Is the Market Trend Changing? How I Use Chaikin Analytics to Forecast Market Direction and Pick My Strategies

12/15/2013

Before each trading week, I like to get a sense for market conditions and develop a forecast for where the market is likely headed over the short, intermediate and long term. This really helps my trading. While I prefer trend following strategies over any other type of trading, sometimes the market won't reward this strategy. It's important to have a plan for up, down and sideways markets. Chaikin Analytics and a couple of charts are the only tools I need. Here's my 6 step process.

1. I ANALYZE THE LONG TERM TIME FRAME - MONTHS TO YEARS - TO CONFIRM WHETHER IT'S A BULL OR BEAR MARKET.

The Bull is Still Running. But She May Need to Catch Her Breath.

S&P 500 is still making a series of higher highs and higher lows in the weekly time-frame.
The 10 week Exponential Moving Average is above the 40 week EMA and both averages are pointing up, with the faster moving average accelerating away from the slower MA. These are signs of a strong bull market.
Price has fallen to the 10 week EMA, and a cross below it will change my long term posture to Mildly Bullish from Extremely Bullish.
The market appears to have made a short term top and could be rolling over. I look at other time frames to confirm. Technicians will note that last week's hanging man candle was confirmed this week with a lower closing price than last week's intra-week low. This suggests further possible downside for stocks, but not necessarily a change in the long term trend.
The trend remains bullish, but the market can retrace significantly before bouncing (perhaps down to 1650). As long as a higher low is made, the bullish trend remains in tact.
How will this impact my trading? Use Chaikin Analytics Portfolio Health Check to make sure my holdings are as strong as possible. I'll be looking to protect profits on stocks that have appreciated significantly by moving up stops, selling covered calls or buying collars. My criteria for entering a trend trade will be much more stringent. I'm more likely to trade in a shorter time-frame a cut my risk in half.

2. Intermediate Time Frame (Weeks to Months)
The Bullish Trend Is Breaking Down. We're in a Sideways Market With Further Downside Potential

While the 10 Day EMA remains bullishly above 40 Day EMA, price has fallen below both. A bearish cross of the two averages would be a very bearish development.
After making a series of equal lows and highs, the market appears to have broken a significant intermediate term support line.
Fears of the Fed announcement may push prices down further Monday - Wednesday morning, with a possible snap back relief rally after the announcement (assuming no unexpected fed curve ball).
How it affects my trading: I will find very bearish or very bullish rated stocks according to Chaikin Analytics that have highly liquid options and trade directionally when price is both oversold/overbought and touching an outer volatility bands. I prefer selling out-of-the-money call and put spreads at support or resistance if option premium is rewarding enough relative to the risk, but neutral strategies like calendars and iron condors come into play here. I'm unlikely to initiate bullish trend trades in these market conditions. I also do not believe that longer term short trades are appropriate...at least not yet.

3. Short Term Time Frame: Days to Weeks

Very Bearish But Oversold

The hourly chart shows a break of support at around 1782 on the S&P 500. The 10 period (green) exponential moving average is below 40 period moving average, and both are pointing down and price is below them. Technicians may notice a broken head & shoulders neckline, suggesting a possible 25 point additional downside move.

The market could experience a relief rally after the Fed announcement Wednesday. We could break to the upside, but my forecast is that the relief rally will fail and the market will fall further (See my Chaikin Bull Bear Power Gauge Analysis next) So I will be ready to pull the trigger on some bearish trades. But only short term ones.

I'll use the moving averages in multiple time-frames to trigger a change in posture. If the 10 hour EMA crosses above the 40 hour EMA AND the 10 Day EMA remains above the 40 Day EMA, then it's likely the market bull trend will resume.

5. My Secret Weapon: The Power Gauge Bull - Bear Ratio Trend Confirms Recent Downward Price Action

The Chaikin Analytics Power Gauge Bull:Bear ratio has fallen below 1 for the first time this Fall.

Ninety S&P 500 stocks have a BULLISH or VERY BULLISH Power Gauge rating are outweighed by 110 BEARISH or VERY BEARISH rated equities.
Fundamentals drive the Power Gauge ratings of each stock in the S&P 500. So weakening aggregate Power Gauge ratings confirm technical damage to the market's bull trend this week.

6. Sector Strength: Healthcare, Tech, Financials and Industrials

I apply The Power Gauge Bull Bear Ratio to each major sector ETF, then rank them on a relative basis. This helps me focus only on the sectors likely to outperform the market over the never 3- 6 months.

Healthcare, Tech, Financials and Industrials are the ones with most bullish potential. But ratios are much lower than they were a few weeks ago.

For bullish trades: I will look for the strongest industry groups within each sector, then find stocks with the highest Power Gauge rating within those industry groups. I'll pull the trigger when the stocks are oversold and at support. Until the market starts trending, I will trade a shorter time frame, with a price target and put on half my normal risk for directional trades.
We can look at weak sectors, weak industry groups, Very Bearish stocks at resistance and oversold to trade bearishly over short time frames. Same deal: price targets and half the normal risk.