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Chapter 2. Evaluating Risk > Market Direction

Market Direction

Sizing up the current market direction gives you a heads-up as to whether it makes sense to invest new money or stay on the sidelines. A strong uptrend gives you a green light to add to positions, while a strong downtrend advises caution.

Since many investors rely on the S&P 500 to represent the market, the easiest way to gauge market direction is to compare the index to its 200-day moving average (MA) (see Figure 2-1). If the S&P is above its 200-day MA, it's probably in an uptrend, and vice versa. The distance between the index and its moving average reflects the trend strength. The trend is strong if the index is far above or below its moving average. It indicates a trendless or consolidating market if the index is hovering near, or crisscrossing, its moving average.


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