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Probe Markets Before Making The Big Bet

Since early October, the S&P 500 Index (SPY), NASDAQ Composite and the Dow Jones Industrial Average (DIA) have soared to new all time highs. The trend in the market has been up and remains up at this time. There is an old saying, “the trend is your friend” and this has held true.

 

Traders must try and stick with this old market adage as long as they can as it helps to keep you on the right side of the market. Very often, traders read or hear negative things and begin to sell short the market a bit too early. Then they get stopped out or take a big loss as the market goes against them. If you watch or read any financial news program you will see and hear many opinions about the market and where it is going. Some talking heads are extremely bullish and others are extremely bearish of the market. This is why it is so important to watch the charts and let the charts tell you what to do. Sure, there are global problems, lots of debt, declining earnings and lots of other negative readings out there, but the trend is still up and that is really all that matters at the moment!

 

Recognize the trend…

 

There will be a time when the trend changes and it becomes bearish, but that has not happened yet. When the trend does turn down you will see a lot of leading stocks trading below the important 50-day moving average. That is not the case right now. Most leading stocks are trading above the 50-day moving average and that helps me to recognize the trend. Also remember this, trends usually do not change until the vast majority is on board. The crowd is still very divided between bulls and bears. As I like to say, we do not have everyone on the same side of the boat yet. Once we get everyone on the same side the boat tips and the trend changes.

 

This is why it is important to probe markets when you think the trend has changed. Take a small trade with a stop loss above the recent high. If a new high is made you stop out with a small loss. If the trend has changed that high should not be breached on a closing basis. This technique was used by the legendary trader Jesse Livermore. He called it probing a market, but did it only when he believed the trend had changed. If you put these simple rules to work you will see how important and effective they can be.

 

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