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To Trend or Not to Trend

by Ray Rondeau

It is obvious that markets change and markets evolve. Investors who accept this as reality and adjust their approaches accordingly put themselves in a better position to succeed.

Like seemingly everything today, markets and their characteristics are changing at an ever-increasing pace. One of the more apparent changes is that we seem to be in an endless series of boom/bust cycles. These “bubbles” are being formed by a continuous revolving series of overextended price trends.

An investor may attribute these changes to multiple factors, including globalization, technological advances, the Internet, constant media coverage, increases in automated high frequency trading or the growing amount of hedge fund assets. New investment vehicles designed to allow individual investors to short and/or leverage (while staying long) is also a likely contributor. Add in ultra-low commissions and the fact that an investor can change his entire portfolio with a few clicks of a button, and it is easy to see why markets seem to be trending longer and wider than at any point in history.

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Ray Rondeau is president of the Boston AAII chapter and a member of the Market Technicians Association. Additionally, he is a former analyst for the website IndexUniverse where he wrote a weekly technical analysis column.


Discussion

Tony Hausner from Maryland posted 3 months ago:

A very useful article. Thanks


Dione Bunnao from California posted 3 months ago:

Absorbing, well written and timely topic.


Frederick Mc Kay from Massachusetts posted 3 months ago:

Good info,understandable an pertinent.


Mark Sheingold from Massachusetts posted 3 months ago:

Very interesting. I would never have considered that a company's pe, could be looked at using technical analysis.

A great article.


John Chamberlain from Massachusetts posted 3 months ago:

He gives us two handy adjuncts (relative P/E and implied volatility) to interpret price trend and to help determine points at which the trend may change. And reminds us that even those may not be reliable or sufficient to predict the stock or market. Good advice for an individual investor.


Robert Zakon from Massachusetts posted 3 months ago:

Mr. Rondeau’s article, “To Trend or Not to Trend” has given us a cogent, precise and understandable pathway to a most vexing conundrum; that being interpreting and predicting price trend. I look forward to more articles from Mr. Rondeau.”


Stephen Percoco from Massachusetts posted 3 months ago:

Great article, Ray. It ties together technical and fundamental analysis and offers the potential input of options market valuations to give investors greater insight into current trends and the potential for reversals. I just have a couple of comments:

(1) Relative PE analysis can be quite useful, unless the fundamentals change. For example, a low relative P/E ratio could signal a decline in the company's earnings growth potential. So sometimes what looks to be cheap may not really be cheap. Likewise, a high relative P/E ratio could be justified, if a company is entering a sustained period of accelerated earnings growth.

(2) Collecting all of this information, especially on implied option volatility, could indeed be quite useful; but it also may be costly and time consuming (which means best suited for sophisticated traders and investors). I also my believe that Mr. Market has found new ways of keeping us all guessing until the last moment and reversals happen more quickly and more sharply than they used to (witness your example on gold). All of this makes the game still quite challenging, even for sophisticated investors, so we should all take your final comments - in "A Synergistic Viewpoint" - to heart.

Thanks for your insights.


Serene Lee from Massachusetts posted 3 months ago:

In this article Ray Rondeau combines fundamental and technical analysis that offers potential entry and exit a position is very interesting. We have seen people use fundamental financial ratios to pick a security, and then use support and resistance confluence with overbought/oversold indicators, or momentum oscillators to enter, or exit a position. Rondeau’s study using support and resistance combine with relative PE is unconventional but very interesting, and innovative idea. Options traders often use implied volatility to choose the strategies. Rondeau‘s study points out paying attention to VIX for position trading is useful. The article is very innovative, and interesting. I enjoyed reading it. Excellent article for the references.


Barbara Karten from Massachusetts posted 3 months ago:

Great article that blends the theory of trends with the technical tactics of entry/exit points. A great explanation of selected fundamentals and volatility further helps the reader to determine entries and exits. Looking forward to more articles from Ray Rondeau.


Emilio Iannuccillo from Rhode Island posted 3 months ago:

Thanks for an eye opening article. As a novice investor, I was always told that the trend is your friend. So I am constantly frustrated and confused by being whipsawed by Mr Market.. Thanks for showing that other elements must be considered when following trend. I guess I have a lot more work to do.


Dan Varon from Massachusetts posted 3 months ago:

This is a very well written article. These days, when you listen to the pundits, half of them say that the market is due for a correction and the other half say that the market still has ways to advance. So what is an investor to do? Ray Rondeau tells you.


Robert Williams from Massachusetts posted 3 months ago:

The Gold and Lockheed Martin Charts are beautiful. This is something I can use in my trading.


Peter Cornell from Massachusetts posted 2 months ago:


Mr. Rondeau used universal truths to aid his clear explanations of what to most individual investors consider “too technical” to know; e.g. the combined research of multiple charts will indicate when and how to act.

One statistic alone does not justify an action, and Rondeau’s detailed explanations of the movements on price/volume, relative PE, and the “volatility index” charts will help all of us judge the trend and then plan our actions.

I look forward to reading more of Mr. Rondeau’s insightful writing.


Ivan Orozco from Florida posted 2 months ago:

This is a great article combining Tech Analysis and Fundamental Analysis with a big portion of reality. Hope to read more articles like this in the near future.


Scott Soulman from California posted 2 months ago:

A great article giving examples for the average stock investor how to use technical, fundamental and implied volatility indicators to look at the trend of a stock for potential buy and sell opportunities. I would like to see more articles in the AAI magazine from Ray Rondeau.


Mark Goldberg from Rhode Island posted 2 months ago:

Well written article.


Helen Lambaise from Rhode Island posted 2 months ago:

Very helpful article. The suggestions on ways to tie together technical indicators, fundamental factors, and VIX will help investors to make more informed decisions.


J C Kramer from Massachusetts posted 2 months ago:

The article stresses numerous truths that everyone, whether trader or investor, should take to heart in his investment endeavors.


Robert Miller, President AAII Portland Chapter from Oregon posted 2 months ago:

This article briefly touches on many points that new technicians need to develop and experience. As clearly stated, the market is not stupid and the objective of trading is to put the odds of success in the traders favor. Put into perspective, if a trader wins 60% of the trades and loses 40%, the trader is generally considered successful. The article highlights the synergy of following multiple parameters upon which to determine the tread and signals for potential changes. Here are a few more thoughts: recognize your personal bias, remember to never put too much money into a single trade, monitor similar stocks associated with your trade (compare your stock to a group of trending stocks within same industry or sector), check the longer term trends before entering a shorter term trade, and be prepared to exit quickly or as Ray says hedge your trade to protect yourself should your trade go wrong. In a short space this article covers several important aspects of the trading universe authored by a proven trader.


Phil Edwards from Florida posted 2 months ago:

I thought Mr Rondeau's approach was very helpful. I have spent a lot of time studying fundamentals and picking stocks, only to watch the market go the other way. That left me more confused and poorer. Mr. Rondeau shows a good way to reduce those occurrences. Thanks.


John Cartella from California posted about 1 month ago:

Mr. Rondeau has written an excellent article which points out the importance of combining fundamental and technical analysis before making investment decisions. It will be most helpful for novice investors like myself. I look forward to more articles from Ray in the future.


Tim Higgins from Massachusetts posted about 1 month ago:

I appreciate how Mr. Rondeau identified specific points in time on the graphs, and then explained them through his experienced perspective. His interpretation of the charts greatly assists in my comprehension of the material.


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