Stock Market Trends

Market Trend Analysis

Determining stock market trends is all about time frames (fractals). Each time frame, whether we're talking about a 1 minute chart, daily chart, weekly chart, etc. has it's own unique trend.

You might be trading off a 5 minute stock chart which appears to be trending up, according to one market trend analysis method and at the same time be trending down on many other time frames.

Honestly, the subject of stock market trends and which time frames to choose for market timing and direction is very subjective and no method is anywhere near perfect.

As with so many other concepts of trading, some days certain trend analysis methods will work great and some days they'll let you down.

But, you have to have some kind of trading plan to follow during the day, otherwise you'll just be lost and confused and not know which direction you should be trading and that's never a good thing.

Some stock traders like to trade both long and short throughout any given day depending on their strategies. Others, like me, like to know before they make their first trade in the morning and for possibly the whole day, what direction of trade they're looking for: Long or Short.

That way they can focus on particular stock sorts, scans and/or strategies, and follow with reasonable discipline a well thought out trading plan and hopefully minimize any confusion during the trading session.

Knowing in advance whether to look for long or short trading opportunities and sticking with that the whole day (or at least for the morning session) is certainly too limited for some traders. Some much prefer to determine stock market trends on the fly during the day and have a multitude of trades in both directions.

If you're inclined to trading in a simpler manner and think you might be comfortable trading in only one direction throughout the day after choosing a method of market trend analysis, then read further and I'll present three very easy ways to suggest which direction to take for the day.

Remember, stock market trend analysis is time frame dependent and very subjective as well. Ask a hundred traders which direction the trend is on a daily chart of the S&P 500, and you'll probably get half up and half down. That's what makes a market. Different opinions on the same exact location of price relative to it's time fractal.

What the three following simple trend analysis methods attempt to do, is give a slight edge above 50% that you'll be taking trades in a direction that is better than a coin flip.

They also give you part of a trading plan (trade direction) for your day. I think having a plan before starting to trade and sticking to it is very important to long term success in day trading and knowing which direction to concentrate on during the day can help you focus. But again, to each his own....limiting direction to long or short for the day is not for all.
The following stock market trend analysis methods will not necessarily be in agreement with each other, nor do they need to be. The concept here, is to try to have a slight edge on the directional momentum for break out trades, especially during the morning session when breakouts tend to be extra strong. On days when these trades are against the will of the market, well then those trades are capped off very tightly and efficiently.

Obviously, not all stocks are going to follow the S&P 500's trend and some are going to let you down even though you catch a perfect long entry on stock while the S&P 500 is on a screaming up trend. There's always going to be laggards and slackers. Just cut them off and move on.

The rest of this article assumes you are interested in trading component stocks of the S&P 500. If you'd rather trade component stocks of the NASDAQ 100, then you could apply the following methods on that index or the ETF QQQQ.


WEEKLY CHART - S&P 500 - TRENDLINES

The first trend analysis method utilizes trendlines on a weekly chart of the S&P 500 (or ETF SPY). If you're confident of your trendline drawing abilities, you can use them with the following rules:

  • If the current price of the bar is above an up trendline OR down trendline & previous bar's high -- Trade only Longs
  • If the current price of the bar is below a down trendline OR up trendline & previous bar's low -- Trade only Shorts
  • In the case of a Lateral (yellow shaded region) it's best to stick with the prevailing trend (which in this case is up) until price breaks down through the lateral.

stock market trends on weekly chart of S&P 500


WEEKLY CHART - S&P 500 - 50SMA

This next method leaves no room for interpretation, but reacts very slowly....which is not always a bad thing, as you'll soon see. Simply place a 50 period simple moving average on a weekly chart of the S&P 500.

Simple rules:

  • If price is above the 50 sma -- Trade only Longs
  • If price is below the 50 sma AND the average is falling -- Trade only Shorts
  • Requiring the average to be falling gives a slight overweight to Longs which is reasonable due to the overall long term upward trend of the stock market.

    This method has the advantage of keeping you trading long during a good portion of bull markets and short during a bear markets. As you can see in the chart below, a trader following the above rules would continue to be trading on the long-side since mid-July 2009 when price went above the average. The average turned up in mid-September 2009 (blue arrow) and although price went momentarily below the average, trades would still be taken in the long direction even through today using this method.

    So although slow, not bad for determining bull and bear markets. Stock market trends are generally easier to spot on a weekly fractal then on a daily fractal.



    market trend analysis through moving averages


    DAILY CHART - S&P 500 - 10SMA

    If you think the weekly chart and a 50sma are too slow to respond to current market conditions then consider this method.

    • If price is trading above the 10sma -- Trade only Longs
    • If price is trading below the 10sma -- Trade only Shorts

    It's possible though, using this method you might be required to shift direction during a single trading session since price can very easily move above or below the average during the day. No big deal to most, but could be slightly confusing to a novice. Although this method of stock market trend analysis is much quicker to respond to directional changes in the index, it is still not without it's faults.

    Notice in the white oval (below) two consecutive trading sessions. One being a good day for shorts and one good for longs. This method would've had you trading shorts and most likely getting stopped out of most trades on that tall black candle day. But, overall it's done a good job of demanding mostly long trades since December 2010.

    market trend on a daily chart of S&P 500

    Determining overall stock market trends using indexes can help give you a slight edge when trading components of that index. I'm convinced that it is better than a coin toss and in the stock market, that's always good thing.