Opening Position
December 2005
Is the market in a trend or a trading range? It's a more difficult question than you may think, and one that all traders should answer before they start their day's trading. When you bring up any long-term chart, it's easy to see when the market was trending and consolidating, but trying to determine where it will go in the trading days that follow is another story.
For example, when I bring up a chart of the Standard & Poor's 500, I can see that the market has been trending in an upward direction since October 2002, up until August 2005. There were times when that trend stalled and the market moved in a sideways range, but overall, the trend was up. Now, I have more questions. How do I know whether that trend will continue? How do I know when the trend will end or reverse, or when a consolidation will start? Given that we are worrying about inflation once more, it seems to be very likely that the markets will show poor performance in the coming days, and since October 2005, it certainly seems that a downward trend has begun. Was it possible to have recognized that shift in sentiment?
Typically, the middle of a trend is relatively easy to identify. It's the end and beginning of a trend that require more effort from the trader. So who's more enthusiastic, the buyer or the seller? Since enthusiasm shifts more quickly in a consolidating market than a trending one, it becomes that much more important to be extremely alert.
In this issue of Technical Analysis of STOCKS & COMMODITIES, we cover some of the indicators that could be applied to a consolidating market. In our feature article "Breadth Of Fresh Air" by Gregory Morris starting on page 36, you will find out how you can apply the McClellan summation index to improve your trading results. In Jacobus van den Brink's article "Overhauling Market Breadth," starting on page 62, you'll learn to apply market breadth in a slightly different way.
See what these indicators do for your trading; for starters, you can use them to identify divergences, which give a good indication to a slowdown in the direction of price movement. Applying such indicators may even answer your own questions about when that trend will end and when that market will consolidate or reverse. Between now and the end of the year, you'll be able to reap profits and make the holidays very special.
Season's greetings!
Jayanthi Gopalakrishnan,
Editor
Originally published in the December 2005 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2005, Technical Analysis, Inc.
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