Wednesday, December 2, 2009

Regarding the Markets and Moving Averages

In last night's market wrap, I noted the markets weren't that attractive from a trading standpoint. Let me illustrate that prospect with the following charts. First, basic materials and financials were some of the strongest performers. However, consider these charts:

The XLBs have been in a trading range for the last few months. And the financials

Have been there longer. In addition, we've seen a weakening momentum in the SPYs and a concentration of upward action in larger shares. As a result market breadth has narrowed. Consider these charts:

New York market breadth as moved sideways and

NASDAQ market breadth is dropped.

Simply put, it's not the greatest market to make a trade in.

Now -- unfortunately I deleted a very insightful comment that mentioned that moving averages are the best indicator for a sideways market. And -- since markets usually more more sideways than up or down, moving averages weren't the best indicator. This is a good observation. However it depends on what you are looking for.

Trading sideways markets is (in my opinion) a waste of time. Markets move sideways because there is no momentum one way or the other. With no momentum, even the most well thought out plans can get laid to waste. Momentum really helps the odds.

Regarding EMAs etc. it's important to look at all the EMAs. The shorter will whip around a bit more and therefore must be looked at in conjunction with the larger trend -- the longer EMAs.