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Thursday, September 29, 2011

Adam Hewison: Do You See the Trees In a Forest, Or Do You Just See the Forest?

There is a saying that goes like this “can’t see the forest for the trees” is a reference to people who get so involved with the details of an issue that they lose sight of the big picture.

If your involved in the markets, it is easy to fall into the trap of just looking at the minute or hourly charts, rather than considering the market as a whole.

When you can’t see the market for the minutia, it means that you are deeply involved in a situation, and you are perhaps focusing too much on the inner workings of the market, and not enough on the big trends.

With all of this talk of problems in Greece, defaults, contagion and a host of other problems in Europe, it is easy for traders to get distracted, and not see the forest for the trees.

The most important element in trading in my opinion, is the direction the major trend for that market. It doesn’t really matter what the news is, if the market is doing something else. As traders I believe we have to look at the forest in this case the big trends in the marketplace.

Let’s look at them now: S&P 500 index major trend down. Gold major trend up. Metals major trend down. Crude oil major trend down. Dollar index major trend up. CRB index major trend down.

So, there you have it, all the major trends in all the markets we are dealing with right now. Everything else is just individual trees, that don’t mean a heck of a lot in the big picture.
It takes a tremendous amount of energy to move a market and change a major trend. This kind of energy normally does not happen in one or two days. As they say in statistics, one data point does not make a trend.

Let's take a look at the SP 500 including our Trend Analysis and Trade Triangles.....

The S&P 500 index rallied based on the vote in Germany to bailout Greece. This is far from a done deal. As mentioned in yesterday’s post, we thought that rallies in this market would run into problems, which they have today. A close below the 1163 area would be negative. Last month, the S&P 500 closed at 1218.89 and last week it closed at 1136.43.

So while the market is higher for the week, it is sharply lower for the month and the quarter. The big picture for this market is down. At the moment this index is trapped in a trading range bound by 1120 on the downside and 1220 on the upside. We are looking for this market to break down and be on the defensive for the next several weeks. Intermediate and Long term traders should continue to be short this index.

Monthly Trade Triangles for Long Term Trends = Negative
Weekly Trade Triangles for Intermediate Term Trends = Negative
Daily Trade Triangles for Short Term Trends = Positive
Combined Strength of Trend Score = – 75

The U.S. stock indexes closed higher today in more volatile trading. The stock market got a boost from some upbeat U.S. economic data released earlier today, and on some ideas of an improvement in the EU debt crisis. If all three stock indexes drop and close below their August lows, that would be extremely bearish for the stock indexes and for most commodity markets.

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