As you know, although we'd like to think the market moves in one direction without deviating to sharply from its course, this simply isn't true.
Even during one of the worst bear markets in US stock market history, there were significant trend and counter trend moves. I use to spend a lot of time when I taught Technical Analysis trying to get my students to not look at a price chart as a bunch of signals generated from numerous indicators or at resistance points or pivot points; I wanted my students to really understand what drives the market and what drives each of us to a very large degree- EMOTION.
In business school you might be taught how supply and demand effect prices and how the market is a representation of not only supply and demand, but of fair value, having discounted all knowable information in to a stock's price. The truth is the market moves on sentiment, it moves on EMOTIONS, the two biggest drivers of the market and our behavior are Fear and Greed, they are what cause supply and demand.
Most stocks' prices have very little to do with value, they have to do with what sentiment toward the economy is, what sentiment toward the market is and the particular stock. Have you ever seen a stock blow away estimates on earnings and still be sold off? That's because the market doesn't care much about what you did, it cares about what it thinks you can do moving forward, if they feel your best quarter may have indeed been your best quarter, they will sell the stock despite a beat.
In any case I'm getting off track, but if you really want to get the most out of a chart, learn to put yourself in the emotional moment of the chart you re looking at; how would you feel if you were long or short, if you had a profit or loss? It's difficult because you know what comes next, but that's an exercise worth working on.
As to multiple trends, lets take a look at that nasty bear market from the Crash of 1929.
Here's the Dow-1929 Crash, when you get some time you might take a closer look and think about how you might have traded it. I suppose most people would say they'd have shorted this market and stayed short for a nice trending trade.
Look at this countertrend rally. If you didn't know that is was a part of the chart above, would your answer be different as to how you would trade this chart? Of course it would.
This is the same section from above in the trend, it was a +52% move, worth trading as it took less than 4 months (bear market rallies are some of the sharpest rallies you'll see) to make that money, but ask yourself this, had you not known what came next, would you have had the fortitude to hold on to your short as more than 50% of the value declined in 3.5 months? Remember at the time you have no idea what comes next so if you could see this move coming in advance and had an opportunity to trade it from the long side and make extra money rather than sit through a very emotional draw down, would you have traded it? I would have.
There were at least 6 of these bear market rallies within the downtrend.
Here's a Fibonacci set, it just shows how your short would have suffered over 50% draw down. How many of you could actually keep that trade open?
Now along a similar line of thought, lets take a look at the market right now, some of you have asked me if I'm bearish this market as I have spent a lot of timing making a very bearish case. The answer depends on the opportunity available and the probabilities, I want to take whatever the market offers whether that's long or short. I do have different feelings about different trends and I'll show you why and what evidence I use to come up with these positions.
This will not be a comprehensive treatment of all of the reasons, it would take me weeks to post all of the information we have gathered over the last several years.
When we think of the market, think of the primary trends as the ocean's tide, a bull market is the tide coming in, a bear market is the tide going out, but unless it's a tidal wave, the tide doesn't come straight in when viewed from the beach. You have waves, early in the cycle and if you placed a stake in the sand where the wave came up to the beach and then stopped and went back, over some time you'd have to keep moving that stake in the sand further and further up the beach as the tide pushes the waves up higher. Conversely in a bear market as the tide goes out you still have counter trend waves that come up the beach, like rallies, each may fall a little short of the previous one, but they come and go and each can be an opportunity to make money.
When looking at a weekly chart of the QQQ I can see a leading negative divergence at the top in early 2000, I can see a positive divergence at the 2002/2003 lows, I can see a negative divergence in to the 2007 highs and I can see one of the worst negative divergences this chart has ever seen right now. When the time is right, I want to load up short like I never have before, but the timing must be right because right now it feels like although the tide may be going out, we have a wave coming up the beach.
Here's the SPY with the 2011 top before that we had confirmation of the trend, at the 2011 top we had a negative divergence so we might go from long to short, even though our main view is bearish, it doesn't prevent us from taking advantage of an opportunity to make money on the long side. As you can see, the recent top had a very bad negative divergence to it and many core shorts have done great, but you can also see a little reversal, I believe that's just the start of a bigger move to come.
This 15 min chart of the QQQ shows a positive divergence from October to November, it's large and we've only seen a small move up so far from it. Ultimately there should be enough power to take this market higher from that accumulation zone which is fairly large.
On a shorter term basis on a 5 min chart of the QQQ we have about 4-5 days of a negative divergence, this tells me it's likely the market pulls back before continuing higher from the chart above this one, so if I can make money trading this pullback, why not. I don't want this to be my main exposure, but a few positions here and there can produce extra profits. This negative divergence is no where near the size of the positive above this one so I think after a pullback we will see a continued move higher, but we always watch the market and look for its message.
If I had a large portfolio and I was very speedy, I could even trade this TICK chart from the long side, this isn't something I could do for a number of reasons, but the point is there are different trends and different opportunities. If you ask if I'm bullish or bearish it's not a simple question, it depends on the trend we are trading or preparing to trade.
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