Stock Market, Trend Alignment and Indicators

As I was going to write about today's market action, I came across an unfinished post from Sunday - November 28, 2010. It seems like now is the best time for this post.

It was initially being written in response to an article published by Zero Hedge titled, "Smart Money Preparing For Sell Off Like Never Before." Please visit the following link for the original article at Zero Hedge.

The above mentioned article provided an interesting analysis of the recent anomalous stock market activity of the 'Company Insiders' and of the 'Smart Money People.' However, this behavior in itself did not guarantee a crash nor precluded a significant rise. This statement has been proven right by the strong rally of the last two days. On Sunday, in response to Zero Hedge's article, I wanted to stress the fact that these observations were just data points and not guarantees.

Financial markets are inherently intelligent and continuously evolving entities, and therefore, they should be followed rather than dictated. In order to trade successfully, one should align himself with the major market trend. In this regard, one should treat various key indicator based developments only as indicators rather than future predictors. However, if a development is extremely significant then one should trade with strong risk-management discipline.

One of the primary goals of "Understand, Survive and Thrive," was to present a broader overview of the stock market internals and to analyze these markets via the Market Analysis Matrix (used for weekly stock market review). This matrix is based on the below mentioned trading lessons, optimized for their respective significance.

Trading Matrix

This matrix shows the relative importance of each individual trading/investing component. If one follows these segments in a systematic manner, hopefully he will not only be aligned with the major trend but will also be successful in the financial markets.

I will continue to use my trading algorithm to continuously optimize this matrix and the corresponding Market Analysis Matrix. I will continue to update this blog with the latest state of this Matrix. In one of the future posts, I will further elaborate on this chart.