Section 10:
Broad Market Trend
Determining the trend of the broader market is a simple and absolutely necessary step when calculating the Market Situation. It can be done very easily by using the Single Moving Average Method of defining trends. Recall the rules:
The trend is bullish if today’s moving average value is greater than yesterday’s value.
The trend is bearish if today’s moving average value is less than yesterday’s value.
When defining the ‘broad market’ we like to use the S&P 500. Other indexes are acceptable such as the NYSE Composite or NASDAQ Composite or Wilshire 5000. But we find the S&P 500 index as a good fit for determining the trend of the broader market due to the facts that it’s widely followed, used as a benchmark for performance, and is a nice round number of 500 stocks.
The 200 day simple moving average is a great moving average to use when defining the trend. We like it because it’s slow and steady, and only turns at major changes in trend. The 200 day simple moving average keeps traders on the right side of major trends that last for years. In doing so, the 200 day helps to minimize whipsaws and a lot of the random price action that occurs even in the context of a long-term trend.
Broad Market Trend Scoring
The broad market trend gets a score of +1 if the S&P 500’s 200 day simple moving average is greater today than yesterday. (See Figure 10.7)
Figure 10.7
The broad market trend gets a score of 0 if the S&P 500’s 200 day simple moving average is less today than yesterday. (See Figure 10.8)
Figure 10.8