Grad call summary 10-30-08

In tonight’s Grad Call, we discussed the difference between trading in a bouncing market and trading in a trending market.  In general terms, the market is in a strong trending phase about 30% of the time.  These trending phases make trading options easier for many individuals, but they tend to get frustrated with bouncing or sideways markets. 

 

In trending markets, the MACD, moving averages, and other technical indicators give great entry and exit points.  When the market is bouncing, support and resistance with volume become the keys as trend indicators become less accurate. 

 

So how can we tell when the market is likely to move in between trend and bounce phases?  We discussed 2 options.  First the Bollinger bands.  When the bands are very tight and begin to spread, the market or stock is most likely headed for a trend phase.  When the bands are spread apart and begin to narrow, the market or stock is most likely headed for a bounce phase. 

 

 

The second option is in the use of the Wilder’s DMI/ADX.  The black line on this indicator measures trend strength.  When the line is above 40, there is a strong chance of moving into a bounce phase as the trend phase has reached near maximum strength.  When the line is below 20, the trend has been very weak and a trend phase could be on the horizon. 

 

 

Take a look.  See which ones you like the best and make sure you understand your trading environment.  There is nothing more frustrating than a dysfunctional MACD due to a bouncing market. 

 

Happy Trades!

Jeff