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Friday, November 9, 2012

My sub interemediate trend filter

There is a sub intermediate trend status in the market trend status section on the blog that can be very helpful for traders.  I am going to show some trend flips that have happened in the past and you can decide for yourself if you might find it useful.  Making new highs or lows in the direction of the trend flip helps to validate the change. It also helps to filter out those market shake outs that aren't trend flips.  Here is the recent SPX chart with the latest trend filter flips to fully bearish (red arrow) and fully bullish (green arrow).

All those big pullbacks in July never flipped the trend from fully bullish.  Also notice the rally above 1460 in Oct. came with the filter fully bearish.  That led to the current sell off.  Lets go back a little more in time.

Both the long and short trend flips in Oct. and Nov. saw price continue a bit, but were not real big moves.  The long flip in early Dec. happened during a pullback and provided a good early long entry into the rally all spring.  Lets go back a little more.

There was a lot of choppy action in 2011.  Even so the trend filter did provide some profitable opportunities. It also kept you out of trouble quite a bit of the time.  If a trader shorted in April on the double top they were doing so against the trend.  If they stayed short too long they got their face ripped off.  The opposite was true in May after the trend flipped down.  Staying long too long there hurt a lot.  Lets go back a little more.

The flip to long on Sept 2nd was pretty good.  However, the flip to short in Nov. was not too pretty.  The market never took out the earlier Nov. low so the trend flip never got going.  Shorts really got their face ripped of Dec. first.  However, if the trader flipped to long they were well rewarded.   The next chart covers the infamous flash crash.

This is about as bad a time period as there is in the market for determining trend.  Notice the trend flipped to short the day before the flash crash.  Not much warning there.  The long flip in June did not work out so well either.  It happened during a pullback with no good long entry.  Price never took out the high of a prior day on the way down.  The flip back to short in late June was a bit late.  The flip to short in late Aug. was also late and did not last long.  The flip to long in July worked out pretty good though.  Lets go back to 2009.

That was one long uptrend from July to Jan.  There were some pretty big pullbacks along the way, but never enough to flip the trend.  Lets look at one more chart.

These charts cover all the different types of market action there is.  Strong trends up and down.  Choppy high volatility and choppy low volatility time periods.  It seems to perform fairly well.  Keep in mind that it goes neutral before the up and down flips.  I did not put the neutral states on the chart because it can be neutral or neutral with a bullish or bearish bias.  That is more difficult to show with arrows and I did not want to complicate the chart.  But wait, there is more.  When combined with the intermediate trend filter I show on the blog, it is slightly better.  That trend filter comes from the weekly charts and can help in interpreting the sub intermediate trend sometimes.  Flips to short when the intermediate trend is long have much lower odds of being profitable then when the intermediate trend is neutral or bearish.  For instance, that flip to short in Nov. of 2010 that did not work at all, came against a fully long intermediate trend.  Using the two together can help eliminate some of the false triggers.

Markets can do some really crazy things.  No trend indicator is perfect, but I believe this one helps bring a little bit of order to the chaos.  It can also be helpful for day traders.  When the trend is fully long, buy morning dips.  When the trend is fully down, sell morning rallies.  That is what the big money traders will be doing.  If you can't beat them, you might as well join them.

When the trend filter flips, the market can be running in the direction of the new trend or be pulling back or about to pullback against the new trend.  A trader has to evaluate the overall market at the time to determine how aggressive to be on entry if not already in.  Any counter trend move that does not flip the trend should be watched closely for a sign of the resumption of the trend.  

I think I have provided enough charts that most people should be able to determine whether they find the trend filter useful or not.  Whenever it changes I will comment on it in the daily update.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.