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Sunday, October 4, 2015

Long term investment trading signal

After watching the markets since 2006, and being a professional day-trader in 2001-2002, I have learned quite a few things.  As an analytical person, I search for logic in a the markets, which do not operate by any rules at all.  If you have a rule-based trading system that makes you money, one thing is for sure, eventually the system will break.
Upshot: Great to have guidelines for trading, but nothing is absolute.

Couple of mantras I heard as a day trader is 'don't fight the trend' or  'the trend is your friend'.   Basically if the market is going up, many stocks will be going up, and vice-versa.   The market has been on a tear up since 2009, will be 7 years this March!!.  That is quite a trend!
Unfortunately I did not listen to this rule to my detriment, and second-guessed when the market is topping.
Upshot: Spot the trend and play in the direction of the trend.

Today I bring back a post I did in 2008, I am re-writing it simply because my original post is a mess, and this week we may have a trend change upon us.

The concept is simple, have a MACRO tool to spot a trend change to help remove the emotion of guessing the market direction.   I present to you today a tool that has worked as far back as the market has been trading.  Take the weekly simple moving averages for 20 week and 50 week average and use its trend direction to indicate overall market direction.  In the image be,ow when the 50 week (blue line) is above the 20 week (orange line) the trend is up.  If reversed, the trend is down.

Does this mean we are in for a multi-year market fall? Perhaps.  As we can see on the chart the two may flip back and forth and the trend does not change (one example around 2012 below).  But even if this happens, simply sell when the indicator shows, and buy when it flips.  Historically speaking the 'profits' lost is minimal compared to the typical risk of ignoring this indicator.
I do think the markets may someday reach a flat-line when this indicator will be broken.  But until today, it has shown to be a very useful tool.

So look at the image below, take the emotion out of your trading, what do you see?

I see a time to be conservative.  Combine this with China production at 78 month low with china stock market collapsing,  Japan contracting, Brazil collapsing, along with other emerging countries.  USA indicators include (click to read) Factory orders down, payroll is shrinking, GDP is revised lower,  US 3 month treasury yield has gone NEGATIVE, Chicago PMI collapses, home prices are weakening, durable good orders declining, Fed reports plunge in orders, backlogs, and workweek, Fed reports US households contracting in spending, existing homesales decline almost 5%, Philly Fed manufacturing survey collapses, NY manufacturing plunges, Illinois (the Greece of the US) has halted payments due to lack of funds, US export prices collapse most since 2009,

Combine above with my article on future of work, US income levels are back to 1971 levels for men and 2001 for women,

All doom and gloom, not at all!  I see a very bright future AFTER we go through some more hard adjustments to the new economic model.  What matters now is preserving wealth.  For that, consider the long term trading signal below.  For current chart click here:

Video from Karl Denninger, explaining this signal history

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