Trading the line of least resistance

A lot of the people who were profitable in 2008 became unstuck the following year. They seemed to get in their head that, once the markets started rallying, they were anticipating a further, more pronounced price drop.

In the summer of 2009, they got their chance. There were numerous trading blogs of the day talking about a 'head and shoulders' pattern which had formed on the indices between May and June, and they were going to use this as a trigger to go short the market, and really make a killing.

The futility of predictions

Yesterday I had the misfortune to be copied in on an Facebook thread discussing an impending stock market crash, together with an invitation to join the group who were discussing it. 

This post had more than 200 comments from a number of traders covering the intricacies of the current economic climate and their opinions on this - most of which I didn't understand. 

Idly browsing through those comments wasted ten minutes of my life that I couldn't get back. But it did give me the inspiration for this post.

The rules of the game haven't changed

I started getting involved in trading back in 2003, and didn't get into trend following until 2006. As a result, I missed the huge trends (both up and down) from the dot.com bubble around the millennium.

While thinking idly back to those times, which are now getting on for 20 years ago (yikes!), I began pondering about how things have changed in the intervening period.

Back then, Facebook and Twitter didn't exist. The dot.com bubble sprang from something new to the masses called the internet. Mobile phones were nowhere near as common as they are today.

How on earth did we survive?

And that got me thinking, from a trading and historical viewpoint.

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.

What's there not to like?

It is not often that I post up a potential set up before it decides whether to trigger an entry or not. It is even rarer for me to trade one of the major indices. However, I was struck by the current set up on the chart of the Dow (see below). The S&P and Nasdaq are also showing similar characteristics and price structure.

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 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.