Identifying Market Trends in its Simplest Form

At the heart of technical analysis is the so-called “trend.” You can simplify the market trend into three categories: up, down, and sideways. They can further be categorized by time:

  • primary – months or years
  • secondary/intermediate – weeks or months
  • short-term – days
  • intraday – minutes or hours

The trend length of interest is determined by the time horizon of the trader (intraday, daily, etc); however the shorter and longer timeframes surrounding the length of interest should not be ignored when trading. In short, if you are looking for a trade to hold for multiple days, but less then a week or so, it still pays to check out the hourly and weekly time-frames.

Identifying the trend:

It’s easy to know if a stock is moving up or moving down, but determining the true trend and its strength takes a little more information then just knowing the price or percentage changes of the stock. In its purest form, one way to determine the strength of the trend is to look at how the moving averages are lined up. A strong uptrend will have the shorter time frame moving averages on top and work its way down in an orderly fashion. They will also all have an upward slope to them. See the example below with this daily chart of NKE. Screen Shot 2014-11-20 at 4.21.50 PM

The opposite is true for a downtrend. A strong downtrend will have the longer time frame moving averages on top with the shorter ones beneath it. Furthermore, the moving averages will be sloping down as in the daily chart of DNR displayed below.

Screen Shot 2014-11-20 at 2.46.17 PM

The two examples above are the cleanest trends you can identify. More often then not even in strong trending stocks there will be some vacillation within the shorter term moving averages (i.e. the 5, 10 and 20 day). For example, in the chart below GS is in an uptrend when you look at the weekly chart, but on the daily chart the trend is less clear and possibly in transition. Screen Shot 2014-11-20 at 4.30.28 PM

Screen Shot 2014-11-20 at 3.00.02 PM

Stay tuned for more education on trends and how to identify changing trends.

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