Sunday Thoughts for July 20th 2008

By: Rebel Traders Monday, July 21, 2008 2:49 AM

Symbols: AAPL, ALB, ALDN, AME, AMLN, ARTC, ASTE, BAC, BSX, CACH, CNI, CRNT, CX, DSL, EFX, EXP, FNB, FWRD, GBE, HAS, HIFN, HPC, HXL, LNCR, LOGI, MHK, MRK, MSPD, NVR, OMCL, OMI, PETS, PGI, PKG, QLGC, RE, RGA, RPM, RX, SAY, SFG, SGP, SNDK, STLD, TXN, UB, VLTR, VRTX, WFT, WGOV, ZRAN

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In other words, if the primary trend of the market is down, then the smartest trades are those that are profitable to the downside. Wait for resistance levels to be reached on each rally attempt and short them. As long as the primary trend in the broad indices is down, then so to should ones trading game plan. Day traders can pick up some juicy plays on the long side in a bear market rally, but a majority of the professionals who trade day after day will adhere to the primary trend. Bear market means holding long positions for anything more than a few days becomes VERY risky. Where the primary trend of the market is bullish the opposite becomes true which is holding shorts for anything more than a few days becomes risky.

There are multiple methods to determine bear or bull market. One of the oldest is the Dow Theory developed by Charles Dow in the early part of the 1900’s. Dow theory is simply the trends of both the Dow Industrials and the Dow Transport indices. For a bear market to be claimed both indices must decline and establish lower lows. In reverse, for a Dow theory bull signal both indices must establish higher lows and exceed the previous sell signal points. But, both indices have to meet the criteria for the signal to be valid. If only one of the two indices advances while the other does not then that is not a bull signal. At this time we remain in a Dow theory ’sell signal’

Other methods used are moving averages. On multi year charts the interaction between two moving averages can provide insight into the markets trend. For example, on a multi year weekly chart you can plot the 20 week and 80 week moving averages and when the two cross it signals a potential trend change.

Multi Year Weekly Chart with 20 and 80 week moving averages plotted. Cross over points are highlighted.

Another method is to simply know where the primary trend is in any market direction. And the break of that primary trend line is a technical indication of a possible trend change. In the chart below you can see that the primary trend remains slanted downward. As Jesse Livermore would say here "It’s a bear market you know".