Trading stocks is like dancing with a partner who always leads. IBD Market School's power trend is the aerial flourish to the crescendo of a particularly strong uptrend.
Never fight the stock market — it's bigger than you are.
IBD founder William O'Neil echoed this sentiment throughout his book, "How to Make Money in Stocks." Being able to correctly identify and analyze the market's movement is the foundation for all further analysis and stock trading.
The stock market trends in three main directions: up, down or sideways.
When the market is in a downtrend, your best course of action is to avoid it altogether. Simple.
Sideways, or rangebound, markets are some of the trickiest times to be an investor. There is still money to be made, but your likelihood of success drops dramatically.
A confirmed uptrend is when your real money is made, and this is when you can find a power trend. If you are fortunate enough to be trading during a power trend, this is when you will likely be fully invested because stock market conditions are so favorable.
IBD researched the strongest uptrends throughout the history of the Nasdaq, comparing them with O'Neil's trades at the time. Thus, IBD's Market School was born: a meticulously crafted set of rules to identify new uptrends as early as possible and gauge the quality of each uptrend. This can help investors decide how much market exposure to have at any given time.
How To Recognize A Stock Market Power Trend
A power trend starts when these four events occur simultaneously on a major index:
- The low is above the 21-day exponential moving average (EMA) for at least 10 days.
- The 21-day EMA is above the 50-day simple moving average for at least five days.
- The 50-day line is in an uptrend.
- The market closes up for the day.
A power trend will usually end with the 21-day line crossing back below the 50-day.
However, there are two possible events that will end a power trend early: a circuit breaker and a follow-through day failure.
Most circuit breakers are triggered by a break of the 50-day line while the Nasdaq is more than 10% off the most recent high.
One way a follow-through day fails is when the Nasdaq closes below the follow-through day's low. You can find more details in IBD's Market School Home Study Kit.
The Power Trend In Practice
A power trend started in October 2020 (1) as the Nasdaq began a four-month advance of about 20%. The power trend came under pressure about a week later (2) and resumed in full strength on Nov. 24, 2020 (3). It was under pressure again on Feb. 25, 2021 (4) until a circuit breaker ended the power trend March 4 (5).
Just because a power trend is your opportunity to trade most aggressively, don't think that means your other rules go out the window.
Follow your normal trading rules. Trade stocks that are breaking out of well-formed bases. Use 7%- 8% stop losses. Be open to pyramiding, especially when the market is trending positively.
