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How do we determine Market Direction?
How do we determine Market Direction?
Market direction can easily be determined using the eye test on larger timeframes (daily, weekly). Below are some of the most popular methods for determining direction:
200 Exponential Moving Average (200EMA - Purple line)
We are looking to see if we are trading above or below the 200MA
Bullish - Price action is above 200 EMA
Bearish - Price action is below 200 EMA
The Exponential Moving Average weights the price action in relationship to volume during a given period of time. Think of it as the average movement
Note: even with price action above or below the 200MA, there will always be smaller bullish and bearish trends that exist
Trendlines
Connects three or more points in a single direction (three or more for strong trends)
Bullish - If you can connect the bottoms of three or more candles in a upward direction it is considered bullish
Bearish - If you can connect the tops of three or more candles in a downward direction it is considered bearish
Notice how the candlesticks seem to 'bounce' off the trendline
We would want to enter near the trendline to watch it rise or to quickly exit if it closes below the trendline
This is the same chart as the 200 MA above, but provides clearer points where we can enter
Market Direction
Market Direction
Bearish
Bearish
Down trending
You will see Lower Highs and Lower Lows
Lower Highs - notice how it stays below a previous high
Lower Lows - notice how the low gets lower and lower with each downturn
Draw a trendline (TL) that connects the tops of the highest candles (3 or more points)
Notice how each time it gets close to the trendline that the candlesticks turn red and reverse (red candles)
Trendlines are not guaranteed to reverse price action, but we need to see a break above to confirm that down trend has been broken
Remember, we do not catch falling knives!!!
Bullish
Bullish
Up trending
You will see Higher Highs and Higher Lows
As price rises and pulls back to the trendline we consistently see higher highs
We also notice that the trendline holds for our lows
Draw a trendline (TL) that connects the bottoms of the lowest candles (3 or more)
As it indicates in the chart, a strong trendline is when we have at least three points of contact
Range/Consolidation
Range/Consolidation
Sideways
Price continually rises and falls to support and resistance levels
Often securities that are in a range are positioning themselves for bigger move
We use volume as another indicator for breakouts above or below our range
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