4 tools Swing Traders can use to identify market trends.

Trading System Part 1 — Market Evaluation

Which way is the market going?

Swing trading means you must be aligned with the trend. That means you need to answer these questions:

• What is the overall condition of the market?

• Is it bullish, bearish, or neutral?

• Should trades be long or short?

• Should you even be taking any trades?

This should be the first part of your trading plan.

Here are 4 tools for the job.

Moving averages:

Where are the major indexes relative to the short-term 8/21 exponential moving averages, the medium-term 10wk/50 simple moving averages, and the long-term 40wk/200 simple moving averages?

• Brian Shannon says “don’t buy stocks when they are below a declining 5 day moving average.”

• Derrick Oldensmith teaches us that the space between the 8/21 exponential moving averages is the “price equilibrium” and that we should be mindful of extension from that area.

• Scott Redler tells us that stocks need to be above the rising 8/21 EMA’s to be “special.”

Quantitative measures:

Van Tharp developed the System Quality Number and applied it to evaluate market type. He also incorporated volatility into the measure to come up with a market type is defined as Bull Quiet, Bull Volatile, Bear Volatile, etc.

Market breadth:

The percentage of stocks above 50sma/200sma is a measure of breadth and market participation. If the percentage of stocks above these moving averages is high and rising then you know many stocks are in uptrends. Conversely, a very low reading means the markets are in a bearish mode.

NYSE Bullish Percents — measure the percentage of NYSE stocks that show a “buy signal” on a point and figure chart. This can also give an idea of the breadth and how many stocks are participating in an overall market move.

Relative strength:

Finally, we can measure stocks or indicators against each other to see which ones are stronger relative to the others. Measuring the SPY vs Cash, SPY vs Bonds, SPY vs QQQ, can all give useful insight into the state of the market.

What do you see when you apply these tools? Or perhaps you have another tool for market evaluation. Leave a comment or send me an email. I’d love to know what you think.