Here’s How to See the Trend

(Part 9 of ten-part series on Financial Truths)

Section 1: Why Did Your Short-Term Pattern Fail?

Section 2: Follow the Money: Start with Inflation/Deflation

Section 3: Make a Long-Term Forecast

Section 4: Make an Intermediate-Term Forecast

Section 5: Identify & Trade the Best Opportunities

 

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wide view

(CC image by Ulbrecht Hopper on Flickr)

 

Blog Post References:

An Active Management Plan for Self-Directed Investors

Inflation, Deflation, and Your Portfolio

Fearless Forecasting for Long-Term Investors

Fearless Forecasting for Traders

 

Section 1: Why Did Your Short-Term Pattern Fail?

  • Why do chart patterns fail?  Most often, it’s the higher-level trend – found in the sector, the broad market index, or longer-term stock chart.
  • SBUX looked bullish to a short-term trader on 11/3/15 …

    … but the sector was WAY overextended and at a key level …

    … and the S&P 500 had recovered as much as it could. Nowhere to go but down.

    Long-term chart looked bubbly! SBUX still hasn’t broken this level as of 2/6/17

  • Always study the sector and market (higher-level assets)
  • Always study the intermediate-term and long-term trends (higher-level trends)

Section 2: Follow the Money: Start with Inflation/Deflation

  • What inflation is
  • How we measure inflation
  • Why inflation matters so much
  • How to forecast inflation

Section 3: Make a Long-Term Forecast

  • I introduced this concept in Episode 4
  • Pull up a weekly chart, 25+ years of data
  • Examine the four dimensions of: Price, Pattern, Momentum, and Time (see Episode 7 for details)
  • Choose your baseline asset allocations
    • Best approach: Rank all the choices in your investment universe from highest to lowest Sharpe Ratio
    • Simpler approach: Just adopt my allocations (shown below as of February 2017), but adjust as needed for your risk tolerance, goals, and market outlook
    • More details coming up in Episode 10!
    • As of Feb 2017, I’m bearish on most financial markets over the long-term, so these are conservative allocations despite my relatively young age.

      The sector-by-sector view for serious traders. This shows how I divide my stock allocation across various sectors. They’re ideal targets, not something I try to exactly match my portfolio to. As of Feb 2017.

Section 4: Make an Intermediate-Term Forecast

  • Pull up a daily chart, 8+ years of data
  • Examine the four dimensions of: Price, Pattern, Momentum, and Time (see Episode 7 for details)
  • “Flex” your baseline allocations, going overweight the assets that you expect to rise in the intermediate-term, and underweight or short the ones you expect to fall (review Episode 4 for more details)
  • Overweight bonds, underweight stocks, and short the US dollar as of early Feb 2017. But I’m still diversified.

Section 5: Identify & Trade the Best Opportunities

  • You’re free to trade anything within the asset class or sector; just stay reasonably close to your asset allocation targets
  • Remember that options and futures are leveraged.  Don’t underestimate the exposure.
  • Update periodically
    • Re-evaluate the long-term trend every few months, or sooner if the intermediate-term trend has changed
    • Re-evaluate the intermediate-term trend every few weeks, or sooner if market conditions warrant
  • Learn more macro trading strategies and stay current on market news by viewing our online trading videos and live streams

 

Intro music by audionautix.com

Image credit: blog.uyora.com/author/george/

Find more episodes of the Torpedo Trading Podcast at this link