The Trend is Your Friend, But What is The Trend?

One of the oldest cliché or sayings in the investing world, "The trend is your friend" is also one of the easiest rules to follow for the average investor.  Perhaps Sir Isaac Newton put it best with his First Law of Motion which states 

"a body in motion at a constant velocity will remain in motion in a straight line unless acted upon by an outside force."

Sure, I'm simplifying the situation, but the simple fact of the matter is that stocks that are in a strong trend tend to remain that way until an "opposing force" acts upon them.

So, it's easy enough to look at a chart to gauge if a stock is in a strong trend higher or lower but being the numbers guy that I am I prefer to quantify the "trend".  This, of course, gives out quantified models the ability to search through more than 8,000 stocks each day to find stocks that are in a trend, either bullish or bearish.

Our historical testing has resulted in an algorithm that is able to detect a stock's trend by measuring the slope of the 50-day moving average over certain periods of time to tell whether a stock is trending higher.

Of course, I took this data one step further to test the effectiveness of the "trend is your friend" rule and found the following;

  • When a stock is trending higher, as measured by the trend of the 50-day, it has a 2:1 probability of closing HIGHER the next day, period.
  • Conversely, there is a 2:1 chance that a stock will close LOWER the next day when its 50-day moving average is indicating that it is trending lower.

It really is that simple.  

Given this, every long-term investor and short-term trader should always maintain an eye on a stock's trend-critical 50-day moving average.  It will almost always identify a turning point for the stock that will affect its future performance.

With this in mind, let's apply my 50-day moving average rule to the market to break down the market from 5,000 feet.

Currently, the S&P 500 (SPY), Nasdaq 100 (QQQ), and Russell 2000 (IWM) ETFs are trading above their bullish trending 50-day moving averages with some room for a potential "healthy correction."

Tomorrow we'll tear down the trends of these three important ETFs along with the short-term trader's outlook on each

The post The Trend is Your Friend, But What is The Trend? appeared first on Penny Hawk.

About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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