My short term trend classification system labels can be assigned to your own holdings, if you look at a 15 min chart in whatever you own. I base them on my interpretation of the short term trading ranges I call the Opportunity Ranges™. There is a trend pattern within the ranges just as there is on any stock or index chart.
For those not familiar with the Opportunity Range™…
If the range for the day is 90-100 for a given stock/ETF, then if it’s at 91 at any point in the trading day, it’s at 10% vs. the range of 10 points. The position vs. the range tells me if stock/Index etc. is relatively overbought or oversold.
A breach of the range to the upside/downside indicates “pressure buying/selling,” otherwise known as “panic buying/selling.” Yes, investors panic in and out of positions, and when they do, the volatility goes up rapidly and out of step with the prior behavior of that market.
It’s like throwing a wrench into a machine. The tricky part is that sometimes a range breach at the end of a large move can be a low, vs. a break to a new low, but often breaches continue in the direction they are going, even it its just for a further bounce/dip.
If you like to trade around your positions, you’d sell the highs in the range (80%+) and buy the lows in the range (0-20%) in the best case scenario, but only if the trend is still up.
If you are shorting, you’d short the top end of the range and cover at the low end, at least with part of your position (perhaps 20%).
However, if a trend is moving strongly in either direction, it will often only get to say 60% vs. the range if in downtrend, and down to 40% on pullbacks in an uptrend. If you want to build a position using the ranges, you often can’t buy the bottom of the range in an uptrend or sell the top of the range in a downtrend.
Remember to always look at the daily and weekly trends before using the range position to adjust your exposure. In a very strong uptrend, you might decide to just ride it up, and even add more exposure, especially if it were a breakout off a prior low or base after a big pullback.
I’ll take a moment to discuss what to do on a trend break, even if the given index or other investment is at the bottom of the range. Why? Because a market that is breaking down will drag the range down with it, just as a rising market drags it up. If you are buying every single dip in a market that is changing direction, you will increase your losses, which is why I also look at the intermediate term trends, as well as the very short term Opportunity Range™ trends.
If the trend breaks, you might sell your entire position or 50% of it, hopefully having taken some off on the first significant break off the high (look for larger than normal moves, meaning more volatile declines, off the recent high). Then if it breaks down further you might sell the rest. These decisions are often made in the context of specific political and economic circumstances, with varying degrees of potential drawdown. But the behavior of the price of anything you own is the most important clue as to the need for action in either buying more or selling it all.
If we are talking about index exposure, you may decide to hold a minimum percentage in the S&P 500R for example. As just one example, you might go from 60% exposure in equities down to 30% in a Bear market, and you might decide to do that in steps, first selling 1/3 to 1/2 of the position, and then the rest on a second stop. If the market drops 50% in a typical severe equity Bear market, and you hold 30% in equities, you’ll “only” lose 15% of your invested net worth. Better than owning 100% equities at the top and riding it down and losing 50% of your assets on paper. Yes, stocks recover, but sometimes it has taken over a decade to do so…
How do I classify the very short term trends using the ranges? The following short term trend classification is based on the behavior of the given stock/ETF/Index within the Opportunity Range™. When a stock/ETF follows the range higher with higher highs and higher lows, the trend is labeled “+” or “+4.”
These nine labels are from a negative short term (ST) trend to a positive one (assigned a number from -4 to +4; Neutral = 0). N = Neutral. B=Bounce. Cor or C=Correction.
–
– N
– B
N –
N
N B
+ Cor
+ N
+
I use a number score to keep track of results in a quantitative way. That score goes from -4 for “-” to +4 for “+.” Neutral is scored as “0.”
For ex. look at $IBB back on 9-20-2024, the biotech ETF. It’s rating is “+ N” or “+3.”
The first symbol/letter indicates the previous short term (ST) trend as “-, N, or +.”
The second indicates the more recent move from that trend, if any. “+ N” means the ST trend was positive and has shifted to neutral, meaning it’s consolidating. IBB is consolidating after beginning an uptrend on a ST basis.
Remember that if you hold stocks etc. for the longer term, this would be applied only when you want to add to positions, and when you may want to take off some profits. For ex., if a market is very stretched and it’s at the top of its recent trading range (the top of my Opportunity Range™), you may want to shave 10-20% of it off, or whatever you feel suits you. Maybe it’s only 10% for you. If you sell too much, you may not have enough exposure. Then you may feel forced to chase the price, which can lead to greater losses. Sometimes you can chase, but when I do, usually based on a catalyst or a rapid and volatile change in market direction, I generally add less to the position. But if it’s the first move off the low, I’ll add more, especially if volatility picks up on the upswing, because the momentum will often continue.
You may then decide to add back exposure if a market turns from “-” to “- N” or even better, to “- B” and use a stop on the add, in order to increase the size of a winning position. It can be a losing position on a ST time frame and win big on a long term time frame.
Practice assigning those designations to all your investments, and you’ll get a better feel for it, and it will help you better manage your position buys and sells. IMO… 😉
Standard Disclaimer: It’s your money and your decision as to how to invest it. Consult an advisor if needed.
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