(click image to enlarge chart)
When I look at the multitrend configuration in Stops and Targets, the trend that is on top in a macro bearish market is the controlling trend—and the trend that is on the bottom in a macro bullish market is the controlling trend.
As I type, the intermediate trend is on top and bearish–and price is below the long-term primary trend, which is also now bearish under 1079.50
So long as price stays below that long-term primary trend line, this is a fully bearish market and there is absolutely no good reason to be long under those circumstances (in my opinion).
If price rallies from beneath to cross back above the long-term primary trend line, then the macro configuration would change back to bullish, with the long-term primary trend reasserting control. As I mentioned yesterday, the long-term trend has more relative strength than the intermediate and so it will have reasserted dominance IF price rallies and remains above that line.
One of the most common tactical trading mistakes is to allow a losing trade to be drug across a primary trend line into ‘hold and hope’ territory—or to initiate low-odds countertrend trades against the prevailing macro trend.
We saw the permabears repeatedly shorting a persistent uptrend from March of 2009 all the way to the recent swing top on 4/26/10, and many were severely damaged or ruined by ignoring the primary trends and making the same fundamental mistake over and over again…
There is absolutely no tactical difference on the other side of the trend in a bear market by constantly buying in a down-trending market against the prevailing trend!
It should come as little surprise that almost no permabears were properly positioned when the dam finally broke at the recent swing top. They were exhausted, most had capitulated, and some had become bullish.
Stops and Targets, on the other hand, remained patiently bullish until the swing high was detected on the very day when a top spotter signal was generated, followed in short order by confirmation and a flipping of trends.
Sadly, most retail traders are condemned to do the same dumb things over and over until they eventually run out of money, only to have their place taken by the next crop of ‘suckers’ whose moves are so easily predictable by the pros using sophisticated psychological models and mathematical probabilities.
If I could impart just one thing to anyone reading my posts it would be to always respect the primary trend structure and to ONLY take trades that agree with the direction of the prevailing macro trend. It is extremely difficult for an individual trader to stay on top of the always evolving macro trending structures—but we now have a great strategy tool in Stops and Targets that does all those calculations for us, and if properly followed, it can help to keep us on the right side of the market in our individual equity trades and out of the majority of major trouble.
The ‘right’ trade here under 1079 is IT short from 1116 with trailing profit stops set (and nicely profitable) while awaiting the outcome of this test of long-term support. Those traders are currently on the right side of the trend pressure and riding the momentum with little to no risk on a properly initiated trade.
If it crosses back above the LT primary trend line, then IT bears can cash in and look to switch to the other side after a well-played hand. However, if it doesn’t rally here, as many seem to expect, then the folks presently holding countertrend longs at a loss are running a real risk of being swept away on a trend breakout. Those IT bears will be waiting for the capitulation moment to take the other side of panicked countertrend traders willing to exit at any price just to be free of the mounting pressure.
There is absolutely no difference between those who continually shorted the bull market when all trends were up and those who now buy in a bear market when all trends are down. Similar outcomes may be expected over time. Those ignorant of history are doomed to repeat it.
When a long-term trending bear market is underway, it is highly unlikely that any subsequent daily bar will close above the long-term primary trend line for the duration of that bear move. A close above that line would be a bearish failure—but so long as price remains below, this is a new long-term bear market and all trends remain down below 1079.50.
As I mentioned yesterday…1079 is the new bull/bear line for all timeframes. IT bears are pushing here to see if the LT support can crack and if it does, the downside can come quickly with the support trendlines below as the likely next targets and then possibly followed by a test of the bottom of the spotter trend channel. A rally back above 1079 changes things as explained above—just as the reversal below 1116 changed things after the gap into a fully bullish market that failed.