The Major Trend

Now finally we can get to the marquee moment, for your most
important job on Sundays is to determine whether the major trend
of the market is up or down—and at the same time you must think
about what could change your mind. With any luck, you will come
to the same conclusion for 250 weeks in a row or more, but as a
day trader it is still something you must consider and decide upon.
What makes the big trend? As equity investors, we are participating
in an auction market, and that simply means that buyers are pitted
against sellers. For the value of the market to go up, buyers need
to find a way to force sellers to hand over their inventory, which is
shares of stock. They do this by offering them an increasing amount
of money, until finally the holder hands over the shares. This is why
the starts of bull markets are characterized by such intensity. Sellers
need to be begged to hand over their shares, and buyers must
bid ever higher and more intensively to make them do it.
This battle over a limited number of shares is at the heart of the
market. In a bull trend, we start with the premise that buyers must
be more anxious to buy than the sellers are to sell. After we have
determined that this is true, then the question becomes: How muchTen Percent
Solution
Fortunately, there is one more statistical signature in Lowry’s bag
of analytical tricks to help us trade and make money from countertrend
declines amid a bull market. What you need to observe is
the percentage of NYSE stocks trading above their 10-day moving
average, as this is helpful in measuring short-term extremes of panic
behavior. According to Lowry’s, when the percentage of stocks trading
above their 10-day moving averages drops below 10 percent
amid a broadly uptrending market, this is a panic situation that cries
out for you to get your buying groove on. It often coincides with an
isolated 90 percent downside day, so there are lot of sparks flying
that might distract your attention.
A recent example emerged not long after the stock market began
to drop on February 27, 2007. The 10-day percentage indicator
dropped from a peak of 84.6 percent in February to a low of 3.7 per-Poor Timing
Method: Earnings Growth Forecasts
This may be a good time to note a timing methodology that makes
a lot of sense on the surface but doesn’t work at all, and that is trying
to time the market based on earnings growth projections. This
is because there is a real disconnect between earnings growth and
the stock market.
What gives? I know this goes against the conventional wisdom,
but hear me out. Ned Davis Research says that the disconnect
between earnings and stock results has occurred because earnings
don’t actually drive broad-market results—and never have.The same thing happened in
the spring of 2007, as you can see
on the same chart. The decline in U.S. markets started with a jolt
from the blue in late February as a result of a plunge in the Chinese
stock market and then continued into early March toward the
40-week low. The time to buy heavily into the plunge, as you can
see, was when the McClellan Oscillator fell to –200. The oscillator
ultimately fell to –300, but that’s OK. After it fell below –250
during the time frame in which you were expecting a major 40-
week cycle low, you should just have added to your new, leveraged
holdings with confidence.
Not too much later, in both cases, the market reversed, and you
were on your way to a big gain. But there was much more to both
cases than a quick profit because the vacuum created by selling led
to a tornado of bargain hunting and fevered buying. So many stocks
of all sizes and sectors were picked up so rapidly by voracious insti-
260
250
240
230
220
210
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
242890
194312
145734
97156
×100The first pocket pivot is off both the 10‐day and 200‐day moving averages. The
two
days after this pocket pivot could be considered buyable as the stock is breaking
out
of a sideways consolidation/base. The two Xs that follow are both extended from the
10‐day moving average and above the buyable gap‐up day.
2. The second pocket pivot is off the 50‐day moving average after a constructive
consolidation
into the 50‐day moving average. Note how the price action does not suddenly
run into the 50‐day moving average but has a subtle rounding‐out effect.
3. Part of the third pocket pivot is cautionary since it is extended relative to
the 50‐day
moving average because the stock bounced straight up from its 50‐day moving
average.
The two Xs that follow are under the 50‐day moving average.
4. The fourth pocket pivot is up through the 50‐day moving average after a
rounding‐out
pattern is formed under the 50‐day moving average. The X that follows is extended
from the 10‐day moving average.
5. The fifth pocket pivot is a base‐breakout, so while it is extended from the 10‐
day
moving average, it is not extended relative to the overall base.
6. The sixth pocket pivot is also a base‐breakout and off the 10‐day moving
average.
The first, third, and fourth Xs that follow are extended relative to the 10‐day
moving
average. The second X that follows comes after a relatively sharp drop in the
stock,
and so it should not be bought until it closes at or above its 10‐day moving
average.
7. The seventh pocket pivot is cautionary since it is somewhat extended from the
10‐day moving average and comes after relatively choppy price action, even though
it is rounded‐out price action.The first X prior to the first pocket pivot is too
soon in the pattern, since it is just the
stock’s third day of trade since it went public. The second X occurs after a
downtrend
and closes under the 10‐day moving average. That this stock has only been trading
for a few weeks increases the risk in buying here. The first pocket pivot occurs
off
the 10‐day moving average, after the stock has had a chance to round out its basing
pattern, trading tight for three weeks. The next two Xs are extended from the 10‐
day
moving average.
2. The second pocket pivot is a buyable gap‐up, which is discussed in the next
chapter.
It occurs after a steep pullback, which is not unusual for a volatile IPO such as
this one.
3. The third pocket pivot occurs off the 50‐day moving average on the day it does
its
secondary offering. Notice in the days leading up to the third pocket pivot how the
stock got continuous support as it tested its 50‐day moving average. The next two
Xs
are extended from the 10‐day moving average. The window of opportunity to buy is
often just on the day of the pocket pivot.
4. The fourth pocket pivot retests, breaks to new highs intraday, then has a
reasonably
strong close. Such upside reversal patterns are particularly favorable. The X that
follows
is extended from the 10‐day moving average.