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Trend Bias is the tendency of technical setups to resolve in favor of the trend. The stronger the trend, the stronger the Trend Bias. This is a new term, and an enhancement of an old concept: The trend is your friend.

One of the problems we face as technicians is that technical situations don't always turn out the way "the book" says they should. While the term certainly applies to standard chart formations, such as head and shoulders, double top, support and resistance, etc., we most often encounter it with simple overbought and oversold conditions detected by oscillators.

For example, during a bull market, technical indicators can become quite overbought, but prices, instead of correcting as we normally expect, often keep moving higher or simply consolidate. There are certainly many examples of this during the rally from the March 2003 market lows, and during that period, technicians who had become proficient in picking overbought tops during the 2000-2003 Bear Market were suddenly getting their heads handed to them as their favorite indicators began to betray them time after time. Yes, there were some corrections, but they were small, resulting in a series of higher lows.

During the same period, oversold conditions proved to be quite reliable bottom identifiers, although I should emphasize that oversold conditions tend to be fairly reliable regardless of Trend Bias. Nevertheless, during down trends reactions from oversold conditions will usually precipitate some kind of bounce, and deeply oversold conditions always occur near a tradable bottom. Conversely, extreme overbought conditions are very often the sign of a rally initiation, not a top.

The chart below demonstrates the nuances of Trend Bias.

There are two areas enclosed by blue dotted lines which show areas of positive trend bias during the bull market. Note how in most cases the weekly PMO tops do not result in significant price tops because the trend is up and the correction of overbought conditions is manifested internally, not in the price index. Conversely, PMO bottoms are fairly reliable indications that higher prices are on the way.

The area surrounded by the red dotted lines encompasses the bear market. Trend Bias now favors the downside, and PMO tops become reliable indications that important price tops are at hand. PMO bottoms are still fairly reliable confirmations of price lows, but the rallies that ensue are often short, and even the strongest rallies fail to break the price trend.