Riding Bull Markets is Challenging (This Rule Will Keep you on Track)

“Never confuse brains with a bull market.”

The above Wall Street adage is true in some respects and false in others. On the true side, it is much easier for investors to be long stocks, as a rising tide lifts all boats. However, while many investors may not admit it, bull markets can be far more challenging to navigate than they appear on the surface. That’s because, in real-world trading, our emotions run wild. Some everyday investors’ thoughts in a power trend may sound like this:

“The chart looks like the Empire State Building!”

“This rally feels long in the tooth.”

“This is a bubble. How much further can these valuations go.”

Trends Tend to Persist

Legendary growth investor William O’Neil summed up market trends best when he said:

“It is one of the great paradoxes of the stock market that what seems too high usually goes higher, and what seems too low usually goes lower.”

The quote above should be revealing to investors, especially in the current market climate. For example, the tech-heavy Nasdaq 100 Index ETF (QQQ) looks as if it can do no wrong and continues higher.

Zacks Investment Research
Image Source: Zacks Investment Research

Conversely, Natural Gas ETF (UNG) continues to hemorrhage. “The Widow Maker” plummeted from a mind-blowing $138 to $14 – with no end in sight.

Zacks Investment Research
Image Source: Zacks Investment Research

In rampant bull markets (like the one we are witnessing now), investors often leave profits on the table (or worse, go short) because the market seems “too high” or “overvalued.” However, the action in QQQ and tech stocks like Nvidia (NVDA), Meta Platforms (META), or Microsoft (MSFT) illustrate why opinions mean little on Wall Street.

How can investors ride rampant bull markets (or at least not short them)?

The Secret: Understand the Difference Between Price Confirmation & Secondary Indicators

Secondary indicators include anything that is not price itself, such as sentiment, breadth, economic data, or the action in leading stocks. Conversely, price confirmation refers to when the price rotates above or below a previous candle ON A CLOSING BASIS (typically on a higher time frame like a weekly or a monthly chart).

Price Confirmation Example

Let’s use the QQQ as an example since it is the time frame I rely on. Investors should never lean short or draw dramatic conclusions about an uptrend reversal until the price **closes** the week below a previous week’s low. The only caveat is that if the price closes below a previous week’s low but is near the 10-week moving average, investors should continue to lean bullish.

Since QQQ broke out in November 2023, QQQ has never **closed** below a previous week’s low without being near the 10-week moving average. This one simple rule would have saved investors tons of headaches while simplifying their process!

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Image Source: TradingView

Secondary Indicators

Secondary indicators include anything other than price itself, such as sentiment measures, breadth, economic data, or the action in leading stocks. Secondary indicators have their place in investing and can add conviction. However, amateur investors must understand that real-world traders never make big directional bets without price confirmation first. Remember, price is the only scoreboard that matters. If you defer to the trend and wait for confirmation, you will enable yourself to block out the noise and ride trends longer in both directions.

Bottom Line

Bull markets can be more challenging to navigate than they appear on the surface. Understanding the difference between secondary indicators and price confirmation is the key to profitability and success.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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