A couple of messy charts

If you are inclined to trade the indices, you may be familiar with the charts of the UK FTSE and the Australian ASX, which show a distinct lack of direction in recent months:

Having the freedom to switch direction - riding the bucking bronco

One of the skills an aspiring trend follower has to develop is being able to accept when he is wrong, and to switch directions if necessary. He attempts to ensure that his beliefs or opinions about what may (or may not) happen to a stock, index or instrument do not impact on his ability to follow the entry or exit signals presented to him.

A broader perspective on 2015

So that's another year come and gone - and one of the weirdest from a trading perspective. I've seen one or two people refer to 2015 as 'The Year of the Failed Breakout', and I certainly wouldn't disagree with that!

I can remember that moving from 2010 to 2011 seemingly changed the state of the markets from a trending to a non-trending state - certainly on my preferred timeframe. It was literally like someone had flicked a switched on 01 January.

These kind of changes can occur at any time, and when they do, we never know how long the new market state will last for. And, in the case of the markets switching from a non-trending to a trending state, we do not know what the magnitude of the new trend will be - or initially even the direction it will take.

That was the week that was

Last week will have been an educational experience for many people, particularly those who have started trading since 2008.

Since the major market averages bottomed out in early 2009, they have generally been in a steady uptrend. There have been one or two short periods where there has been some downside volatility (August 2011 and early October 2014 spring to mind) but they were small beer to what happened over the last few sessions.

Then again, we still need to put this into perspective, particularly with people calling the beginning of the week a crash or even 'Black Monday'. Last Monday, the FTSE and DAX fell more than 5%, and the Dow fell just over 3.5%, although intra-day it fell a lot more. Back in 2008, the Dow fell more than 7% on more than one occasion.  And further back in 1987, the Dow fell more than 22% in on the real 'Black Monday' - now that's a crash!

Price and volatility contraction - the coiling of a spring

According to an article on CNBC this week, the Dow is on course to form its tightest price range (in percentage terms) in the first half of any year since its inception back in 1896.

Price has currently remained within a range of just over 6% so far within 2015. Sure, there have been some sharp moves on a intra-day basis, or over the course of a day or two, but these have all been contained within those basic price boundaries.

An argument against market direction determining your bias

I've been pondering further the question of letting the general market direction determine your trading bias, against focusing solely on the price action of stocks that you are looking to trade.

Regular readers of the blog will know that I made the decision late last year to place less reliance on what the major market averages were doing, as I was not looking to trade them. I look to trade individual stocks based on what their own price action is telling me.

Fiscal cliff and other market unknowns

The buzz words or phrase that everyone is referring to at the moment is 'Fiscal Cliff', and the possible impact it will have on the US economy, as well as the markets.

As it happens, the US indices have performed an abrupt about turn over the last few sessions of the year, and are now on short signals. Perhaps unsurprisingly, the major European indices are showing greater strength, but are also being dragged down in concert.

The rally keeps on going

The charts below show that both the FTSE and DAX have now made marginal new highs. The US indices somewhat lag (shown the S&P below) but have also made new highs off of the November lows. In all cases there has been a sustained rally over the last month or so, with very few 'down' days in that period.

Looking at the bigger picture

It's always worth zooming out on a chart every once in a while to look at the historical price movements and trends on an instrument, and to place any current trend into context.

I've shown some charts below of interest (using monthly candles). What is interesting here is how certain markets have been in a non-trending phase the last couple of years compared to the nice trends in the preceding decade. This explains the difficulty that trend following systems have had generating profits over the last year or two. In those instruments that HAVE trended, the movements have been far more volatile, which again makes it more difficult to generate profits.

A muddled picture

As the various charts shown below highlight, there has been a complete reversal in direction in many of the major instruments that I follow. The major indices, commodities, and forex pairs I keep track of (but do not trade) as they determine in which direction the bias for my individual stock positions should be.

Trends vs value

Trend following is basically a timing mechanism that tells you when to go long or short on a particular market, as well as when to exit any existing positions. Some people do not like to trade unless they have an understanding of the reasons behind a move in a particular market, relying on some form of fundamental analysis for this. The danger with this is failing to heed the warning signals when an existing trend finishes and shows signs of reversing.

FTSE and DAX trying to follow the US

These charts again show why I do not trade indices (due to their inherent volatility), but simply use them to determine my directional bias when selecting individual stocks to trade. Both FTSE and the German DAX have moved from near new-highs down towards new lows in a matter of a few days. As previously mentioned, the US indices, gold and silver, oil and EUR/USD are already on a short signal - these two indices have stayed stronger for longer but are now falling into line.

Learning the skills to be a trend follower

I had an interesting conversation today with one of the other traders in the mentoring programme, and the current state of the markets. Currently we are in the position whereby the US indices are on a short signal, yet this has not been confirmed by either the FTSE or the DAX, which are both showing higher relative strength, considering the still-fragile state of the Eurozone.

Interesting times

Despite the markets' best efforts, the downtrend in the US indices appears intact. Over the last few days EUR/USD (chart below) has also joined the party and given a short signal. The key drivers or catalyst as to the price direction in an index, currency or a stock are an irrelevance to a true trend trader. Price is all that matters.

Market indecision

Both the FTSE and the German DAX are showing strength after giving intra-day short signals a few sessions ago. The pattern of lower highs and lower lows is still intact, so therefore the benefit of the doubt is given to the short signals, which are definitely in place on the major US indices (charts of the FTSE, DAX and Nasdaq below).

Indices about turn?

I've shown below the current charts for the FTSE and the German DAX which highlight the sharp move downwards this week so far.

Trends tend to persist

Once a trend takes hold, it will continue even if the general market itself reverses trend. It is always advisable to continue to hold your positions until such point in time that you get an exit signal for your position.

Indices still on a bumpy journey north?

The charts here show that the FTSE and DAX are still in an uptrend, with a pattern of higher highs and higher lows starting to form.

A bumpy ride

Despite the downward move in the general market this week, the charts show that the uptrend, while a bit bumpy, is still intact on the indices. I've shown the S&P and the FTSE below.

Volatility and the markets

There are basically 4 combinations of states that the markets can be operating in:

1. They are either trending or non-trending;
2. They are either quiet or volatile.

Trend followers prefer quiet markets that also trend. Day traders prefer volatility. Swing traders prefer volatile trending markets to catch swings from a couple of days to a couple of weeks.