We must consider the possibility of a market advance back up to the (black) down trend line, or at least the bottom of that old (green) up trend line that you see in the upper right corner of the charts of the S&P 500.
There are many reasons.
First let me say that I don't recommend playing the current price advance if you are a long-term (months to years) or intermediate-term (weeks to months) trader. Only short-term traders should be participating in this intermediate-term advance with bullish positions. After all, the next bigger trend, the intermediate-term trend, is up.
S&P 500 2-Year Chart
In my Technical Analysis Millionaire course, in addition to the live market commentary I give twice a week before the lesson, we have a live Q&A at the end (where I answer live questions about the lesson I've just given, but also on the current market situation).
I got a great question yesterday at about 5:05pm, even though I think it was the wrong question to ask.
The subscriber had asked if, in a "mean reversion market" like the one we have been in for the last couple of months, one should start to focus more on the shorter-term indicators that we offer in the tools section of the TAM website.
I was forced to answer the question with a suggested question that the subscribers should ask themselves, and that was: "What type of trader am I?"
What did I mean?
Well first, do understand that a "mean reversion" market is basically one that just zig-zags up and down with big swings, but generally ends up in about the same place.
The question of whether a person should start focusing on the shorter-term indicators implies that the subscriber was considering trading the shorter-term trends as the market zig-zags up and down.
Who knows if this subscriber already had a plan of playing more than one time frame or not. I only know my own personal preferred time frame, and it doesn't involve being glued to the screen all day long.
If you read last week's "Special Edition" of The Tycoon Report, you know why we consider the stock market to be in a long-term down trend. TAM subscribers know this as the "mark-down" stage -- the stage where institutions gradually knock down prices after distributing a LOT of shares to the uninformed investors (almost everyone).
The subscriber, whether knowingly or not, was asking if he or she would be best served to start trading the short-term trend.
I can't give personalized advice anyway, but I couldn't even answer if "a person" should do so, because it really depends on the person's intended lifestyle. And that goes to the heart of the problem most individual investors have with the stock market: They tend to change their game plan depending on the dish served to them at the time. Thus, they change their lifestyle based on the stock market's fluctuation -- which is unacceptable.
PERSONALLY, I prefer to trade the intermediate-term trend (weeks to months).
No matter what time frame a person prefers to trade, the key is to always focus on the direction of the next larger trend and to trade in that direction. So I focus on the long-term trend, and trade the intermediate-term trends when they are in the same direction.
Right now, the long-term trend (months to years) is down (the mark-down stage), which tends to last about 1/2 as long as the last bull market (which, in this case, means about 12 months of downside from the July high... but nobody knows for sure, as all situations differ).
Now we know that intermediate-term up trends, within the long-term down trend, should currently be viewed as "counter-trends", and our "entry points" are the sell signals that tell us to take our bearish positions and ride the next intermediate-term down trend lower, thus profiting.
Dancing With the Devil in the Pale Moonlight
I tend to dabble in counter-trend trading. But I must confess that I haven't been nearly as successful in counter-trend trading as I have been when I trade in the direction of the trend. The sharp advances within long-term declines and the sharp declines within long-term advances certainly look sexy and can pay off big time.
But now that I'm retiring and I want to spend more quality time with the family, I just view the counter-trend rallies (in the current scenario) as times when I should take a break from trading all together. My indicators will let me know when it's time to go back to "work" again ("work" meaning it's time to go look at my computer for about 12 hours total and push a few buttons to position myself in my trading account, my 401k and my kids' 529 plan).
If you are the type of person who likes to play the counter-trend trades and are good at it, then by all means it probably makes sense to do so, but with smaller position sizes than when you're trading with the trend. But what's most important is to decide what kind of LIFESTYLE you want to live beforehand, and STICK TO THAT no matter what the equity market decides to serve you.
Don't go in as an intermediate-term trader and let the market change you into a short-term trader. Don't let the market whip you -- you've gotta whip that market.
And if you are a human being, and I assume you most likely are, sticking to your original planned time frame can certainly be a bit of a grind.
I'm a human.
Yes, I've looked deep within my soul and discovered that I am.
And I'm definitely watching this strong rally, which appears to have some more strength to it, with an itch. My finger is itchy. Part of me wants to log on to my investment account and start pushing buttons. And that's coming from someone who has studied market analysis for about 17 years and managed millions for other investors. And that should be the today's lesson right there.
You can be a 50 year market veteran and know all the rules to successful trading like clockwork. If you're a mortal creature as I am, you will have to fight against yourself (your own human nature) to at least some degree. That's why casinos make money -- even though you know you shouldn't, you still do.
But your account shouldn't be viewed as "play money". Not one single cent of it.
When I start to catch myself rambling, I know it's time to end the article. I don't know which part to delete or revise at this point, because I feel the points made are valuable.
I originally planned on breaking down the two S&P 500 charts at the top of the article and explaining where the next resistance points are and why, but I think I'll save that for my TAM subscribers and discuss those charts during this week's live TAM webinar instead.
See you next Tuesday.
Chief Investment Officer
Technical Analysis Millionaire