08
Dec
Market Trend Analysis Part 2
This posting and Stockanalysistalk.com provides information using market trend analysis for technical analysis of stock data for market investment, stack market trading, portfolio management, and investment position for financial growth.
Let us continue the talk about trend analysis. There are various ways of trying to determine the trend of the market. This can be done by using moving averages, various indicators, various filtering techniques, an algorithm technique, and with the market cycle tops and bottoms technique. All these methods have a market time lag associated with the results, but they can still be quite effective. I have recently read a book by John F. Ehlers called “Cybernetic Analysis for Stock and Futures”. This has some very interesting information, but when I tried to use this data to develop a trading system, the results fell along the lines of my typical trading system results. I am looking for the system that gives me a trading advantage in the market. One manual analysis technique that has served me quite well is the Tops and Bottoms technique.
Tops and bottoms analysis of the market is reasonably simple, but it has a few little quirks associated with it that you must understand. I will attempt to explain this technique. The market or stock behavior is comprised of some small cycles in about 8 days in duration, 4 days up and 4 days down. If this cycle really held, you could simply find the bottom, buy, and sell in 4 days and make a lot of money. It isn’t quite that simple, but if you investigate the data (it is more prevalent in an index like the S&P 500) you will be able to see the cycles. In general, you will be able to identify the top of the cycle and the bottom of the cycle. The tops and bottoms technique is a method of comparing a top with the previous top, and a bottom with the previous bottom. If the top is greater than the last previous top, you have what is called a rising top. If it is the same price, it is sideways. And if it is lower, it is falling. The same goes for the bottoms. If you are in a BULL or rising market, the tops and bottoms will be rising, and of course if they are falling you are in a BEAR or falling market. As these rising or falling amounts change, the strength of the trend is changing. If you study the tops and bottoms relationships you can get a good indication of market strength and trend. You can use the early indication as the top is not rising well for a BULL market as an exit criteria or the bottom is not falling well for a BEAR market. Or you can wait until the results of the next cycle, but of course that will give you some decision lag. You can use a combination of the top and bottom to cut that lag in half. It by itself is not a complete trading system philosophy, but rather a effective trend analysis technique.
Let me talk a little bit further about the market cycles. There are times that the cycle is hidden, but it does not mean it is not there. If in the count, the market is suppose to go down and it doesn’t. That is an indication that the market is very strong and the down portion went up. If you continue the count, in many cases it will go up more when it is in the up portion of the cycle. The 4 day count appears to change in phase, and therefore once a top or bottom is formed, that is where you start the count. If a top or bottom does not form, then the count has to be derived from the previous top or bottom. If you draw a line to connect all the tops and another line to connect all the bottoms, you will see a divergence and convergence of these lines. I will save that discussion for another day, but there is some real meaningful information in this relationship. It gives indication of the stocks volatility, and real volatile stocks have more prevalent cycles making them more tradable using this technique. Additionally, you can use the signals from an index to trade a stock if they are in sync with each other. Many times the trading signals are clearer from the index. This is a good technique for determining trend and strength, but be careful and study the effects if you use it as a trading system.
This isn’t a plug for the CaprockAnalytics.com site, but some of this information and technique is used in their analysis. I have been in contact with these folks, and they have shared and taught me quite a lot in some of the things that are useful in stock analysis. Of course, they are probably not telling me all of their secrets. The perfect trend analysis would be predictive in nature, and they seem to have that ability in their analysis.
