Technical Analysis | Market Direction - What's Your View?

2nd Sep '23 by The Brass Monkey

25 comments 916 reads

I think its fairly widely accepted that knowing when the market is in a trend and which direction the market is moving is important for successful investing.

I've being wresting with this for a while and it's not as easy as I thought to determine, maybe thats my lack of experience or perhaps it is very subjective and difficult to label.

I'd like to ask three things and it would be great to get as many views and responses as possible from the community.

1 . What do you think the UK market is currently doing, are we in a BULL a BEAR or moving in a sideways range?

2. When do you believe this started?

3. What's your approach to determine what the market direction or trend is, what to you look at?

Thanks in advance

TBM

Unlock with Email

Unlock with Google

Already have an account?
Login here

About the Author

The Brass Monkey

Premium Member

25 comments

The Brass Monkey

2nd Sep '23

Yeah I'd notices that NS&I were now offer 1 year fix at 6.20%

WarrantStar

2nd Sep '23

Not quite. Ignore the stationary shares each day. Calculate the ratio of advancing shares to declining shares each day. Stocko has this information after 5pm every trading day.

William K

3rd Sep '23

Four technical criteria for a downtrend in any market using the weekly chart

1. Is the price below the 40 Week EMA?

2. Is the 30 week EMA above the 10 EMA?

3. Is the RSI below 50?

4. Is the MACD histogram negative?

If the answer to all those questions is yes, the market is in a downtrend.

The UK market is currently in a downtrend, but it's well above the lows of a year ago, Hopefully it will improve. but until it shows strong signs of going up, one needs to be ultra-cautions before buying shares in any British companies.

Logical David

3rd Sep '23

1. My view is that the Bear market is slowly coming to and end and the market is starting to bottom out. However, we are not yet in a Bull market.

This week I have been evaluating which shares I should invest the cash holding I have in my portfolio.

I have decided to add: TBCG CRH BGEO XPS RR. MKS to my portfolio.

On my watch list are: YU ASH MSI KITW FOUR W7L but I'm waiting for RT10 > RT40.

2. The Bear market started towards the end of 2021 and it definitely got a foothold when Russia invaded Ukraine in early 2022 causing energy prices to skyrocket which lead to rising inflation and interest rates.

I believe the Bull market will start when interest rates start to fall and borrowing becomes cheaper for businesses. We are starting to get falling inflation but not yet falling interest rates.

3. Very simplistically, my view is that we tend to enter a Bear market when both interest rates and inflation rise and we tend to enter a Bull market once interest rates and inflation start to fall.

David.

Benson212

3rd Sep '23

1). Personally, I use the Momentum Rank as my benchmark (https://www.stockopedia.com/sc...) and although I have managed to outperform this benchmark by overlaying my own absolute momentum filter to it, I would say we are in a SIDEWAYS market with a slight downward bias (especially if you're in mid/small caps).

2). For me the sideways market has been in motion since the start of the year. The market appears to have priced in interest rates/inflation in 2022's decline and now we are waiting for core CPI to come down and the BoE to turn dovish again. The reason why I think it's been priced in is because the share price reaction on each rate hike is no way near as severe as it was in 2022. Combine this with cheap valuations and general investor doom & gloom, then I would say we are in the bottoming process, but we are not out of the woods yet!

3). I look at the individual stocks and determine the trend on a case by case basis. Here is my screen:

https://www.stockopedia.com/sc...

I use an abolsute trend template to determine the trend. If it doesn't meet this criteria, I don't look at the stock. Then I use the Momentum rank to ensure I'm buying into the best 5% of the market. I don't use indicies to determine the trend because they are market cap weighted and don't represent the basket of stocks I would trade. Why would you use the combined price movements of Jet2 (LON:JET2) Burford Capital (LON:BUR) and HUTCHMED (China) (LON:HCM) to determine whether you should buy or sell Warpaint London (LON:W7L)... it doesn't make any sense??

Furthermore, the great thing about using an absolute trend filter is that when you're in a severe bear market (e.g. COVID-19 crash of 2020), the number of valid opportunities dries up and is a great way of the maket telling you to go to cash.

BnB

3rd Sep '23

It’s important to recognise that, if you are waiting for a sign that the trend has definitively turned upwards, the market will have moved substantially against you by the time you have the conviction to go all in. You’ll have missed big gains. Consequently, once you get the feeling that the market is close to bottoming out, you might want to start feeding funds in on a regular and progressive basis.

If you are not horribly wrong, you will catch the absolute bottom with some of your funds, and probably a level only a few percentage points above the bottom both on the way down and on the way up. The early stages of a new bull are extremely violent, in a good way, and you will definitely miss out on those gains if you wait for certainty.

And if you are wrong? Well, by adopting a progressive approach, you won’t be putting all your funds at risk from the outset. And better prices can still be achieved with the rest of your money.

The Brass Monkey

3rd Sep '23

My main investment approach is indexing and I steadily invest into these every month come rain or shine (pound cost averaging) I do this because at the moment I don't have the knowledge or skill to beat the market so I just accept that the best I can do is track the market.

I've decided i want to actively trade with a much smaller pot of money and the approach i'm looking to take it to buy a share when it breaks resistance, use tight stops for when I get it wrong and use a trailing stop to ride the ones where i'm right. The start seems to be to know the general direction of the market which is what was behind my question. I think your right early bulls will be violent and come with little warning. In your view what are the best moving averages, RSI values, volumes or other metrics to look at in order to give an indication a market has bottomed and seems to be changing direction?

The Brass Monkey

3rd Sep '23

Thanks for sharing your view and filter, your approach makes a lot of sense and has really helped me, thank you.

BnB

3rd Sep '23

In your view what are the best moving averages, RSI values, volumes or other metrics to look at in order to give an indication a market has bottomed and seems to be changing direction?

None of those. Simply watch for central banks to pause or pivot. Or for the market to definitively price that in. Unless you believe the S&P500 is in a year-long bear market rally, the US market bottomed when the 10yr peaked last October. UK investors can watch 10yr+ Gilts.

The Brass Monkey

3rd Sep '23

Thats makes sense, I assume its when the interest rate on the 10yr+ gilts fall that encourages people back into equities looking for a risk premium?

BnB

3rd Sep '23

Well it’s never that simple given the number of moving parts. Yields have been rising with equities over the pond these last few months as recession risk is assessed to be diminishing. But a BoE pivot bringing yields down would likely be a positive for UK equity markets.

The Phoenix

3rd Sep '23

Hi BnB I'm mostly in line with yourself and Logical Dave in that my view is rising interest rates and inflation is bad for all assets bar cash and the opposite is true when things flip.

What was your logic behind tracking the ten year rather than the two year I'm assuming the two year is more interest rate sensative whilst the ten year is more inflation sensative ?

Thanks Andy

BnB

3rd Sep '23

It’s simply that 10yr Treasuries are the most important and most watched data point in markets

Edward Croft

4th Sep '23

I've written on this a few times this year.

I use a simple trend following system for AIM that relies on the index being above its 120 day (or 200 day) moving average. This is a highly effective timing signal.

After almost 15 months of a downtrend, it turned up on January 12th with a buy signal.

It didn't last long until the downtrend reasserted itself. On March 13th a bear signal was re-triggered.

The index has remained significantly below the 120 day MA ever since.

Of course, higher quality indexes like the FTSE Small Cap are not in such a bearish position. They have just triggered a buy on their 120d MA. But that index has been a bit choppy.

Nonetheless, for my full buy signal, and for an indication that "animal spirits are back" - I'll be waiting for AIM to turn.

The Phoenix

4th Sep '23

Thanks for the reply

The Phoenix

4th Sep '23

Hi Ed do you base the moving average on simple or end of day ?

The Brass Monkey

4th Sep '23

Ed thanks for taking the time to reply, I really appreciate it, thats made my day!

The Brass Monkey

4th Sep '23

William as always thank you for your input and for such clarity. I'm reading the book you pointed me at 'The new trading for a living' as you say well worth the investment and time. I'm trying to absorb everything I can to develop my own TA based approach/system to trading so thanks again for your advice and encouragement :-)

doctor dave

4th Sep '23

Except that this was the very moment to have piled all in on stocks......(?)

William K

5th Sep '23

Thanks. It's so good to see relatively new investors / traders who are prepared to work hard and intelligently to adopt a professional approach. Glad you like the book. I've picked up a lot of useful advice over the years on this site, and I'm sure you will too. Very best wishes.

Unlock the metrics for all these stocks and more...

Take a free trial

Facebook Twitter Youtube Instagram RSS

This site cannot substitute for professional investment advice or independent factual verification. To use it, you must accept our Terms of Use, Privacy and Disclaimer policies.

Unlock the metrics for all these stocks and more...

Take a free trial

Market Direction - What's your view?

Unlock the rest of this article with a 14 day trial

About the Author

The Brass Monkey

25 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...