The Trend Is Still Our Friend

 | Jan 27, 2013 | 12:00 PM EST  | Comments
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The first big week of earnings season is finished, on a shortened week, and the market is still standing tall. The S&P 500 just finished the week above 1500 -- a significant milestone, as it hadn't closed above that level since 2007. The Dow, meanwhile, is within a stone's throw of a new all-time high.

S&P 500
Source: StockCharts.com

Yet the skeptics abound. I understand how difficult it is to climb on board a market that has broken out, as our tendencies are to "buy low, sell high." When it comes to trading, the worst feeling is buying when everyone else is selling. But an even worse feeling is missing a great run by failing to recognize that it is OK to buy. These signals don't show often, but they tend to be very clear -- if you are looking them.

A couple weeks ago, I discussed a concept called embedded stochastics that is repeatedly cited by famed technician Ira Epstein. This indicator points to conditions that could be favorable either for bulls or for bears, showing when it's time to sell the rips or buy the dips. Obviously the current condition favors the latter. Folks have hated a great deal about this January rally -- though doesn't the crowd hate all of these as they completely miss them?

Of course, we should look at some facts before we pass judgment, and I am not overly bullish or "giddy" about the market. I have been selling many things of late, and have added cautiously, only when I see that the chart or technicals fitting the right profile.

In the meantime, volume has expanded this month as many have tried to jump on board. Shorts have been forced to cover their positions, as well, as evidenced by the decline in the recent record-high short interest. Price action has trumped news, and we never saw a fiscal-cliff-triggered market collapse. Earnings have been rather decent so far, and even a disappointment from Apple (AAPL) could not derail the market. This is a strong indication of a less correlated market.

Sentiment continues to show complacency, as seen in the CBOE Volatility Index (VIX) and some surveys, and I know that'll change at some point. But the trend is your friend until it is not. Will I time it perfectly when the trend shifts? Maybe not, but it isn't my game to play tops or bottoms, unless I get lucky.

To a market technician focused on charts who's interpreting the condition of the markets, there have been no surprises. That's not to say it has been easy, but you'll be capable of cleaner decision-making if you keep focused on the market in front of you, rather than the noise of the media, pundits and opinions. The speed of moves can generally be an issue, but let us remember: Trading is not a game of striving to be perfect. It's doing the best you can in order to make yours and live to fight another day.

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