Why are the charts always right? First, they represent the market’s opinion relative to value of a given stock, sector or index. Regardless of our opinion the chart will always reflect the consensus for value. If you buy a stock and the chart is falling in price you are going against the trend or consensus valuation. Thus, the term, “don’t fight the tape” comest to mind. If you short a stock and the trend is moving higher, you are a salmon swimming upstream. It is important to understand, acknowledge and respect the fact the market is always right. There is no such thing as the market moving up or down for the wrong reasons. The market is always right – our job as investors is to get in sync with the market. Being right for the wrong reason beats being wrong for the right reason.

Second, markets create trends over time. The old statement, “the trend is your friend”. Respect the trend. This is where we can get in sync with the market. Define the trend, define the reasons or rationale for the trend. Even if you disagree with the trend or consensus, the trend will be your friend or your enemy. It is our job to deploy the tools and techniques with the sole purpose of defining the trend, up or down. Learn to get in step with the market and following the trend versus fighting it for all the wrong reasons.

Why do I bring up the obvious relative trends? For the simple reason we forget or we start to think we know more than the market. A friendly reminder, being on the wrong side of the trend leads to principle damage. In the current market environment the short term trend is down. A simple look at the chart of the S&P 500 index validates that fact. I have read plenty of articles and reports stating all the reasons the market should bounce and move higher. The reasons sound logical and believable, however the chart says something completely different. Until which point in time the opinion expressed on the chart show a reversal and buyers starting to take interest, the trend is your friend.

There are stocks currently fighting the market trend by creating their own individual trend. If we look at Netflicks (NFLX) we will find the uptrend still intact and moving higher. The same is true of Chipolte Mexican Grill (CMG) and SanDisk (SNDK). The point being, if you want to buy stocks or sectors of stocks with and ETF, follow their trend. This is one reason we spend so much time scanning the market to find trends up or down.

There are other sectors setting up for a trend reversal. Take a look at the semiconductor ETF, IGW, if it follows through, the chart would break above resistance at $48 and reverse the downtrend from the April high. The Industrial ETF, XLI, needs to push above the $30 level and break higher to reverse the downtrend as well.

Others are setting up for a continuation of the current downtrend in play. XHB, the homebuilders ETF, broke below support at $16.30. The last two weeks has been spent retesting the upside, but the chart shows the ETF at resistance near $16.30. What was support is not resistance and the likelihood the downtrend will continue are high. Watch for a confirmation or continuation of the trend lower.

The trend is your friend, respect the trend and remember, it is our job to deploy the tools and techniques with the sole purpose of defining the trend, up or down. Put in place a strategy for capturing the trend.

Make it a great day!