After the financial fiasco and stock market crash of late 2008 and early 2009 investors were stunned! As the dust from this disaster was beginning to settle I was reminded of the importance of trend watching.
We can’t predict the future, but we can sense some of the early warnings of a major shift in financial trends. In March 2008 one of the most obvious clues that big changes were coming hit the markets.
In that month the Federal Reserve Bank of New York under the leadership of Fed Governor Timothy Geithner provided an emergency loan to investment bank Bear Stearns to avert the company’s demise.
Bear Stearns, which had traded as high as $133.20 in the previous 12 months, was beyond saving and supposedly “too big to fail”. The headlines oozed with clues that it was “the canary in the coal mine”.
By July banking and federal regulators arranged for it to be sold to JP Morgan Chase for $10-a-share.
TradeStops subscribers who owned Bear Stearns would have sold well before the bottom if they’d set and heeded their trailing stop alerts for that stock.
If you owned other bank and financial stocks during that time period you could have been alerted by huge spikes in volume and the shares’ prices that fell below key moving average support levels.
These trends indicators were signaling big changes, and by September 2008 Lehman Brothers had collapsed triggering a devastating meltdown in every investment asset class except U.S Treasuries.
The stock and commodities markets didn’t change course and trend higher until March 2009. The trend reversal was dramatic and followed a series of announcements about emergency stimulus programs.
It turned out to be one of the best buying opportunities in over two decades. Those who knew what to look for and believed that “the trend is your friend” rode it to outstanding profits.
Many investors have heard the old adage concerning the investment markets, “The trend is your friend”. A trend in motion, especially a powerful one, is enduring and can’t be ignored.
The trend is another name for the overall prevailing direction of an investment, a sector or a market like the stock market. Another metaphor for a trend is the tides of the ocean; there’s no stopping them.
This brings up another aphorism about the stock market. “A rising tide lifts all boats and a falling tide does the opposite”. Yes, like the boats in mooring, once the tide goes out most will go down.
Just like the tides, a bull or bear market trend always runs its course. Once it has the trend will often reverse signaling it’s time to buy, sell or short the market, a sector or individual stocks.
Macro Trend Signals
If the market has a high-volume day and the prices of the major stock indices are up, it may be due to mutual funds and institutional investors buying, which is a sign of a rising or “up” market trend.
The reverse can be true as well. A high-volume stock market day with lower prices could mean a downward trend has begun with the big players exiting the market.
It may be time for you to tighten your trailing stops or take some profits by selling a few positions.
Charts are helpful to illustrate whether a macro trend is a bullish or bearish one. Both TradeStops account types have a valuable charts tool. Click on the word “Charts” at the top of each page to use it.
A smaller macro trend can impact stock sectors and each of the companies that make up that sector.
Let’s take a look at a recent Banking Index (the “BKX”) chart as a stellar example of a stock sector that had been in a bullish, rising trend but reversed course and signaled trouble for the stock market.
The bank sector had been lagging the market for the month of August 2013. In September, the BKX rallied back up and touched its 50-day moving average (DMA) from below.
With perfect hindsight that would have been an ideal time for speculative traders to short the Banking Index sector.
The BKX moved lower after testing the 50-DMA. If it loses support at $62, it would be a quick trip down to the next support line at $59. The two red lines represent those two price support levels.
The point is that this price breakdown of the BDX from its uptrend of a few weeks earlier turned out to be a harbinger of a big reversal of the upside trend of the entire stock market.
From a technical viewpoint the move downward included a bounce upward moving the index back towards its breakdown point and the anticipated resistance of the BKX 50-DMA.
Chartists say that if the broader stock market was also extended and approaching overbought conditions at the same time, there’s probably not enough momentum to drive the BKX above that resistance level.
This often signals that both the sector trend and the market’s macro trend may soon be changing.
When the Banking Index pulled back from that last price level, it’s very likely that the broad stock market will follow. That’s exactly what happened in late September and into October 2013.
That trend shift, if confirmed by further downside market action, also creates the chance to short the market using individual stocks or ETFs. Once again TradeStops can alert you to this opportunity.
For example when you set up a trailing stop alert on a position, TradeStops lets you choose both the percentage and the position “type”…whether you are “Long” the position or “Short”.
TradeStops subscribers can go to the “Video Tutorials” section from the Home page to quickly learn how to use this feature. To learn about the advantages of TradeStops Complete consider this brief video.
Trailing alerts not only can be used to track a short position but can also to let you know that a stock you want to buy has corrected to your desired entry level.
When setting a new alert for a stock you want to buy, also set the position “type” to “Short”.
Then set an alert (using a percentage, a dollar amount or both) that tells you when the stock you want to buy has corrected to your desired price.
This may confirm a bearish “micro trend” regarding a stock that you want. The alert can also be used as a reminder that it’s often best not to try to “catch a falling knife” by buying during a down trend.
An Example of a Bullish Sector Trend
The semiconductor sector as represented by the iShares Semiconductor Fund (NASDAQ: SOXX) is a good example of a sector that was (and may still be) in a bullish trend. Look at the chart below, which illustrates what a bullish sector trend can look like.
As you can see from the chart, the semiconductor sector broke out to a new high in August. And the sector held up well during the stock market’s weakness that followed. That indicates a bullish trend.
When momentum has shifted to bullish like it had for the SOXX it often spells opportunity. Traders in this scenario could buy the sector and keep a tight trailing stop just below the red support line at $66.
With TradeStops Complete you can set multiple alerts for stocks or ETFs you want to own. This way you’ll know when a stock is still correcting and also when the trend has reversed and the stock is rising.
These alerts offer numerous insights about a stock or sector that has begun a confirmed bullish trend. To see how to add new positions and alerts with TradeStops Complete view this video tutorial.
An Investor’s Other Best Friend
If you’re a short-term investor you realize that your ability to spot trends accurately and quickly should be your #1 priority. Remember, a short-term trend is usually over in less than a few months.
Headlines, short-term charts and watching the Average Directional Index (ADX) can also be useful in indentifying both short-term and longer-term trends.
If you’re a longer-term investor it’s easy to forget that the short-term trend may influence your investment strategy.
Even if the data supports the idea that a longer-term trend is unfolding, you’ll want to be alerted to short-term trend signals that may affect your portfolio. It’s all about staying on top of the trend.
When trend-changing signals are flashing it’s time to keep your wits about you, overrule your emotions and be prepared to be patient! Your investing disciplines will be tested when trends abruptly change.
Your “other best friend” when it comes to investing is TradeStops. When you set up your trailing stop alerts you’ll eventually be receiving a friendly text message or email so you know what’s happening.
If a position has reached your trailing stop loss level, by the end of the day you’ll know the closing price, and through the discipline of receiving your carefully chosen alerts, you’ll know what to do next.
The axiom, “to be forewarned is to be forearmed” is as true as ever. Being aware of the direction of your positions and the sectors within your portfolio will help you work your plan and your exit strategy.
TradeStops Complete provides features that keep you aware and trend-savvy. With the advantages of multiple types of alerts you can quickly know when trends that may impact your portfolio are changing.
At some point during trend changes the winds of fear and euphoria will begin to blow. If you have a trend-following plan you’ll be ready to stick to your strategy and avoid reacting with your emotions.
By using trailing stop alerts combined with Volume & Moving Average alerts an investor can avoid the majority of the monetary losses that unfold during tumultuous, irrational periods.
Because many market analysts and economists believe a market meltdown similar to 2008-2009 is still possible, trend following and having TradeStops’ powerful disciplines are as important as ever.
Since the trend is an investor’s friend, an investor’s other “best friend” is TradeStops. Upgrading to TradeStops Complete will offer you access to the full range of alert types and benefits you need today