Is This The Beginning of a Bear Market?
Stocks are selling off. Is this the beginning of a bear market, or just a long overdue pullback?
Traders try to forecast market action with indicators. Some indicators are elaborate. Others are simple. Over time, the simple ones tend to be more useful.
This might be surprising. Many of us think Wall Street is using sophisticated tools to make money. It is.
As individuals, we can’t compete with its sophisticated techniques. That’s why day traders tend to lose money. Wall Street firms are trading in nanoseconds, and our data feeds can’t process information that quickly.
But big Wall Street firms also use simple tools to make money. Many long-term trend-following strategies use simple ideas. And we can use these same tools to ride big trends in the stock market.
The Advance-Decline Line
One tool many large firms use is the advance-decline line. The advance-decline line indicator subtracts the number of stocks that closed down every day (declines) from the number that closed up (advances).
The A-D line simply counts how many stocks are going up. In a bull market, we expect most stocks to be going up. In a bear market, the majority of stocks should be going down. Near market tops, we see fewer stocks going up.
The S&P 500 and the Advance-Decline line are in synch. As long as they remain in synch, a bear market is unlikely.
After spending nearly 20 years developing pattern recognition software for the United States Air Force, I retired from my military career in 2005. My plan was to utilize the same pattern recognition principals I used in the military and apply them to the largest and most lucrative market in the world: the stock market.