Number
15
Please note that
we have used historical data. These examples are
for educational purposes only.
Trend-Spotting:
Taking a Longer Term Perspective
The Dow
is falling! The Dow is falling! Like Chicken Little,
we can easily get caught up in the daily turmoil
of volatile markets. Volatility is not bad. In fact,
price changes over time are the bread and butter
of the markets. And our bread and butter if we succeed
in getting on-board the right trend at the right
time.
In this
issue of ChartFilter Newsletter we'll examine mid-
to long-term trends and how to spot them using some
of the tools at our disposal. And, once again, I
will be reminding you of the usefulness of some
of the simpler tools.
CURRENT
TRENDS - Learning from the Long Term Picture
"Ignore
the long-term trend at your peril!" Was it Napoleon
who said that? (Just kidding!) I don't know who
said it first, but I'll take the credit if this
one is up for grabs. And then there's "The trend
is your friend." There's a lot of truth in these
words.
For example,
let's take a look at the Dow over the past few years.
You might be surprised to see the number of clues
that suggested a year ago that these markets were
running out of steam. If you are regretting your
current position in the market these days, these
charts may provide some good lessons for the future.
Of course, you can always take comfort in the knowledge
that the markets will turn around some day. And
we'll even take a look at some of the first signs...
read on!
In the chart
below I've plotted the Dow Jones Industrial Average
over the past 5 years, using weekly data. I've also
plotted the 20 and 50 week Moving Averages as well
as the MACD indicator.
As we know
from previous newsletters, MACD is a lagging or
trend-following indicator... or, in other words,
it helps to confirm a trend once established. In
the chart above MACD gave two clear sell signals
(red arrows) - with the first in late 1998, after
more than 3 years of steadily upwards trending markets.
We had another clear indication of a weakening trend
in early 2000 (2nd red arrow).
These signals
were confirmed by the 20 & 50 week (one year) moving
averages. Notice how the 20 week MA stayed above
the 50 week MA during most of the uptrend, dropping
below in late-98 and again in early 2000.
If you're
interested in going with the long-term trend (as
I am), this type of perspective is invaluable. Whenever
you're in doubt about the overall health of any
market - or wondering what the major trends are
- I advise you to check a similar view. Plot the
particular index you're interested in, using at
least 5 years of weekly data. In the day-to-day
markets, it's easy to lose sight of the big picture.
How do
you know when a market is showing signs of turning
around?
The first
signals will likely be given by a lead indicator;
such as MoneyFlow. In the charts below you can see
that MoneyFlow is still strongly downtrending. When
the Dow turns around, MoneyFlow will lead the way,
followed by the MACD, which can be used to confirm
the trend reversal.
I don't
think you can expect these markets to turn on a
dime. There will, in all likelihood, be a couple
of false starts before a true bottom is established
(and we might not even be close at this time because
some serious support levels have been broken recently).
However, we do know that the Dow will turn around...
and a long term perspective using weekly data with
MACD and Moneyflow should give you an edge in determining
a good time to buy into some nicely devalued stocks.
Speaking
of which... here's another view -- of a stock this
time (Nortel) -- showing the Money Flow Index in
action. Notice how the price is still sideways/downwards
trending, while Moneyflow has reversed and made
a sudden upswing. If Moneyflow continues to gather
strength, price can be expected to follow (and will
likely be confirmed by MACD).
Moving averages,
MACD, and Moneyflow can provide many clues about
the direction a market is trending. I find patterns
are also particularly useful in determining market
reversals (tops & bottoms). Retracement tools, such
as Fibonnacci retracement lines or Gann fans, are
also very handy - but we'll save those for a future
edition.
TIPS
& TECHNIQUES - Using this combination of indicators
For more
detailed information see the ChartFilter reports
on MACD and Moneyflow
[as well as PVT
& OBV].
Also see
the Chartfilter report on identifying tops
and bottoms (patterns).
Putting
ChartFilter into Context
ChartFilter
is meant to complement your overall trading knowledge
and decision-making. This newsletter focuses
on applying technical analysis (TA) methods
to various markets; but this is not to say that
you shouldn't be considering important fundamental
criteria, such as EPS or revenue, as well. Think
of ChartFilter as your TA assistant; not as your
overall trading strategist.
