Stock Market Mega-Trends August 2008

By: Hans_Wagner

If you want to learn to invest, one of the best ways is to follow the trend. Following the trend is a proven way to beat the market and grow your stock portfolio. Basic technical analysis provides the tools to identify and follow the trends of the market as determined by the S&P 500.

It is best to begin with the big picture in mind and then work our way down to weekly and then daily views of the charts. You will notice that the chart and the value of the indicators change as we move from a monthly to a weekly and then a daily chart.

Let us start with the long-term view of the S&P 500. The Relative Strength Index (RSI) is a good indicator of the cyclical bull and bear markets. In addition, the 78-week Exponential Moving Average (EMA) acts as support in a bull market and resistance in a bear market.

In January, we fell into a bear market as the RSI dropped below 50. The index fell through the rising trend line and the 78-week exponential moving average and MACD crossed below zero. This is consistent with the fundamentals of a weakening economy, and a recession. It is best to remain nimble during times like this.

The first support level looks to be just above the 1,200 level. We briefly tested this support level before rebounding. The 78-week exponential moving average remains as resistance.

The weekly S&P 500 below was in a bullish ascending triangle that broke to the down side. This was another important sign the bull market was over and the bear market was beginning.

More recently, the move up that started in March turned back at the 50-week moving average. The market pulled back to support at the 1,230 area.

RSI below 50 indicates a downtrend. MACD fell through the 9-week moving average, a sell sign. The Slow Stochastic has risen through 20, a buy sign, though this can be early.

If we get a rebound from here, there is resistance at the 50-week moving average and the descending trend line. Just keep in mind the overall trend is still down, so any move up is temporary and likely to only last a few weeks.

The daily S&P 500 chart below shows a small ascending triangle forming (dotted lines). This is a bullish formation indicating we are more likely to see a move up soon. If we get a move up, look for resistance at the descending trend line and the 200 simple and exponential moving averages.

RSI is below 50 indicating a downtrend, though it could turn up. The MACD turned up through the 9-day moving average, a buy sign. The Slow Stochastic signaled a buy when it moved up through 20.

In bear markets, it is best to be nimble and/or use risk protection such as trailing stops, protective put options and even covered call options. Of course, you can go short or use any of the short Exchange Traded Funds (ETFs).

Given this perspective, it is important to have your portfolio positioned for a bear market. I expect the market to rebound from this support level. However, any move up will only last a few weeks before turning back down. Any rebounds are good places to add more down side protection by using short Exchange Traded Funds (ETF), put options or covered calls. Of course, you can also sell long positions that can be bought back after they have fallen further.

While it is tempting to buy when the market falls, a better strategy is to be sure the market has formed a base before committing your capital. Most likely the prices of many companies will be even lower. That does not mean you cannot buy high quality companies that are in sectors that are trending up. Just keep in mind, Warren Buffett's first rule of investing is to not loose money. His second rule: Do not forget the first one.

By Hans Wagner
tradingonlinemarkets.com

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at http://www.tradingonlinemarkets.com/

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