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Monday, April 8, 2013

Intermediate trend indicator

Once upon a time Don Worden from the makers of the Telechart software used to have a table of trends in his nightly update.  He did a fantastic job at it.  Unfortunately he got to the point physically he could not do it anymore.  He had four classifications and it is from that idea that I ended up with three trends on the blog.  I have been trying to simplify things down to make it easier to trade by.  I think I have finally come up with a way to do it.  I added some dots to the chart to indicate the status of the trend.  These dots are, not surprisingly, colored green, white and red, LOL.  The white dots show a neutral trend, but they can be below price (bias up) or above price (bias down).  I am calling it the intermediate term trend indicator.  Hopefully it will work as well in the future as it has in the past.  Lets look at some charts.  Here is the current chart.

We can see the white dots started flipping up and down in early Oct. before the big decline in Nov. got going.  That turned out to be a warning sign of an impending pullback.  The dots turned red on Oct. 23 indicating the likelihood of a down move.  The dots moved back below price on Nov. 23 which gave the trend an upward bias.  The first green dot showed up on Nov. 28 indicating the market was getting stronger and probably starting a new uptrend.  The dots stayed below price all the way up until Feb. 25.  They quickly moved back under price on Feb. 27 and have stayed there ever since.  The flip to a negative bias marked the low of the pullback.  In order for a bias flip to have any meaning price needs to close below the low or above the high of the flip bar.  The flips sometimes make short term highs and lows.  Lets go back in time some.

The first bias flip to down was on April 9.  The market closed lower the next day giving more meaning to the bias flip.  There was more bias flipping back and forth similar to what occurred in Oct. before that decline began.  The bias flipped to bullish on June 6 and stayed there until Oct. 10.  At the time I was thinking there might be a retest of that June low, but we never got any sign in the intermediate trend that would be the case. Lets back the chart up a little more.

After the big collapse in 2011, the dots started flipping back and forth in Sept.  That is similar to what we saw at tops.  Was that portending the market making a bottom?  The dots finally flipped to bullish for the last time on Nov. 20 and stayed there until April of the next year.  Lets back up some more.

As the head and shoulders top was forming in 2011, there were a lot of trend flips.  The system did a reasonable job in capturing some of the moves.  It went red on July 29 a few days before the big collapse.
Lets back up some more.

2010 had two inverted V tops followed by sizable declines.  There was not a lot of warning in the charts of what was to come.  The bias flipped to bearish two days before the flash crash.  At least it was not a total blind side.  These types of moves are why I look at market internals like breadth and sentiment data.  There are usually some clues before a move down of these magnitudes occur.  Both of these tops had a clear case of exhaustion.  I have noted exhaustion type conditions this year more then once, but so far nothing bad has happened.  However, that is not always the case and that is why I will continue to note them in the future.  The bias flipped positive on Feb. 16 and stayed that way into May.  Lets look back a little further.

The bias flipped to down on June 22, but there was no lower close before the market bounced.  There was a bias flip back to positive on that bounce, there was no higher close before rolling over again.  The bias flipped back to down again, but there never was any red dots on that decline.  The bias turned back up on July 13 and was confirmed the next day with a higher close and the market was off and running.  There were two more bias flips that winter, but neither one saw the market make a lower close.  Each one marked a pullback bottom.  Lets go back one more time.

The first positive bias flip came in Oct.  It was confirmed by a higher close and indicated the start of the bottoming process.  The market would eventually go quite a bit lower in the spring of 2009.  The bias then flipped back to positive on March 12 and was confirmed the next day with a higher close and the bull market was off and running.

Over the last few years we have had very high volatility and very low volatility so it was good time period to see how a system handled the moves of the market.  There is always a trade off with switching bias too soon and too late.  I think I have got this about as good as I can get it.  Those V and inverted V patterns have always been very hard for me.  I have trouble figuring out when we are past the point of a retest.  You might have noticed that in the daily updates, LOL.  I also have some trouble when the market runs into exhaustion on the upside waiting for it to drop.  I am hoping this system will make it easier for me in both cases.  Maybe it will help others as well.


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