Monday, November 2, 2009

What exactly does a broken trend line mean?

Along the lines of my last post, I see a huge contingent of technicians focused on this broken trend line as a sign that the cyclical bull is finished.

I have to wonder if a simple trend line break is really all that important. It certainly wasn't during the last cyclical bull market.

Anyone taking anything other than short term positions based on a broken trend line got their head handed to them.

Like every tool investors use, sometimes trend lines work  and sometimes they whiff badly.

More important in my mind is the direction of that 200 DMA. As long as that is moving higher I've got to assume we are in a cyclical bull market. As long as that remains the case then broken trend lines aren't going to mean a lot.

The longer term trend is now up. Corrections should be viewed as counter trend moves that will eventually reverse. If you think you are going to be good enough or lucky enough to spot the bottom of these moves then by all means try to trade them.

If you prefer to keep the odds in your favor then you just go to cash when you think the market is due for a breather and get long again as close to the bottom as you can with the knowledge that if you don't time it perfectly it's no big deal as the larger trend will eventually bail you out.