Never Fight the Trend Again. Easier than You Think.
Determine the trend in seconds.
There is no doubt it is much more enjoyable to be in a trade for upside.
All of your long-term positions are going up, which means your overall wealth is increasing, and your short-term trades are winning. Everything is lovely!
Of coures there are also traders that prefer to short, are good at it, and really enjoy it.
I definitely enjoy catching a drop and making money on it. It creates cash at the perfect time!
All of that said, going long is my preferred trade. But I will not fight the trend.
The chat room will tell you that I am not afraid to short even the biggest names. For example, the PLTR double top treated us well this week.
Whichever type of trader you are, there are a few simple observations you can make to ensure you are on the right side of the trade. No matter the direction.
The first is incredibly simple and at the same time really effective.
5 Day SMA +
The five-day simple moving average (SMA) is a great tool for ensuring you are trading with the trend. And I mean it is very simple. Don’t overthink it.
There are two steps:
Look for 2-3 candles closing above (uptrend) or below (downtrend) the 5-day SMA
Look for additional information confirming direction
For example, take a look at the daily candles for SPY.
After trading sideways for a few months (Nov-Jan), three red candles closed below the 5-day SMA (white line) in late February. The candles also happened to close below the 50-day SMA at the same time.
Add to the picture, the relative strength index (RSI) dropped below 50 signaling weakness.
The candles closing below the 5-day SMA is a simple pattern to spot. Noting the drop back below the 50-day SMA as well as the weak RSI number and it becomes a clear short opportunity.
The same happened recently, but in reverse. Providing the bulls with an upside trade.
First, two candles close above the 5-day SMA in late April. Then a third candle closes above while also breaking through the prior recent high (546.33) which had proven to be resistance.
The candles have been holding above the 5-day SMA since, giving no reason to cut the trade until possibly Friday when the line flattened out a bit.
This simple strategy helps you understand the direction of the trend, when to get in a trade, and when to exit.
You can use it on different time frames. These examples were utilizing daily candles, which are ideal for swing trading (2-6 week duration).
If you are trading shorter time frames, you can apply the same logic to shorter duration candles. I might use the 30-minute candles for intraday trading.
For long-term investments the same concepts can be used on weekly or monthly candles.
Signs from Sectors
Sectors are another way to measure market sentiment, which helps understand near term direction. There are a few sectors that typically gain favor when markets are turning “risk off” and investors are selling.
If you see money moving into Utilities, Staples, and Defense sectors you can almost be guaranteed there is a drop in the major indices.
How can you tell? And how do you take advantage?
The S&P500 historically underperforms these sectors when sentiment is bearish and you will see signs of “breaking out” for these sectors.
To get a quick understanding of what is going on, you can review charts for the sector ETFs: XLU (utilities), XLP (staples), and XAR (aerospace & defense).
Take a look at the current chart for XLU which is now well above its March highs (SPY has yet to get there). It is also avoiding the “death cross” which would form if the 50-day SMA crosses below the 200-day SMA.
This is generally a bearish set up for the market overall and I would want to see how the candles react here for XLU. If they break out, I will expect SPY to do the exact opposite.
Other sectors that can be noted as defensive are Energy (XLE) and Healthcare (XLV). These sectors have stronger yields and in low-rate environments they can be an alternative to bonds.
If you missed it, I did provide my watchlists which includes all of the sector ETFs I like to utilize for market analysis.
Here is that link again: All 23 ATE Watchlists
I hope you find this helpful!
Please feel free to use the comments to ask questions or make suggestions. You can also message me directly if you’d like.
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Have a great weekend!
-Nate
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This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.