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Wednesday, May 10, 2017

Trend indicator and Trend table

When I first added the trend table to the blog the market was flying up and all trends were clearly up.  I modeled that table after Don Worden's table as noted in the comments.  I added the capability of adding a bias (+ or -) to the neutral status.  I wanted the bias because there is a natural progression in the absence of out sized moves when a market goes from one trend to another.  The idea was that an uptrend would first weaken into a neutral with upward bias.  Further weakness would lower the trend status to neutral.  If weakness persisted the trend would get downgraded to neutral with a negative bias.  Finally the trend would get changed to down upon even more weakness.  Obviously the reverse normally happens when going from downtrend to uptrend.

Markets can always change course and many times there are corrective periods that continue the original trend.  I wanted a set of rules that caused most corrective periods that ended up being continuation patterns to stop somewhere before the trend was reversed.  When I started studying the original ideas for how to do the trend they did not work very well in that manner.  The short term rules work pretty well, but there is no bias applied to them.  The shorter the trend the faster it changes and the short term trend does not really lend itself to having a bias.  I found through time that I did not like the original rules for the higher degree trends.  As I realized that I hesitated to update the higher degree trends in the table.  I eventually stopped altogether as no solution presented itself to me.  What really sucked was turning the primary trend down (using standard measures from trading books) only to see the market fly back up to new highs.

I have been researching rules for the various trends on and off for a long time now.  I believe I have come up with the best rules I can.  I programmed them into a trend indicator in TradeStation.  The Primary trend uses the monthly chart.  The Intermediate trend uses the weekly chart.  The sub intermediate trend uses the daily chart.  Here is a look at the monthly SPX chart with the trend indicator in the middle panel.

The bar colors are:
  1. Green - up
  2. Yellow - neutral with positive bias
  3. White - neutral
  4. Orange - neutral with negative bias
  5. Red - down
Notice there are no red bars since turning green after the 2009 low.  There are no red bars from Feb. 1975 to Aug. 2001.  During that period SPX went from 81 to 1133 while making a series of higher lows.  The biggest decline was the crash of 87 which was short lived.  That was a very unusual event largely caused by Wall Street's great idea of portfolio insurance using those new fangled things called S&P futures.  An event unlikely to ever be repeated.  Every other method of measuring the bull and bear trend that I have ever heard of had a number of false readings during that time period.

Of course the shorter the trend the more often a trend change will result in a reversal in the near future.  However, most of those rapid changes in this indicator happen in the direction of the higher degree trend.  I think this is the best I can do so I will update the table to the latest data and keep it up from now on.  Hopefully it will help.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.