Neutral-Trend Market Offers Us Good Opportunities

by Darrin Donnelly on March 27, 2011

Click on chart to enlarge.

Click on chart to enlarge.

The NASDAQ rose 3.76% last week and retook the 50-day moving average line.  This price action was enough to put us in a neutral market trend. 

However, volume was not at all impressive during last week’s rally.  In fact, volume was below-average all week, which tells us the buyers lack conviction and the sellers are still in control. 

In most cases, rising sharply on lower volume is a sign that a sell-off is on the way.

Still, not ALL low-volume rises lead to downturns.  There are times when such price-volume action is actually the behavior of a new uptrend slowly waking up.  Thus, we are now in a neutral trend environment.

As you can see in the chart that accompanies this article, the neutral zone we’re trading in is between the 2800 and 2725 marks on the NASDAQ.

Climbing above 2800 would put us back into an uptrend (assuming that we see some high-volume “follow through” action along the way).  Falling below 2725 would confirm the downtrend’s continuation.

As traders, how do we play a neutral trend?  

First off, you don’t want to make any drastic moves. 

There’s no reason to sell your short positions that haven’t hit their stops.  It’s very common for downtrends to experience several weak-volume rally attempts along the way and you don’t want to get whipsawed out of your short positions on these rally attempts. 

On the bullish side, you also don’t want to aggressively load up on new long positions before we’ve actually entered a new uptrend.  You obviously want to hold onto your long positions that are continuing to climb, but don’t add to them during a neutral trend market.

What about those leading stocks that broke out of their bases last week on strong volume? 

These stocks can be tricky because, while the first stocks to break out in a new rally are often leaders of the next uptrend, these stocks are also the most likely to quickly turn into losses if this neutral environment reverts right back to a downtrend.

Therefore, you should avoid buying into FULL positions with these stocks

A neutral trend environment is what we refer to as a “yellow light” environment; you want to proceed with caution and be ready to stop quickly. 

This means that if you want to initiate new positions in these recent breakouts, you should do so only with a SMALLER-than-normal position size, at least initially. 

And do not chase any breakout that is more than 5% past its buy point.  If a stock is 5% past its buy point, wait for a pullback and then buy on the bounce (only buy into STRENGTH – when a stock is moving higher – and never on weakness).

Also, do NOT let your trading account go into margin at this point.  Only in an uptrend should you maximize your positions with the use of leverage (that is, if you prefer to take on the added risk that comes with the use of margin in the first place).

* To access our current portfolio and watchlist of leading Darvas stocks – with EXACT buy points and sell points – consider a 30-day trial to Darvas Trader PRO.

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