Trading with the trend should be your main focus for long term success no matter what type of trader you are (options, stock, or ETF trader), although it’s not as easy as it sounds.
The good news is that there is a simple trading model that removes 95% of trading analysis and greatly reduces trading-related emotions. That's because the key technical analysis rules -- based on one of the world’s best chart technician's (John Murphy) technical analysis methods -- have been applied to the chart automatically. The key is to identify the trend of the market. Once that is known you can focus on trading strategies that take advantage of the current trend.
Recent trends and signals for the S&P 500 Index (INDEXSP:.INX) Daily Chart
Trading With the Trend – The Sweet Spots
Trading with the trend is not as simple as it seems because of natural human behavior. Traders fall victim to trying to pick a top or bottom because they think the price is overbought or oversold and they want to catch the next big trend change.
We all know the saying "the market climbs a wall of worry." Well, the biggest worry most traders have is buying long in a bull market because stocks and price always look overbought and ready to top each week. This leads to people trying to get fancy, picking a top only to get their head handed to them a few days or weeks later depending on how stubborn they are to exit a losing position.
The key to long term success is to buy during broad market (S&P 500) corrections once sentiment, cycles, and momentum are starting to flash extreme oversold conditions. These show up as green arrows on the trend chart. At that point most sectors and high beta stocks like IBM
(NASDAQ:GOOG), and so forth, should be at a key entry points with most of the downside risk removed already. Remember: three-fourths of stocks follow the broad market, so it only makes sense to follow it also.
What about a runaway stock market? This is when the stock market does not pull back but just keeps grinding its way higher and higher. The only thing you can do is sit in cash, or look for a stock or sector that is having a small pause or pullback and get long with a small position until you get that broad market pullback and major buy signal to add more.
Below are a few sectors showing a minor pause/pullback within this bull market.
Mid-Week Trend Conclusion
Overall, the broad market remains in an uptrend. While I would like to see the S&P 500 pull back and give us another major buy signal like it did in December and February, I don't mind too much if prices keep running higher as it just give us more cushion and potential profits for when the trend does eventually roll over and flip signals. I hope you found this report interesting. It’s just scratching the surface of this topic but it’s a start.
Editor's Note: Chris Vermeulen offers more content at his sites, TheGoldAndOilGuy.com and Traders Video Playbook.
No positions in stocks mentioned.
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