| Gar's Market Blog
Outlook for week
ending July 16, 2010
(Click
here
for previous outlook)
Is
History Repeating?
Someone
sent me one of the most fascinating
charts I have ever seen. It
is a comparison of the S&P
from 2009 to present, but overlayed
against the market in the 1930's
during the Great Depression.
The
light red line is the percentage
gain or loss of the market from May
of 1936, while the darker red
line is the S&P from July
of 2009 to July of 2010. Notice
that the two patterns are nearly
identical. Coincidence?
Perhaps
not. During the Great Depression,
very similar strategies were
deployed (government programs),
which eventually proved ineffective.
Today, regardless of your political
persuasion, whatever methods
have been applied so far have
been equally ineffective. Since
the markets tend to look forward,
analyzing every conceivable
scenario, perhaps these matching
patterns are not a coincidence
at all.
Hence,
the bad news is that if this
matching pattern continues to
manifest, even a little, the
market might have a long, hard
fall in the near future. The
good news is that we can trade
the market in either direction,
the "trick" being
the ability to gauge that direction
so we usually play the right
side.
Gauging
Market Direction
While
there isn't any sure-fire method
to predict direction every time,
there are several ways to make
a well-informed guess. And remember,
sucessful trading only requires
that you "guess" correctly
more than 50 percent of the
time to remain profitable. At
least if you maintain the proper
discipline to cut losses short
when you're wrong.
The
simplest way to gauge direction
is the simple trend.
Consider the following 6-month
chart of the S&P.
Note
how the trend begins downard
from the beginning of the year,
only to shift direction in mid
February. The straight, light
green lines mark the trend
line for both directions, and
a change in direction occurs
by simply crossing that line.
From mid February into mid April,
the market trends upward, finally
to break below the green trend
line to head south.
Notice
that the trend shifted sharply
and distinctly the moment the
market broke above or below
the green trend lines. Sometimes
it can be this simple to predict
market trend.
Another
way to determine trend is to
display a moving average, or
an exponential moving average
(EMA). More often than not,
when the chart direction crosses
an EMA, a change in trend has
occurred.
The
above chart shows a 20-day EMA
for the S&P, the same time
period as the previous chart.
Notice that the trend shifts
direction whenever the underlying
chart crosses its 20-day EMA Trading
the market this way would have
paid well, except for a
brief "false alarm"
in mid June (the chart crosses
the 20-day EMA very briefly,
then resumes the downtrend).
But even with the false alarm,
substantial gains could have
been made playing the proper
position soon after these crossover
points.
Sometimes
you don't need to make trading
any more complicated than this!
A simple gauge of trend can
pay in droves. It is there for
your use---and free of charge!
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