Determine Market Trend (11 Mar 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	-3.82%	Bull Market
Dow 30	DIA	-4.25%	Bull Market
Nasdaq 100	QQQ	-7.72%	Pullback
Russell 2000	IWM	-15.22%	Correction

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	202.76	200.74	Uptrend
Dow 30	DIA	172.23	169.76	Uptrend
Nasdaq 100	QQQ	106.49	107.52	Downtrend
Russell 2000	IWM	108.20	113.91	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

Short-term trends can be captured using short-term moving averages.  The 20-day moving average provides you a simple yet effective way for knowing what side of the market you should be trading. 

Benchmark	Symbol	Price	20-DMA	Market Trend
S&P 500	SPY	202.76	195.78	Uptrend
Dow 30	DIA	172.23	166.75	Uptrend
Nasdaq 100	QQQ	106.49	103.43	Uptrend
Russell 2000	IWM	108.20	103.52	Uptrend

If the stock is currently trading below the 20-day moving average then you clearly should only take a short position; conversely, if the stock is trending higher then you should enter long.