The Trend Is Still Your Friend

The market is getting paranoid. The definition of which is, “baseless or excessive suspicion of the motives of others.” The headlines yesterday blamed just about anything and everyone for investor action. The inability to define with confidence the economic picture is one of the biggest reasons for the current market activity and therefore we have all the reasons from Greece to China as to why there is renewed volatility and selling in the broad markets. Better yet, we think there is s simple solution to all that ails the market. The reality is uncertainty about the future causes irrational activity short term in an attempt to find a solution or make money from the disruption. Trend-less markets are dangerous markets, and worse yet, thinking or believing the trend is wrong and betting against the trend is harmful to your net worth.

Last week the trend became defined in a micro time horizon as down. The bounce on Monday brought a renewed hope for the upside from the buyers. That prompted more speculation on a direction or trend change. Looking at the chart of the S&P 500 the move on Monday could be a pivot point off the new low from last Friday, but nothing has confirmed or changed to this point. It is just a suspect activity that requires validation. Price has not pierced the ten day moving average, nor did the volume accelerated above average on the buying Monday. Simply put, nothing has changed. The bias is still to the downside and the lower highs established off the April 2nd high is still in play.

As an investor or trader the challenge is filtering the noise to validate the trend. The micro trend is down and the 1295 support level on the S&P 500 index is in play. A break lower continues the micro trend and confirms the negative sentiment. However, if you are looking for a reversal in the micro trend to resume the previous trend higher off the October low, the index would have to first move above the 1340 mark and then 1360. Thus, we are in the stage of the curent trend that allows both the buyers and the sellers to wage their bets on the direction. If we are patient enough the answer will present itself. There in lies the challenge. Because of charting software and quantitative strategies, we believe we can predict the movement with some degree of accuracy. If we are right we believe we have a fail proof system. Nothing is fail proof and the market is a dangerous place to use predictive analysis.

There are times where the best analysis is to step away from the risk of the current market environment and let the trend define itself clearly and then invest. The recent break of support at 1360 was a clear shift or change from the sideways movement of the previous six weeks of trading. The selling confirmed the downtrend off the May 1st high. The bounce off the 1295 support level puts that move on hold and we now will confirm the continuation of that selling with a break lower, or we reverse and move above the break point at 1360 negating the move lower. I know that sounds like an oversimplification of what is taking place, but sometime keeping it simple is better. Believing you can predict the direction relative to the right side of the chart is a dangerous game to play with your hard earned money.

As we face another day of worries over Greece, keep your focus. Don’t assume anything and let the noise subside as you manage or navigate the risk of the current market environment. The dollar is rising again, commodities are falling and stocks are uncertain. Back to where we left off on Friday with emotions and volatility in the driver seat for the day. Set your stops and manage your risk.