patient looking for good opportunities to enter longs that are able to overcome the downward bias in the market. It will be important to add down side protection to your long positions either through stops, protective put options and/or covered calls. On any rises to a key resistance level look to go short either through selected stocks or the ultra shorts ETFs SDS, and QID.

For those interested in learning more on how to identify the macro trends I suggest reading Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycles by Joe Ellis. It is an excellent book on how to predict macro moves of the market. In addition Stan Weinstein's Secrets For Profiting in Bull and Bear Markets is one of the best books on "reading the market". It is easy to read and an excellent description of how traders and investors use technical analysis.

By Hans Wagner
tradingonlinemarkets.com

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at http://www.tradingonlinemarkets.com/

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