Would you date her?

I get asked almost daily what is the single most important clue that I use to determine when the market is changing direction, and although our trading decision process is completely formulaic, non-emotionally driven … we can learn a lot by looking at recent history and comparing the price and volume movement to itself.

The single biggest factor in our decision process is consistency.

It sounds silly, but I look at being in the market as dating … If the market were a person … would you date her (or him)?  The things we look for in a potential spouse are the same clues we look for in a healthy stock market.

does it act rationally and reasonably?
does it act out of character?
are you seeing out of norm clues?

When the market starts topping and getting ready for a change (moving from an uptrend to a decline), there are subtle clues that are always there.  And more times than not you can look at a price/volume chart alone to see them.

Simple analysis to find out if the current movement is out of the norm for its’ recent history.  Yesterday we had the single largest drop in over 3 months … that is one clue.  We also had a much larger spread (the amount of movement from the high of the day to the low of the day) than normal.  All subtle clues.

In 1987 when the market dropped over 20% in three days … our model was out of the market 8 days beforehand.  The clues were there if you looked carefully for them.  When markets start acting out of the norm (for themselves), it’s probably time to take note and act cautiously.