At ValueTrend, we utilize two distinct disciplines in our process. Foremost, we are macro-driven managers, meaning that we place great emphasis on some specific macro trend indicators that suggest whether general market conditions are higher or lower in risk at any time. As I’ve noted before—it’s all about probability and risk. It not about being absolutely sure about anything—that is, we don’t know for sure what is going to happen, but we do know how to measure the probabilities. Among those indicators are:

  • Trend (more on this in a moment)- this is our most important indicator
  • Seasonality – for both macro and sector probability tenancies
  • Sentiment – are market players overly optimistic or pessimistic – and if so—who (i.e. “smart” investors or “dumb investors”) is optimistic vs. pessimistic?
  • Market breadth—how much participation in a market movement is occurring—is it concentrated or is it a broad based movement?
  • Volatility—is the market showing wide swings or is it fairly benign?
  • Valuation—is the market cheap, expensive or somewhere in the middle?



I’ve touched on some of the indicators I use to study the above factors in past blogs. Today, I want to focus on that most basic tool of technical analysis–the current macro trend – which is the most important factor I study. By looking at the chart below, you will see why I have been holding cash in the equity model, and why I went defensive in January – despite the seemingly wonderful rally seen in the past few weeks – and despite the normally positive seasonal factors for markets at this time of the year.


My basic trend analysis technique is pretty simple. I’ve covered it in this blog before, and I’ve covered it extensively in my book, Sideways.  Lets review it quickly

  • For a market to be in an uptrend, its weekly chart must be making higher highs, AND higher lows.
  • It must be above its 200 day (40 week) moving average- which is the green line on the chart
  • If the market takes out a low and forms a lower low, without having made a higher high – it is suspect for breaking trend. However, it could be just moving sideways. Case in point, the entirety of 2015 was a case of no new highs or lows and a one-time break of the moving average. We were out of the market (50% cash) when that happened in the spring of 2015.
  • For the market to be in a downtrend, it must be making lower lows AND lower highs.
  • It must be below its 200 day (40 week) MA

On the chart below, I’ve drawn the highs and lows and coinciding 200 day moving average breaks with arrows to show buy and sell signals since the 2008 crash. Note that ALL conditions (new low or new high AND a moving average break) must be met to signal a buy or sell. Note how the signals, while sometimes a bit whippy, saved our bacon (so to speak) in 2008, and got us in again later in 2009.



How this applies to today’s markets

The market moved back above its 200 day moving average in the fall of 2015. After holding cash raised over the spring, we went fully back into the market in October. By January (talk about a wild ride…) the market once again broke down through the moving average—AND it put in a lower low. We were forced to sell again–although not as aggressively (current cash is 35% vs. 52% last summer). Markets fell in January and the first half of February. Suddenly, it reversed and rallied – and has since then come right back to the 200 day moving average. The wild ride continues.

howard marks cartoon
The market has NOT seen a higher high since last May. According to our trend rules: Officially, the market is now in a bear market until BOTH the 200 day MA is cracked (which is looking to be the case as I write this) AND a new high is achieved. So, despite the seemingly wonderful rally over the past few weeks, we should view the market as a shorter termed bull within an intermediate termed bear. The above conditions (break of the 200 day MA and a higher high) may occur in a week, a month, a year or a decade. That doesn’t matter. My rules, which you are free to dismiss, suggest holding some cash at this time.

The future isn’t a predetermined scenario that’s sure to unfold, but rather a range of possibilities, any one of which may happen. Investors formulate opinions as to which of them will happen. Those opinions may be well-reasoned or dart throws. But even the most rigorously derived view of the future is far from sure to  be right. Many other things may happen instead.”

Howard Marks, Oaktree Capital



  • Thank you, Keith. Appreciate the analysis I wish more people could see it . I did not think the Dow would break 17,500 but I do not think we will see higher highs . I hope we don’t either as I am strongly hedged to the downside. Respectfully submitted, William

    • I don’t hedge/short until it starts heading down, but its certainly ambitious to expect a breakout past 2135–in fact, I’m guessing that not much is left in the current rally even at this point. Having said that–I can change my mind if that lid of 2135 is broken to the upside–that would indicate a new bull market.
      Its the in-between stages like where we are now that are frustrating.

  • Hi Keith,

    Could you please do the same analysis of the TSX as you have done here of the SPX?

  • It should be noted that other indices such as RUT,NDX, Nasdaq and NYA have not broken through the 200 day. 3 day rule is important here as this is option expiration day.

    • Good point–also 3 days is a minimum rule. Longer = better. Further, even with a BO of the 200 day, the condition of old high (2135) must be taken out (minimum 3 day ++) to officially suggest a new trend–at least that is my way of doing it. As noted, that has saved my butt more than its faked me out.

  • Keith, further to your comments in #1:
    I have a very similar trading approach as you but am probably able to trade shorter time frames as I only have myself to worry about. The market is at a tipping point now with the short term bull at resistance and the intermediate term bear still in place. I got into oil and mining on the TSX as a counter trend trade but they have run up farther then expected. I have hedged the positions even though there is no sell signal yet. For over a week there has been resistance levels and overly optimistic sentiment and high greed, and overbought indicators with stoch/RSI hooking lower at one point. All of this, was enough for me to hedge or take some profits. I would not go net short without a clear sell signal but isn’t it prudent to hedge or take partial profits at this stage if it is a counter trend rally. I didn’t want to sell completely as the breadth and seasonal factors are strong, and I also felt some of the valuations were attractive.

    Secondly, I liked your summary in this blog of how to measure the probabilities in the market. I factor in election cycles as well though to lesser degree as I have never seen a study on the accuracy but there does seem to be historical patterns. Here is a chart:

    • Good job on the commodity trades Ron–and dont get me wrong, I have nothing against hedging risk–i just like to wait until the trend actually moves a bit and try my best to verify a change on the short term. I am keeping a finger on the “buy” trigger for a few hedges myself–including single inverse and HDGE which I’ve discussed in the past.
      And yes–if you ever attend my moneyshow or other type talks, I always show the 4 year presidential cycle. Theoretically, there should be rough times first half of this year followed by rebound in the second half.

  • The pattern in the SPX from 08/2015 to 11/2015 and the one from 12/2015 until now look almost identical. If true that would mean this rally should run out of gas in the next few weeks and head lower. This bounce from Feb of this year is at the same magnitude as the one of 09/2015 to 11/2015. If you think repetitive patterns mean anything this could be of significance. If not I guess it means absolutely nothing.

    • If nothing else I love the dry humor in your comment today Dave!!

  • It should be noted as well that the put/call ratio is extremely low. It is at the level of the January top. I have also noticed that BKX Banking index has not participated and seems to have hit resistance. Please comment on Dow Theory. TRAN has participated. Is this a bull trap?

    • Yes, banks are an important economic indicator if nothing else–however, they are not part of my macro system
      And yes, TRAN is participating–that is actually a bullish sign. However, as you note, put/call is getting there. See my blog today on “Bearometer”


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