Follow the Money, Trade the Trend

Link to YouTube video: https://www.youtube.com/watch?v=7VJqcJJIvyc

Trend following is nothing more than interrupting what is. There is no guessing or predicting involved, you simply look at the market structure to determine if the asset is in an uptrend or a downtrend. Trend trading is an essential component of the technical analysis approach. 

Investopedia defines trend trading as follows; “Trend trading is a trading style that attempts to capture gains through the analysis of an asset’s momentum in a particular direction. When the price is moving in one overall direction, such as up or down, that is called a trend.” 

While there are millions of ways to identify the trend of an asset, ranging from the simplest to the more esoteric, we will use one the oldest and easiest trend indicators around, the trend line. 

Trend lines have been common in mathematics since statistics became a widely studied school of thought. It then makes sense why trend lines found their way into the stock market, as many of the pioneers of technical analysis got their start in mathematics. 

Now that you have a basic knowledge of trendlines, let’s discuss how they can identify market structure. Market structure categorizes if an asset is bullish or bearish. Bullish meaning the asset is in an uptrend. Bearish meaning the asset is in a downtrend. 

To identify market structure, also referred to as the trend, you must look at the asset’s price action over a period of time. A single day of price action is not enough to determine the trend, but it can indicate when the trend has changed. In order for there to be a trend, you need a combination of days all moving in the same direction. Higher lows, higher highs, lower lows, lower highs, and consolidation are different market structures that can be observed in the price action of an asset. As a trader, your  job is to determine when the trend has changed. 

Here is an excerpt from my book “Follow the Money, Trade the Trend,” describing how to identify higher lows, higher highs, lower lows, lower highs, and consolidation patterns! For more information on ordering the entire copy, navigate to this webpage or go to https://follow-the-money-ttt.com. 

Higher Lows: This is bullish to neutral market structure. Higher lows are a charting phenomenon that occur when price puts in a bottom and runs up, but does not necessarily make a higher high. From there, price will “throw back” and stop at a price that is higher than the most recent low.  Higher lows without higher highs is a potential accumulation pattern. Traders are stepping in to buy the low points of an asset, but there is not enough conviction to push the asset to higher highs. 

Higher Highs: This is bullish market structure. Higher highs tell you the asset has upward momentum. The assets want to keep going higher (until it doesn’t). To make a higher high, an asset must pullback, stop, then overtake the previous swing high. Most often you will see a higher low before a higher high, but not always. 

Lower Low: This is bearish market structure. Bulls are no longer stepping in to buy support. Sellers are now  in control, pushing prices lower. Any moves up in the market are often considered “dead cat bounces” that entice bullish traders into buying, just to have the price push down lower. 

Lower Highs: This is bearish market structure. Price can no longer make new relative highs. Bears are in control. 

Consolidation: This is a neutral market structure. Neither the bears or bulls can take control and price will oscillate between a higher price and a lower price. Trend traders should avoid consolidated assets at all costs. There is no money to be made in an asset whose price is going nowhere. 

MOVING INTO TODAY’S MARKET STRUCTURE: 

The NASDAQ  100 ($QQQ) is the benchmark index for all technology and growth stocks. Beginning in the later part of 2021, $QQQ’s market structure shifted from bullish to bearish after it experienced its first lower high near the end of March 2022. This downtrend persisted until this most recent week’s closing bell. 

($QQQ’s bear market downtrend for all of 2022)

With $QQQ making a confirmed new high this week, it is safe to say the technology bear market may be over. This observation is confirmed by the simple fact that $QQQ is bucking current market structure and the downtrend line has been violated. With $QQQ, the technology and growth stock benchmark, entering into a new trend, how do the stock components that make up $QQQ compare? 

NVIDIA Corporation’s ($NVDA) chart is almost identical to the chart of $QQQ. $NVDA made a pattern of lower highs in 2022 and recently broke out of that downtrend. The biggest difference between the charts may be a bit hidden to a newcomer of technical analysis, but for the more experienced this should have been seen right away. $NVDA has an uptrend (higher lows) within a downtrend (lower highs). 

This leads us to an important concept, an asset can experience a bullish trend within an overall bearish trend and vice versa. Within all assets, there will be a trend that characterizes the asset’s performance over the last few years. There will also be trends that characterize the asset’s performance over the last few months, and trends that characterize the last few weeks. Technical analysis is fractal in nature, and identifying trends within trend s only magnifies this fractal truth. 

($NVDA’s downtrend of 2022 and the current uptrend.)

Next up we have Advanced Micro Devices ($AMD). Since $AMD and $NVDA are within the same industry group, semiconductors, it makes sense they have almost identical chart patterns. $AMD saw multiple lower highs in 2022 and recently broke that downtrend. $AMD also made a higher low in early 2023 and has been riding that uptrend since. 

($AMD’s downtrend of 2022 and the current uptrend.)

Adobe ($ADBE) has been much more consistent to the downside, producing less lower highs, but nonetheless, $ADBE is experiencing a change in market structure. 

($ADBE’s bear market downtrend for all of 2022)

Palantir ($PLTR) is the last issue we’ll look at who is in the midst of breaking a long term downtrend. Like most growth stocks, $PLTR’s price was down over 60% in 2022! This is a massive downtrend and shareholders suffered if they continued to hold. This is why it’s imperative to notice these changes in market structure and exit stocks that are now in bearish downtrends. 

($PLTR’s bear market downtrend for all of 2022)

POTENTIAL TECHNOLOGY BREAKOUTS?:

Shifting to stocks that have yet to buck their downtrend, take a look at the charts of Airbnb ($ABNB), Microsoft ($MSFT) and Roblox ($RBLX). All three of these stocks experienced lower highs in 2022 and are on the verge of breaking out to new highs. If you’re looking to trade stocks that are lagging behind the rest of the pack, these may be three potential targets. 

($ABNB’s bear market downtrend for all of 2022)

($MSFT’s bear market downtrend for all of 2022)

($RBLX’s bear market downtrend for all of 2022)

DISCLAIMER:

I am not a registered or certified financial advisor. Nothing in this blog constitutes a recommendation to buy or sell any security listed in this blog post. All blog posts are for educational purposes on;y. Do your own due diligence.