2017, A Year For Trend Following In The Stock Market

The trend is your friend as they say and the year 2017 has been a great year for those who subscribe to trend following. Whether you believe it or not, top traders and investors do very well when they follow the trend. The problem starts when people think they have it all figured out.

The maxim "The Trend Is Your Friend" has once again proved to the whole world that those who follow the ancient wisdom in Wall Street will reap tremendous rewards.

  • If the trend is up, you buy dips and breakouts and make lots of money
  • If the trend is sideways, you try to do nothing
  • If the trend is down, you stay away and do nothing or learn to short stocks and short the markets

That is what it means to be a trend follower. You ebb and flow with what the market brings you and do not dictate the rules but rather follow what nature tells you to do. 

Ever since the beginning of January 2017, the trend for the Dow Jones Industrial Average is up, the S&P's trend is up and the trend for Nasdaq Composite is also up. And for trend followers or trend traders, the rewards were huge. 2017 was the year that saw most people's portfolio grow bigger. The rich keep getting richer all because the trend for stocks was up.

The chart above is the weekly chart of the Dow Jones Industrial Average. Much of 2015 and 2016 were just sideways trading that brought the market nowhere. After the 2016 Presidential Election, the stock market exploded higher. It broke out of a 3 year consolidation and then proceeded to move higher.

That is the power of breakouts and uptrends. From about 19000, the Dow has risen up to 24800. Almost touching the 25000 mark and if the uptrend continues, the stock market may break that barrier by early next year.

Zooming into the daily chart of the Dow Jones Industrial Average, we can clearly see that the index is in a nice uptrend up to December 2017. The Dow stayed above its rising 20 MA, 50 MA and 200 MA most of the time. The favorite moving average that I like to use to determine trends in stocks and major indices.

When a major index is in a major uptrend, it pays to follow the trend. They don't change trend easily so, when the trend is in motion it often stays in motion. Even when there was lots of negative news all year round, the Dow still managed to move higher and higher. Sure there were dips and sideways movements here and there most of the time but eventually, the Dow Jones resolved to move higher.

So where does that leave us now?

If you look at the price action at the moment, it clearly tells us that the uptrend is still intact, The sideways movement in the Dow reflects the holiday season of Christmas to New Year. In a way, its good to see the Dow consolidating and trading sideways as this price action may set us up for another leg up breakout higher by early next year.

The Nasdaq Composite is also still in a nice daily uptrend. It broke higher recently only to have a slight drift downwards. But most traders will deem this as a normal correction to support area. And if Nasdaq manages to stay above the 6400 area, it will eventually move higher as the path of least resistance is still up.

The S&P 500 index is also in an uptrend. There is no doubt about that. The current sideways trading for 2 weeks is great as it gives the index a nice rest after a nice run up. I would be worried if the major indexes only have a parabolic rise. Uptrends that have nice consolidations here and there are more sustainable than a major parabolic bull run.

I would like to point out Malaysia's KLCI index. It has been lagging most of the major indexes in the world partly due to the massive amount of supply in 2015 that needed to be absorbed. Hopefully the rallies in May to September 2017 would have done enough to absorb those supply.

There was ample support around the 1720 area which was why the stock market in Malaysia rebounded back up in December. This rise coincides with the looming general election that will ripen around early next year when Parliament needs to be dissolved. As we all know, a rising stock market 3 months prior to an election is usually good news for the incumbent government. The Malaysian market has a history of rising prices in January to March.

Much will depend on the performance of the Malaysian stock market to point out the political landscape of Malaysia.

If we look at the monthly chart of the KLCI, we can see that it is forming what chartist call a triangle. As the index nears the tip of the triangle, one can often expect a breakout higher in most cases. Since the prior trend is up, the breakout should be towards the upside. Especially if the world economy continues to expand, the KLCI might explode higher.

Last but not least, this year might be the year of Bitcoin. Rising so much in a single year, Bitcoin is perhaps the star performer in this year's speculative endeavor. Having a new status as a new currency and being listed in CME, Bitcoin has taken the world by storm. 

Drops of 50% is not uncommon in this currency so it is quite difficult to determine whether it is a bubble or just the growing pains that this new trading vehicle experiences. But what we can look for is if it is able to stay above 12000 and form some kind of longer term continuation pattern, then this cryptocurrency will have the ability to continue to move higher.

This year has truly been a year of trends. From the massive uptrend in Dow Jones to Bitcoin's crazy trend up, trend followers are richly rewarded just for following the trend. And I'm a big believer in trend trading as well. Have a great New Year and may next year bring you more trend following rewards!

Charts with the Freestockcharts.com label are courtesy of Freestockcharts.com

Charts with the investing.com logo are courtesy of Investing.com powered by Trading View

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