Sunday, October 14, 2012

A change of trend

The markets are now giving conflicting signals, following the price action over the last few weeks. The Nasdaq appears to be the weakest index, with the most pronounced downtrend signal given by any major index early last week. The Dow went from hitting new intra-day highs to giving a short signal in the space of four sessions. The strongest index remains the FTSE, which remains some way off triggering such a signal.

When there is a change in trend you would normally expect to be stopped out of any long position in stocks, and this is certainly what has happended in my own portfolio. There are some position that have held up well, however, with their own uptend alive and kicking. How long this remains the case is yet to be seen, but I will not cut these positions short. UK stock D S Smith (chart below) is one that I have been holding for a while now, and broke out again last week. This has held up well during the pullback in the general market, exhibiting good relative strength.

As has been mentioned on other recent posts, dealing with a change of trend is the most difficult period for a trend follower. This entials a loss of open profits in existing positions and/or being stopped out of trades that were in the direction of the market trend. As a result you should be lightly invested when a new trend signal is given, allowing you to opportunity to open new positions in the direction of the new trend.

As with all trends, you can never tell which ones will be short-lived and be nothing more than failed signals, or which ones will take off and generate decent trends and opportuntities for profits over the following weeks or maybe months. All you can do is use strict risk controls, place your bets and see what happens.

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