4 Warning Signs of a Change in Trend

 | Aug 10, 2017 | 12:32 PM EDT
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I have been preaching for quite a while that the best way to navigate the market isn't to predict market tops based on news and fundamentals but to react to the price action as it shifts. That is much easier in theory than in practice. Price action is never completely clear and this market has been notorious for bouncing back when it has looked to be on the brink of disaster.

The main things I'm looking for to signal a change in trend are the following:

  1. Failed bounces. All downtrends are a function of failed bounces that produce lower lows. That is what corrections are all about. Instead of buying dips, traders focus on selling strength. Distrust of bounces is a key element of a change in trend.
  2. Weak closes. Good markets close strong, bad markets close weak. You don't have it that much these days, but the conventional belief is that the "smart money" makes its move in the final hour of trading while the dumb money acts at the open. I'm not sure who is smart and dumb these days, but a pattern of weak closes is a pretty good indication that the market is in a downtrend.
  3. Lack of leadership. There are almost always a few pockets of strength in every market, but strong markets have good leadership from a key sector like technology, FAANG names, oil or biotechnology. In poor markets, it's precious metals, pharmaceuticals and defensive plays that lead.
  4. Lack of setups. If I can't find good setups, that is a great reason not to buy. That has been the biggest warning sign since earnings season started. There simply have not been very many good reactions to earnings. I see almost nothing that is setup for breakouts right now. There may be some bottom-fishing opportunities, but there just isn't much to buy right now.

Based on those four factors, I'm concerned that this may be the start of something more than just a brief pause. I've already made defensive moves and will be making more if this action continues.



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