We Can’t Forget That Trend Matters

July 23, 2014 8:18 AM

I often write about mean-reversion and look for different charts that show where the proverbial rubber-band appears to be overextended and ripe for a correction back to the mean. These types of setups have shown themselves in several markets and lead to shifts in short and intermediate trends.

However, we can’t forget that the trend is still important. The overarching direction of a market matters and is not something I ignore when reviewing a chart. That’s why the trend of the S&P ($SPY) is always the first chart I show in my Weekly Technical Market Outlook. It’s rarely changes and I often just attach a sentence or two to it. But before we can dig into the internals of an asset class or look at other interesting charts I believe it’s critical to acknowledge the prevailing trend. Those higher highs and higher lows matter!

Today we are seeing new intraday highs in the S&P and the Nasdaq 100 ($QQQ). The trend in the ‘big 3’ indices is firmly positive. While part of my analysis includes looking for turning points, we must still respect the trend itself and is something that can be extremely difficult to do at certain points.

Will the current up trend end? Of course it will! Will we be able to foretell its demise? Studies have shown that it’s unlikely. Will we continue to watch the internals of a market by charting things like breadth and momentum to understand its ‘health’? Absolutely. But we must allow the current up trend to be innocent until proven guilty and at this point the judge has yet to slam his hammer down convicting this bull market to death.


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