Chart of the Week – January 31, 2004
Brett N. Steenbarger, Ph.D.
www.brettsteenbarger.com
Last week’s chart was the Cumulative Trend Index, which broke down on Friday, January 23rd after several days of weak action. This is the chart we saw then. The message was cautionary, as shifts in trendiness—the persistence of directional movement—tend to precede actual changes in trend.
Now let’s update and show the same chart one week later. Note below how the ES futures continued their drop, moving below 1130, while the Cumulative Trend Index declined yet further. This suggested that the market’s trendiness was greater to the downside than to the upside.
The steep drop in the CTI in no way necessitates that we have seen price highs for the 2003-2004 bull move. What it does suggest is that we may have seen maximum upside trendiness for this bull market: a momentum peak. Momentum highs tend to precede actual bull market price highs by quite a few months. For example, we saw a momentum peak in March, 1987, but the actual price peak did not occur until August of that year, and the market did not tank until October. February-March, 1998 also marked a momentum peak, but the price high was July, when the market commenced a several month decline. More recently, we saw a momentum peak early in 1999, but the price high occurred a year later in early 2000 and a full-fledged decline did not start until 2001.
A study of the dynamics of bull markets helps one with trading strategies. Once a momentum peak is achieved, bull markets become more selective. Very often that means that, over time, large cap stocks begin to outperform midcap and smallcap issues, and the market rise becomes more selective. Market movements become more range-bound as we get later in a topping process, often with distinct support/resistance zones. Knowing such patterns helps the longer-term trader make the transition from buy-and-hold to swing trading.
Brett N. Steenbarger, Ph.D. is Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY. He is also an active trader and writes occasional feature articles on market psychology for MSN’s Money site (www.moneycentral.com). The author of The Psychology of Trading (Wiley; January, 2003), Dr. Steenbarger has published over 50 peer-reviewed articles and book chapters on short-term approaches to behavioral change. His new, co-edited book The Art and Science of Brief Therapy (American Psychiatric Press) is due for publication during the first half of 2004. Many of Dr. Steenbarger’s articles and trading strategies are archived on his website, www.brettsteenbarger.com.