Over the last several weeks, the stock market has enjoyed a rally. Many people are anxious for a bottom in the recent bear market. Hopeful traders are thinking this rally may be the favorable reversal they’ve been waiting for. But, is it?

As a conservative market trader, I will not try to call a bottom. I think the market is much clearer when viewed in hindsight. However, I routinely track market trends. In doing this, I’m better able to gauge market momentum and strength of trend.

Today, I’ll share with you some tools I use in interpreting the market.

The box to the right is my quick, visual gauge on general market trends. I update this tool each week, on Fridays. It’s designed to provide a simple Red light, Green light approach to seeing overall market trends. I am currently tracking four major market indexes in this tool: the Dow Jones Industrials, the Nasdaq 100, the Russell 3000, and the S&P 500.

I track these indexes relative to each of four trend lengths: micro, short, mid, and long. I define the Micro-Trend as an intra-month period. The Short-term Trend is based, roughly, on a month’s market activity. The Mid-term Trend considers activity over a market quarter (three months). The Long-term Trend looks at directional movement for roughly a year.

The objective is to contrast trends based on daily activity against trends based on weekly data. I find that thinking in terms of multiple timeframes, while searching for trade candidates, is very helpful. This practice yields a much more informed market perspective. Also, it may assist in locating those equities that break from a trend earlier than the pack. These can become viable trade candidates as well as leading indicators, suggesting that other equities may follow.

Although the calculation of my GMT is proprietary, I’m happy to share its output. I’m of the opinion that a trader’s best tool is the one they hold between their ears. It’s fine and appropriate to seek inspiration from others; however, traders need to ultimately think for themselves.

It’s helpful for me, when considering trades, to keep my General Market Trend (GMT) indicator in an open window, as a quick reference. I trade on a multi-monitor system, on which I dedicate one monitor to these types of tools.

As useful as my GMT red-light/green-light indicator box may be, more useful still is plotting the GMT calculations in a graphing tool. Doing so gives me the ability to sort and screen all equities in my database by these calculations.

The above chart (click to enlarge in a new window) is a screenshot of the S&P-500 index with the GMT calculations plotted in the bottom window. This particular view is of a weekly chart, and the lower window output corresponds to the weekly box in my GMT indicator box (at top).

In that lower chart window, the RED line tracks the micro-trend, as played out over a half-month period. The GREEN line is the short-term trend. It factors data over the month and plots a slope accordingly. The BLUE, dotted line is the mid-term trend, considering three months’ data to plot its slope. The ORANGE, dashed line tracks the long-term trend and is informed by a year’s worth of data.

To be clear, the GMT tracks trend. It doesn’t measure volatility. Several of the precursors I explored prior to settling on this methodology included a volatility component in the calculation. In use, these seemed redundant to other indicators I was using. I elected to remove the volatility component and place other volatility indicators, such as MACD, on my chart to supplement GMT. Thus, GMT is simply an indicator of trend and duration of trend.

Also, the above chart is only one I use in trading. It happens to be the only one in which I’ve embedded the calculations for GMT.

There are almost as many ways to trade the market as there are successful traders. I developed GMT to give me a query value in various screens that I may run.

An example is to buy on the dip in a protracted up-trend. To screen for this, I would first isolate my tradable base (I’ll be writing an article on this in the not-to-distant future). Next, I would select one of the longer-period GMT lines (depending on my objective) and eliminate all equities with a down-sloping GMT. Next, I would screen these remaining up-trend equities to identify those who have closed down for a given number of days. In theory, the remaining list would contain only up-trending stocks in a pullback. Of course, the final screen is to visually read each chart in the list, flagging only those you would consider trading.

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