During the 2000-2003 Bear Market many investors endured devastating losses of 50% or more. The sad thing is that a significant amount of those losses could have been avoided simply by using the most basic technical analysis tools. And we're not talking rocket science here. These are tools that appeal to common sense, and that anyone can use.
As investors we want to align ourselves with the trend of the market. At the most basic level, if the trend is up, we can own equities, and, if the trend is down, we should move to cash. That's certainly simple enough, but how do we determine the trend? If you are new to technical analysis, here's your first lesson. It's free, and you can use it to help you avoid trouble in the market for the rest of your life.
The following chart is a monthly line chart of the S&P 500 Index shown with a 6-month and a 10-month moving average. We determine the trend based upon the relationship of the 6-month line to the 10-month line. If the 6 is above the 10, the trend is rising (bullish). If it is below, the trend is falling (bearish).
You can see on the chart that there were only three moving average crossovers during the ten-year period shown. There was one in 1994, when the trend turned bullish, another in 2000, when the trend turned bearish, and, finally, the last in 2003, when the trend turned bullish again.
It is not always this clean and effective, but this simple analysis technique could have helped investors avoid many of the major down turns since 1929. Shouldn't everyone be using it? Remember, we can't see into the future, but we can see which way the wind is blowing and align ourselves with it. Technical analysis is a windsock, not a crystal ball, although, some of our tools can help us prepare for changes in direction.
This chart is finalized only once a month, and it provides a long-term view of the market. When we use weekly and daily based charts, we can get the same kind of insights, but in a shorter time frame. To learn more about these and other kinds of technical tools, read the next chapter in our free Learning Center course.
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