Recent trading patterns have been brutal, and I hope you were prepared for it. One way I get myself ready for both good and good markets is the use of indicators, and in this column I'll tell you about the indicators I employ in my trading (which I spell out daily in my newsletter, The Chartman's Top Stocks).
While no one methodology, or person, can accurately forecast the market, the newsletter items below contain a number of clues each day.
The Long and Short Picks
Not only are the picks themselves a good way to trade the market, but the trend of picks provides some guidance as well. For instance, the fact that there have been few longs lately is a good tip-off the market is weak, and when the longs predominate, it indicates the market is strong. When you start seeing more longs appear, you can be certain the market is starting to rebound, and when the market is trendless there are few picks of any kind.
This graph was started on Feb. 24, 2004, and reflects the net of longs minus shorts. That number is then compared with how
S&P Depositary Receipts
is performing to see if there is any correlation. My initial hypothesis was that there was an inverse correlation: That is, a high number of longs (vs. shorts) signaled an impending pullback in the market. A high number of shorts (vs. longs) signaled an impending rise in the market.
Others, though, have opined that the correlation comes with the long/short net being correlated
to the SPY movement, with the shift in the net number running about four or five days ahead of movement in SPY. (That is, if the net number rises on Monday, by the following Friday, the SPY should have also risen.) The chart below reflects that "look ahead" with my comments where appropriate. Remember, this is a work in progress!
Oh, one final note. When I say "others" above, it was really the work of subscriber Sam Ginsberg who came up with that correlation. I tweaked it a bit, but felt bad not giving him credit. Therefore, this indicator, which needed a name anyway, is henceforth named "The Ginsberg." Should it continue to work, he'll get all the credit. And should it fail, it'll most definitely be in his lap.
It's not fully baked yet, of course, but it's done a good job of getting the big trend right, if not the day-to-day action. And it's seen little upside lately.
This conservative method is in place to keep one out of nasty markets. As I've noted, it will miss big rebounds, but when you see the indicator say "sidelines," that's a sign the market is still too weak for aggressive action. In addition, this indicator in conjunction with those above has lately signaled a very weak market.
TC/2000 fans, I'll give you the exact parameters. Entry consists of this code: C is greater than MAXC8.1 and C is greater than AVGC50.1 and V is greater than AVGV20.1
Translation: Go long QQQ if it's the highest close of the previous eight days, and if the close is above the moving average of the past 50 days, and if today's volume is higher than the average volume for the past 20 days.
When to exit? Simple. That's defined as C is less than MINC15.1 -- or sell QQQ if the close is the lowest close of the past 15 days.
How does this work in real time? As an example, the last trade you would have made this year was to go long on May 26 and to exit on July 7, essentially missing the bulk of the current selloff. And because the QQQ is still well below its 20-day moving average, we're not even close to an entry.
The good news in this method is that it obviously helps you avoid going long or staying long in a nasty selloff. There's no dip-buying with this strategy, so the bad news is that you'll miss the bulk of big rebounds from extreme bottoms.
However, that's the price you pay for decent returns with small drawdowns. It's not a perfect system and could be tinkered with, but it's certainly a start on trying to dip and weave throughout this frustrating market.
When a market is about to bottom, oversold candidates start appearing. Lately, nothing, which says stocks are either not at support, or even past support. (Overboughts are meant to be shorted; oversolds, to be bought. I try to make the selections when they are near resistance or support, respectively. Therefore, if you short an "OB" for example, make sure you put a stop in right above resistance.)
Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
Smith writes a daily technical analysis column for RealMoney.com and also produces a daily premium product for TheStreet.com called The Chartman's Top Stocks --
click here for a free two-week trial. While Gary cannot provide investment advice or recommendations, he invites you to send your feedback to