Monday, August 16, 2010

Rough Seas Ahead?

In July's trio of posts, The Nifty Fifty, The Effectiveness of the 50 MA, and It Was the Best of Times, It Was the Worst of Times, I explored using the 50 day moving average to generate intermediate term long/short signals on the SPY. Though it experienced the occasional whip-fest , it proved quite beneficial over the long run. Due to the trending nature of 2010, the 50 MA has done a commendable job in positioning its followers on the right side of the trend thus far.

With the recent weakness in equities, we've seen another potential sell signal based on the 50 MA. The reason I say "potential" is because it really depends upon your filter. In outlining the initial strategy I mentioned we want to see a break of 1+% of the 50 MA before declaring it an official break. The idea is to avoid whipsaw by flipping your position too frequently based on noise. Given that the most recent 1% probes below the 50 MA have occurred during the opening of the market on sizable down gaps that have been immediately bought up, I'm biding my time before I call this a genuine sell signal.

[Source: MachTrader]

If another April to July type downdraft is in the cards, those heeding the most recent break of the 50 are going to be well-rewarded. On the other hand, if the SPY quickly reclaims the 50 MA and we turn into sideways chop city, this particular signal may not turn out as lucrative as some of the others in the past.

1 comment:

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