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How To Recognize Trending Markets Early
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How To Recognize Trending Markets Early

by The MoleFebruary 1, 2019

Many years back, during a period of introspection due to a series of losses, an old floor trader who was mentoring me at the time shared with me the most important rule of his 40-year long trading career: Simply trade the market in front of you instead of the one you want to be trading.

Wow. Quite a simple concept really. So why is it so bloody difficult to put into practice? Cognitive biases galore are mostly to blame and the fact that we all have a tendency to start believing our own bullshit.

Fully aware of the fact that I was not exempt from human failings I got to work and embarked on a massive research effort with the goal of identifying discrete market phases and more importantly: which types of trading system were most compatible with which of the three major market phases, i.e. bearish, bullish, and sideways (with HV and LV designations respectively).

I also started exploring a few promising looking indicators (e.g. SlopeStat, VolStat by Ken Long) and various momo measures (i.e. confidence intervals, SQN, bollingers, etc.), hoping somehow be able to catch trend changes in their early phases.

They all work to some extend but what they share in common is that they are all price based and thus are inherently lagging. Which really sucks as some of the juiciest setups happen during the early phases of trending markets, be this on the bullish or bearish side.

What I didn’t realize however, and finally figured out, was that the simplest and most time time tested way of recognizing trending markets early was staring me right in my face! My own failed setups!

Let me give you a few examples of what I’m talking about. Here’s the current E-Mini chart and if you sort of time travel back a few weeks to that first spike high then you may recall how you felt about the market at that time.

Quite a few people grabbed short exposure there and when the setup failed, they cut their losses and then tried again near the 2650 mark. I mean I have to admit – those were some very attractive looking short entries.

But the fact is that they both failed and there is a lesson to be learned here. One failed short setup during a bear market leg happens all the time. Two in a row however should give you pause. And if we get a third it would invalidate an already weakened bearish scenario.

Same thing happened in gold by the way. And this one is actually a lot more blatant than the previous one as we have two juicy looking short setups being blown out of the water in short succession – during a Bollinger squeeze point on the daily chart.

Make no mistake: This is how trend changes look like. But wait – I kept the best for last. Please meet me in the lair:

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Anyway, if everything else fails then find a famous old Spanish gypsy with a crystal ball and you’re good to go. Hey why do you think I moved to Valencia?!! 😉

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About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at the usual social media waterholes.
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  • Darkthirty

    Anyone short AMZN?

  • Ted

    Indeed Captan. Go with the flow until price takes you out. It’s looking very much like a “Goldilocks” market to me. As long as we get numbers that are not to bad and most important inflation remains in check, Uncle Jerome will stay in his cubicle.

  • zzezzezz

    Personally, I’ve been burned too many times with individual stocks… I try to stay with S&P/Dow/Naz only… Sometimes metals…

  • Darkthirty

    I’m with you on that, don’t know enough about it to engage. Won’t use futures or sell options either. Not willing to accept the risk…..

  • Jason13
  • maxcherry

    “updated dec 24th at 11.37 am”
    its over a month behind

  • Jason13

    Am still short Euro and Gold…added Kiwi dollar…crazy action this morning though…almost took me out

  • ridingwaves

    Chinese markets closed most of next week, Shanghai more so than HK
    https://markets.on.nytimes.com/research/markets/holidays/holidays.asp?display=market&exchange=SHH

  • maxcherry

    on balance volume has been leading the spy higher the last month, until today

    https://uploads.disquscdn.com/images/7b3f98e3713dcc03cf16694c5ff6751da0114ffa445aa67e50443088d9203eec.png

  • ridingwaves

    every American should receive shares if this pans out, we rescued the 800 lb housing fix gorillas….pigmen runneth over….

    https://www.marketwatch.com/story/key-senate-republican-outlines-fannie-mae-freddie-mac-privatization-plan-2019-02-01

  • Mark Shinnick

    Well, got in on some dust this morning….but is likely a scalp trade.

  • Jason13

    Yes you’re right. I mis-read the context of the tweet I pulled it from. Thanks for pointing that out. I thought there was something off about it.

  • zzezzezz

    I’m experimenting with using options to hedge my futures trades (when I’m in swing-trade style), otherwise I just scalp options/futures

  • maxcherry

    shows it worked as a contrarian indicator, dec 26 was the bottom

  • Jason13

    Closed Gold and Euro….not moving like it should for me…I’ll sit for now

  • https://evilspeculator.com Sir Mole III

    Pretty much my motto, exactly.

  • https://evilspeculator.com Sir Mole III

    I wish you luck but with the Fed dovish I think that’s going to be a tough trade.

  • Jason13

    Out Gold and Euro but watching…you could be right.

  • https://evilspeculator.com Sir Mole III

    How’s everyone? Zero suggests we may see some profit taking today…

    https://uploads.disquscdn.com/images/50a75a13e8f021c46ddad8636fe7c75b78e265fa980e3bdcdc5de5c1c0011852.png

  • https://evilspeculator.com Sir Mole III

    When you said you were still short gold before – was that recently? I hope you didn’t get squeezed on the way up.

  • Darkthirty

    I don’t see the benefit of futures, all I see is risk….

  • Jason13

    No I was short from 1327 and took profit at 1322….I have another short entry below the low….Euro I’m out with small profit and leaving that alone for now.

  • Jason13

    The dollar yen is moving well.

  • BKXtoZERO

    Mole I have sinned… Thank you for the post. I was wondering about MKT phase and when to know it had changed. I am glad I kept things tight. I am doing ok. Down off my lofty highs but light damage to my ship. https://uploads.disquscdn.com/images/ae3caddd7ce30d0a3148ddb053da855255b7ce61d36f706c1a1d0f7a3265edc9.jpg

  • BKXtoZERO

    VIX finally hit the lower 2.0 bollinger where there is no official style signal yet but finally at a place where VIX has a shot. See past circle events. Trying some TVIX today 38.7
    https://uploads.disquscdn.com/images/f0110343bbc167d18b4c75ec5c87dbcad084d8d8ede3ce6891f1688916305e0d.jpg

  • BKXtoZERO

    me too… closed the DUST position, small gain on this half to somewhat balance the loss on the other. Still took a ding.

  • Mark Shinnick

    I suspect we need to visit other volatility support since October through December….

  • Ronebadger

    I don’t believe it actually HIT it yet…close, but no cigar……W A I T F O R I T . . .

  • BKXtoZERO
  • https://evilspeculator.com Sir Mole III
  • BKXtoZERO

    ya… that is why I don’t dress up.

  • https://evilspeculator.com Sir Mole III

    This is most definitely going to be the Rubicon for the bulls.

  • https://evilspeculator.com Sir Mole III

    I’ll do a momo update on Monday or Tuesday.

  • https://evilspeculator.com Sir Mole III

    I learned a lot of English watching that show in the early 1990s after having moved to L.A. – and I promised to myself I would NEVER get married.

    Well, you all know how that played out…

  • BKXtoZERO

    Here is to a shell right through their armor
    https://www.youtube.com/watch?v=L8vFGQ0uJQc

  • HD
  • Jason13

    To me, the 200 SMA is the line in the sand….thats at 2742 right now

  • http://www.captainboom.com/ captainboom

    Lol. I met my wife when the last thing I wanted was anything to do with women.

  • http://www.captainboom.com/ captainboom

    What does this tell me? Resistance? Critical point of some sort?

  • zzezzezz

    I agree here. I will take a nibble at 2730, then again at the 200 SMA, and then…. ?

  • HD

    The trends have characteristics from the low with Fibonacci. TL’s for confirmation

  • zzezzezz

    checkout the Russell “breakout”..

  • Julie 35 – 25 – 36

    Guys The waiting game continues
    JULIE

  • zzezzezz

    …and that’s the hardest part of all this 🙂

  • BobbyLow

    Afternoon Folks,

    Looks like Crude’s move to the upside on Tuesday might have some legs after all.

    Das ist gut. 🙂

    Price just retested yesterday’s high. We’ll see if it’s able to hold or if it fades again.

  • Julie 35 – 25 – 36

    Patience … $BKX under it’s 5 ema and 5 ema pointing down
    JULIE

  • Julie 35 – 25 – 36

    Just like the Chief says below suggesting profit taking … It’s coming and we gauge the pullback
    JULIE

  • https://evilspeculator.com Sir Mole III

    LOL – that’s the phrase I taught my wife!

  • https://evilspeculator.com Sir Mole III

    The hardest part to do for a trader is to learn how to do nothing.

  • Julie 35 – 25 – 36

    SPX adding a little to short (SH)
    JULIE

  • Jason13

    A lot of tightly pinching BB’s here…feels a little eery

  • https://evilspeculator.com Sir Mole III

    Wrong war buddy – think Cesar and the XIII legion.

  • https://evilspeculator.com Sir Mole III

    I had just moved back to L.A. from Silicon Valley and was determined to play the field for a few years. Then SHE shows up….

    (never looked back)

  • https://evilspeculator.com Sir Mole III

    That sounds much better.

  • CandleStickEmUpper

    I think it is finally about that time we start rolling over into a corrective move, make space on RSI, and continue the uptrend. Unless the bears get their mojo back, I give it about a week for any serious selling, if that fails to breach important support areas, then off we go to the moon. Positioned short NQ for a temporary corrective move within a week.

  • Julie 35 – 25 – 36

    That’s right Chief it is known as the double cheek trade.With your hands you grab both cheeks and sit on your hands LOL! On the sidelines is a strategy too and letting the trade come to you Chief Thanks for the post and commentary today as always

  • TomW4

    Go Julie!

  • Julie 35 – 25 – 36

    Hi Tom …. The key IMO watching the Banks ($BKX) $BKX began rolling over Wedneday and today per post below now under it’s down trending daily 5 ema
    JULIE

  • Jason13

    Boy you really are averaging up.

  • Julie 35 – 25 – 36

    Jason I was down slightly on a probe and small addition . Then a day trade short to break even . I saw a great opportunity to get even on a day trade. I posted the day trade. From break even SPX went up some and I was monitoring $BKX and SPY volume and held. Today I added to existing short
    JULIE

  • BobbyLow

    Almost forgot to mention how much I liked your quote “Simply trade the market in front of you instead of the one you want to be trading.”

    I have a similar quote taped to my desk that reads “Trade the market you have not the one you want”. Ironically, the trader I took this quote from (I can’t remember his name) had what looked to be a nervous breakdown live on CNBC a few years ago as he kept on shorting a rising market and must have lost a lot of money. I found out what happened to him by accident because I stoppped watching CNBC many years ago.

    I also have another saying taped to my desk which says “Let the FKG Candle Complete!” This one is mine that I learned the hard way from getting burned taking action part way through candles regardless of what time frame I was using.

  • Jason13

    Oh, I thought you had your “probe” 200 points ago…

  • Julie 35 – 25 – 36

    I have a quote taped nearby “The sun sets only to rise again” I live by that .. nothing keeps me down !
    JULIE

  • Darkthirty

    Had 2/2/19 as a CRD, but that’s tomorrow …….

  • Julie 35 – 25 – 36

    Jason my initial probe was at 2615 which was two equal legs up from December 26
    JULIE

  • Jason13

    Thumbs up!

  • http://www.captainboom.com/ captainboom

    Boy ain’t that the truth. Very important to let the candle complete.

  • http://www.captainboom.com/ captainboom

    Groundhog day!

  • Julie 35 – 25 – 36

    Guys we must watch bonds closely. Kind of crazy as bonds are being sold today which usually means money rotating into equities.If rotating into equities today looks like profit taking as the Chief suggested in post below i.e. being sold into .
    JULIE

  • randomuser6789

    I think you must be talking about Jeff Macke. I love that guy. Too bad he lost it.
    https://www.youtube.com/watch?v=79HLnTPxMho

  • Ted

    Transports are up as well.

  • Julie 35 – 25 – 36

    Ted IMO SMH going to be a false breakout with lack of volume https://uploads.disquscdn.com/images/bbf4b2cbbfa9ab7a953e43f90cf1e9ab4ca74ec244bab61e976365c4133c2f1a.png Already pulling back JULIE

  • zzezzezz

    let’s rally to 2740 in the next 20 mins… i need a good laugh for the weekend

  • zzezzezz

    That was my one and only new year’s resolution for myself: practice patience

  • Ted

    Julie, a big drop in bonds would scare equities. The Fed.

  • Darkthirty

    2706 is ES VWAP

  • Julie 35 – 25 – 36

    You are correct Ted Bonds and equities can fall together Thanks Ted
    JULIE

  • BKXtoZERO

    Time ckeck! Gerb…

  • Darkthirty

    No whistle pigs gonna stick their heads up, unless they get flooded out!

  • Julie 35 – 25 – 36

    Hey Whoever is buying in the last hour .. Get out of my pot ! Everyone Have A Great Weekend !
    JULIE

  • Ted

    Go Rams, however, I’m not betting on it. LOL

  • Mark Shinnick

    Its cool….losing it is only a superficial appearance compared to his substance; the guy is no joke.

  • Ted

    You too!

  • zzezzezz

    good call. i wanted to see it hit 200 SMA today… but then i read my own comment about patience 🙂

  • Darkthirty

    going to sell the AH, Monday exp options

  • BobbyLow

    That’s who it was. Thanks!

  • Darkthirty

    Losing mine, fundamentals and TA don’t work reliably anymore. Need a tweet indicator!

  • BobbyLow

    I agree. For whatever reason Macke just lost it that day.

  • Darkthirty

    That’s also 786 retrace of the closer move down

  • BobbyLow

    Of course I want the Pats to win. But with their 9 Super Bowl Appearances and 5 Super Bowl Wins over the past 18 Years, The New England Patriots don’t owe me a thing.

    Whether they win or lose on Sunday, I’ll try to live by a quote that I think is originally from Paul Brown that Bill Belichick uses with the Patriots.

    “When you win, say nothing. When you lose, say less.” 🙂

  • https://evilspeculator.com Sir Mole III

    One of my favorites by Lombardi: It’s not whether you get knocked down, it’s whether you get up.

  • https://evilspeculator.com Sir Mole III

    Another one is ‘once you learn to quit, it becomes a habit.’

  • Jason13
  • https://evilspeculator.com Sir Mole III

    On its own it’s often very lagging. Which is why I use it on combination with a bunch of other things as well. I’ll do a momo update either Mon. or Tue. and will take a closer look.

  • Ivan Hrusovsky
  • zzezzezz
  • Yoda

    Congrats Pats!!! Don’t bet against the trend. LoL

  • zzezzezz

    IF there’s a quick SPX drop to 2668-2680, then I’m a short-term buyer at that point.
    IF there’s a quick SPX spike to 2730-2742, then I’m a medium-term seller at that point.
    https://uploads.disquscdn.com/images/e1f117b83f205fbee1e10b314556501bf873716454ebe5f07770762bc8e86306.jpg