4 Rules that Must Be Followed in this Market Environment

by Darrin Donnelly on March 6, 2011

Click on chart to enlarge.

Click on chart to enlarge.

We have entered into a NEUTRAL stock market trend.  And trading in this indecisive trend requires that you follow distinct rules.

A neutral trend occurs when the market becomes tired following a clear uptrend or downtrend.  It’s often a “flattening out” period as the market moves sideways and leading stocks build new bases. 

The uptrend we’ve experienced since September looks to be resting here as Distribution Days outnumber recent Accumulation Days.  However, we haven’t broken into a full-fledged market downtrend because the NASDAQ continues to find support at the 50-day line and bounce back from heavy-selling sessions. 

In the chart that accompanies this article, you’ll notice that after the last two sessions where we experienced heavy-volume selling, the NASDAQ bounced back without undercutting the lows set during these sessions.  Undercutting such lows would have triggered a clear downtrend.  This bounce-back behavior is a sign that bulls are stepping in to buy stocks whenever the market corrects abruptly.

On the flip side, we haven’t been able to completely shift gears and climb back into an uptrend.  The buying we’re seeing is coming on lower volume compared to the selling. 

This action tells us that while buyers are showing up to support this market, there’s still some hesitation to go “all in.”  We’re also seeing what looks like normal profit-taking following the recent uptrend.

Essentially, the bears are worried about the unrest in the Middle East and the subsequent spike in oil prices.  They worry that a surge in energy prices will rattle what is an already-brittle economic recovery attempt.  The bulls, on the other hand, see an economic outlook that is way too strong to ignore and a market that remains undervalued.    

Whatever the reason for this indecisiveness, a neutral trend is typically a perfect environment for sound base-building.  Leading stocks “rest” as investors take profits, which allows these big-earning stocks to build new bases that will set us up for future breakouts.

A neutral trend should be seen as a “yellow-light” environment.  The increased number of Distribution Days has us flirting with a potential downtrend and for this reason; there are 4 rules to follow right now…

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