Determine Market Trend (22 Jan 16)

Bull Market, Pullback, Correction and Bear Market

(1)     Pullback: -5% off 52W High   (2) Correction: -10% off 52W High   (3) Bear Market: -20% off 52W High

Benchmark	Symbol	% off 52-Wk High	Market Trend
S&P 500	SPY	-9.63%	Pullback
Nasdaq 100	QQQ	-10.08%	Correction
Dow 30	DIA	-10.95%	Correction
Russell 2000	IWM	-20.58%	Bear Market

Although your ultimate goal is to use the stock market to build wealth, you must also avoid losing money.  Knowing how to read the market as a whole will help you to prosper during bull markets and protect assets during bear markets.

Long-Term Trend

The “big dog” of moving averages is the 200-day moving average.  If the index is trading above that level, the long-term trend is considered up; generally, the 200-day moving average is seen as a proxy for the long-term trend.

Benchmark	Symbol	Price	200-DMA	Market Trend
S&P 500	SPY	190.52	203.20	Downtrend
Nasdaq 100	QQQ	103.77	108.48	Downtrend
Dow 30	DIA	160.79	172.55	Downtrend
Russell 2000	IWM	101.37	117.49	Downtrend

In an up-trending market, I will lengthen holding times and give my holdings more room to run.  In a down-trending market, I use short holding times and grab profits quickly. 

  Short-Term Trend

Average Directional Movement Index (ADX) – The indicator uses three lines to tell both the trend direction and the trend strength.  When the +DI is above the –DI, buying is stronger than selling.  When –DI is above the +DI, selling is stronger than buying.

Benchmark	Symbol	+DI	-DI	ADX	Trend
S&P 500	SPY	19.30	44.95	34.63	Downtrend
Nasdaq 100	QQQ	18.39	45.41	36.07	Downtrend
Dow 30	DIA	18.77	44.21	32.49	Downtrend
Russell 2000	IWM	13.21	44.88	42.11	Downtrend

The ADX line helps determine the strength of the trend.  An ADX reading above 25 indicates a strong trend.  If the trend is up, use bullish leveraged ETFs.  If the trend is down, use inverse leveraged ETFs.