Simple Analysis Is Sometimes Best
Editor's note: Technical analysis doesn't have to be complicated...
This misunderstood branch of trading involves using patterns and trends to predict where the markets could go next. And while some believe it's little more than "financial fortune-telling," Ten Stock Trader editor Greg Diamond has built his 20-year career studying charts – and using them to predict major market moves...
In today's Masters Series, originally from the May 2 Weekly Market Outlook for Ten Stock Trader subscribers, Greg reviews a basic form of technical analysis... applies it to a handful of funds and indexes... and explains how to implement it in your trading plan...
Simple Analysis Is Sometimes Best
From W.D. Gann, to Elliott Wave, to Fibonacci... in my Ten Stock Trader service, I cover advanced aspects of technical analysis.
Every day, I review hundreds of charts and countless indicators, divergences, and patterns. I utilize three different software platforms to gather technical information on the market.
If there's anything that can give me an "edge" – an idea of what the market is likely going to do next – I'm going to look for it.
It takes a lot of time and a lot of work.
But sometimes, it's best to just sit back and keep things as simple as possible. Now is one of those times. So in today's essay, that's what I'm going to do...
Simple Trend-Line Analysis
Some of what I cover takes more than a day or two to master. It took me years to fully grasp this kind of analysis... and more importantly, to learn how to use the methods in real time (with real money).
But today, I'm going to cover some basics. I'm going to look at trend-line analysis.
It's quite simple if you think about it. Stocks either go up, sideways, or down. That's it.
For our purposes today, I'm going to cover stocks that are going down (in a downtrend). A downtrend consists of a series of lower lows and lower highs. That's all there is to it.
Here's the iShares MSCI USA Momentum Factor Fund (MTUM). I've been tracking this market fund for months. It's telling me the downtrend in stocks is intact...
The black dashed lines from the highs mark the series of lower lows and lower highs. Yes, in late March, this fund breached the downtrend. But as I labeled above, this was a false breakout... and really, it was a trap for bulls. You can see that following this failed rally, MTUM made a new low earlier this month.
Also note that MTUM couldn't muster up enough energy to rally above the important 200-day moving average (200-DMA) in red. This was a warning of continued weakness.
I often tell my subscribers that you can't just look at one market, like the S&P 500 Index, and think you have the entire technical picture figured out. It's critical to look across many markets, indexes, and stocks to get the big picture.
Not all markets – even highly correlated ones – will look the same or have the same technical setup. They're likely similar, but can be different in key ways. This is where you start to put together the clues. It's how you decide whether there's sufficient evidence that a market is topping out or bottoming.
In this case, I'm looking for evidence that stocks are continuing in a downtrend...
Let's compare the MTUM chart above with another favorite of mine, the iShares Russell 2000 Fund (IWM)...
From the high, I used three trend lines. You can measure from the absolute high and important swing highs as the market trends lower. If you follow the trends down, you'll see how the bottom two trend lines marked important swing highs within IWM.
The takeaway is that you shouldn't just rely on one trend line – you have to use several to get a better idea of where resistance will be within a downtrend. Like MTUM, IWM is in a downtrend marked by lower highs. It made a lower low last week and is still below its 200-DMA.
I've been watching this last market closely – and it's not a U.S. index. It comes from our friends in the north, Canada. Here's the iShares MSCI Canada Fund (EWC)...
Canadian stocks have held in quite well, but not since late March.
EWC is now in a strong downtrend. Any rally that unfolds over the next few weeks will be an opportunity to sell.
Also note the big gap down from the major lower high, and notice that EWC is also trading below its 200-DMA now. That's not good.
I have just one last thing for EWC.
This is getting into a different aspect of technical analysis, but it's still very simple to understand and use in your trading. There's a rare candlestick pattern forming on a monthly chart of EWC. Here it is...
This is called an "outside reversal pattern" or a "bearish engulfing pattern," as the second candlestick (red bar above) "engulfs" the entire previous bar. The blue box marks this pattern.
Again, it's quite simple – the high of the red bar is above the high of the previous green bar, and the low of the red bar is below the low of the green bar.
Simply put, this is a bearish pattern. And because it's on a monthly time frame, it should be weighed heavily as evidence of a top.
And if we combine it with the downtrend analysis, we have a high probability that EWC will struggle to make new highs in the weeks ahead. It doesn't mean we won't see relief rallies – we most certainly will. But these will likely lead to a number of trading opportunities.
Good investing,
Greg Diamond, CMT
Editor's note: If you followed Greg's advice since he joined Stansberry Research, you could have doubled your money 30 different times without touching a single stock. Now, he says a major turning point on May 25 could either cost you all your gains since 2020... or set you up for 10 separate doubles if you know what's coming.
In short, Greg believes the market is about to experience a massive "aftershock" of the 2022 sell-off – and stocks could eventually fall another 50% from here. He's revealing the full details in an urgent new briefing... including how you should be preparing today for the coming crash. Learn more here.