Spotting Big Trends With Technical Analysis

Trading Rule #1: Trade with the trend.

Trading Rule #2: Buy Low – Sell High: or Sell High Buy Low.

Trading Rule #3: Understand and stick to a disciplined trend and trading time-frames.

If it was only that easy…

Big Trends in the market are easy to spot, the most recent obvious trends are in everything Oil. Down, down, down. Look closely at rule #3… Because trends and time-frame are where traders make mistakes. When thinking about a trade consider both the TREND time-frame AND your TRADING time-frame.  In this case we’ll call the TREND time-frame, The Major Trend and we’ll consider entering trades on Minor Trends (Rule #2).

CL-1Mo

The Major Trend to trade in Oil is clearly short. To keep this simple, we should enter short trades on our trading time-frame as close as possible to the red line.

The S&P provides a different type of example because the Major trend is ‘longer’. The S&P is not trending as clearly as oil on a monthly chart.

ES-1MoTo see the S&P trend we have to move the trending time-frame to a yearly chart, (the monthly chart looks like it’s found a range).  I’ve left the MACD and a stochastic on the yearly chart to drive a point.

es-tvEach time over the last few years the S&P has approached the 50 day moving average we’ve bounced and continued the Major Trend. If you are looking at the S&P and trying to call the top of this trend, count on losing money. You might be right, it can’t go on forever, but the Major Trend on the S&P is up. Trading short, at this point is too risky. Traders are making money buying the dips on the S&P and shorting the spikes on Oil. You’ll get faked out here if you try to call the top on the S&P or the bottom on Oil.

Lets have a look at Starbucks, first the Major trend, up… The moving averages have been supporting SBUX for a few years. 75 (moving average) and 66 (support/resistance) are trend reversal levels.

sbuxAnd the minor trend, our trading time-frame, also up:

sbux-1MoBut this chart is flashing a few technical warnings. First, the 3rd flag we’re seeing is not as “clean” as the first two and volatility (high-low ranges) is higher than during the two earlier flag setups. I’d say that we’re seeing the TOP of this trading (minor) trend. Why? Traders are less bullish and the resistance line at 84 is firmer (there are lots of stop-losses around 84). You can confirm this with the option chains.

I would suggest if you’re going to trade the trend on SBUX you use one of two strategies: A breakout strategy or a trend resistance level strategy. What I mean by the breakout strategy is that if SBUX breaks into a short-squeeze (over 84) get in for a short trade, and ride up the short squeeze, but that’s a major possible fake-out. It’s a hard trade, but easy money. Don’t stay in long! The short squeeze will happen within the next 5 days, if it happens. Notice the duration of the other 2 flags…

If SBUX doesn’t get squeezed, be patient, watch how this chart plays out, Look for entries at the trend levels 80/75, and eventually 66 before going long. Under 66 the major trend will have reversed.

I won’t say a word about trading against the trend… Or I’d have to break rule #1!