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Robert McHugh

Robert McHugh

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania.

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Finding Short and Intermediate Term Trends in 2011

Traders and Investors long to know when new trends are starting that can be expected to last long enough, and travel far enough to conduct transactions that make money. At www.technicalindicatorindex.com , we have developed several indicators that aim to do just this. Our Purchasing Power Indicator is a Short-term (1 to 4 weeks typically) indicator that measures brand new momentum changes of sufficient power to suggest a market move has started in a new direction that could last a while, and could see stocks move several percentage points. This indicator is tied to the NYSE, S&P 500 and Industrials - the blue chip indices. The other indicator we prepare is an intermediate Primary Trend Indicator that identifies new trends that could last anywhere from 6 months to three years. The performance of these two indicators has been remarkable over the years, and in this article we would like to share the results.

We begin with a schedule showing how our Blue Chip Purchasing Power performed during the past 21 months, since the March 2009 lows:

This chart lists every Buy Signal Our Purchasing Power Indicator Generated since the Market bottomed March 2009. What it shows is that our Purchasing Power Indicator did in fact catch the entire Rally from 2009, but even better, tracked every significant rising trend that followed corrective declines during the past 21 month rally.

The total points our PPI Buy Signals caught totaled 1,021.04, which was 70 percent more than the entire net gain in the S&P 500 over that same period of time.
PPI
  Buy  
Signal
Date
S&P
500
Closing
Price
Date of
Furthest
Price
Move In
Direction
of Signal
Furthest
Extent
Of Price
Move
Price
Gains
Percent
Move
 
3/10/2009 719.6 3/26/2009 832.98 113.38 15.76%
4/2/2009 834.38 4/17/2009 875.63 41.25 4.94%
4/23/2009 851.92 5/8/2009 930.17 78.25 9.19%
5/18/2009 909.71 6/11/2009 956.23 46.52 5.11%
6/25/2009 920.26 7/1/2009 931.92 11.66 1.27%
7/13/2009 901.05 8/7/2009 1018 116.95 12.98%
8/21/2009 1026.13 8/26/2009 1039.47 13.34 1.30%
9/8/2009 1025.39 9/23/2009 1080.15 54.76 5.34%
10/6/2009 1054.72 10/21/2009 1101.36 46.64 4.42%
10/29/2009 1066.11 10/30/2009 1033.38 -32.73 -3.07%
11/5/2009 1066.63 12/4/2009 1119.13 52.5 4.92%
1/4/2010 1132.99 1/19/2010 1150.45 17.46 1.54%
2/16/2010 1094.87 4/9/2010 1194.66 99.79 9.11%
5/10/2010 1159.73 5/13/2010 1173.57 13.84 1.19%
5/27/2010 1103.06 5/28/2010 1102.59 -0.47 -0.04%
6/2/2010 1098.38 6/3/2010 1105.67 7.29 0.66%
6/10/2010 1086.84 6/21/2010 1131.23 44.39 4.08%
7/7/2010 1060.27 7/13/2010 1099.46 39.19 3.70%
7/22/2010 1093.67 8/9/2010 1129.24 35.57 3.25%
9/1/2010 1080.29 10/25/2010 1196.14 115.85 10.72%
11/2/2010 1193.57 11/5/2010 1227.08 33.51 2.81%
12/1/2010 1206.07 1/6/2011 1278.17 72.1 5.98%
 
Rally Points From 3/9/09 to 12/31/10
  Total 764.01  
S&P at 3/9/10 676.53  
S&P at 1/6/11 1278.17  
Rise in Index Total 601.64  
Conclusion:
PPI Signals Identified 1.7 Times the Up Points as the Index Rose

Next we want to show you how this indicator performed at identifying corrective declines during the past 21 month rally:

This chart lists every Sell Signal Our Purchasing Power Indicator Generated since the Market bottomed March 2009. What it shows is that our Purchasing Power Indicator did in fact catch All the significant corrective declines during this 21 month rally.

The total points our PPI Sell Signals caught totaled 731.12.
PPI
  Sell  
Signal
Date
S&P
500
Closing
Price
Date of
Furthest
Price
Move In
Direction
of Signal
Furthest
Extent
Of Price
Move
Price
Gains
Percent
Move
 
2/10/2009 827.16 3/6/2009 666.79 160.37 19.39%
3/30/2009 787.53 4/1/2009 783.32 4.21 0.53%
4/20/2009 832.39 4/21/2009 826.83 5.56 0.67%
5/13/2009 883.92 5/15/2009 878.94 4.98 0.56%
6/16/2009 911.97 6/23/2009 888.68 23.29 2.55%
7/2/2009 896.42 7/8/2009 869.32 27.1 3.02%
8/17/2009 979.73 8/19/2009 980.62 -0.89 -0.09%
9/1/2009 998.04 9/2/2009 991.97 6.07 0.61%
10/1/2009 1029.85 10/2/2009 1019.95 9.9 0.96%
10/26/2009 1066.95 10/28/2009 1042.19 24.76 2.32%
10/30/2009 1036.19 11/2/2009 1029.38 6.81 0.66%
12/17/2009 1096.07 12/18/2009 1093.88 2.19 0.20%
1/21/2010 1116.48 2/5/2010 1044.5 71.98 6.45%
4/16/2010 1192.13 5/6/2010 1065.79 126.34 10.60%
5/14/2010 1135.68 5/25/2010 1040.78 94.9 8.36%
6/1/2010 1070.71 6/2/2010 1072.03 -1.32 -0.12%
6/4/2010 1064.88 6/8/2010 1042.17 22.71 2.13%
6/24/2010 1073.69 7/1/2010 1010.91 62.78 5.85%
7/16/2010 1064.88 7/20/2010 1056.88 8 0.75%
8/11/2010 1089.47 8/27/2010 1039.7 49.77 4.57%
10/19/2010 1165.9 11/2/2010 1187.86 -21.96 -1.88%
11/12/2010 1199.21 11/29/2010 1173.64 25.57 2.13%
 
Decline Points From 2/10/09 to 10/29/10
  Total 713.12  
Conclusion:
PPI Signals Caught Significant Price Moves

You can see the performance of the PPI as phenomenal. Not perfect, but found most of the points and trends over that 21 month period. We present the PPI indicator daily in our newsletters to subscribers at www.technicalindicatorindex.com

Next, let's present how our Intermediate to Long Term Primary Trend Indicator has performed over the past decade:

The above chart updates our Primary Trend Indicatorfor the month of December, 2010, the long-term view, which has nothing to do with the short-term view. It generated a new long-term trend "sell" signal two years ago, September 30th, 2008, just as the autumn stock market crash started, when the DJIA closed at 10,850.66, the first change from the buy signal October 31st, 2003, five years earlier, and the first sell signal since 2000. We saw a 4,400 point drop after this sell signal was triggered. On May 31st, 2010 the PTI generated a new buy signal, and it remains on a buy signal as of December 31st, 2010. Since that buy signal, the Industrials are up 1,606 points (15.8 %).

Here is how the Primary Trend Indicator works: One of the tools we have in our arsenal to identify the status of a Primary Degree trend is a simple analysis of the 14 month moving average versus a Slower moving average calculation, the 5 month MA of the 14 month. It has been terrific at identifying multi-year trends, both up and down. While it is a little late in generating the buy and sell signals, it triggered a "sell" near the start of Primary degree wave (4) down, in mid 2000. What followed was a two and a half year, 39 percent drop into the wave (4) bottom on October 10th, 2002. It took a while for this indicator to confirm that the rally that started on October 11th, 2002 would in fact be a multi-year primary degree wave up, wave (5) up. But in October 2003, this analytical tool did in fact trigger a Primary Degree "buy" signal, which led to a four year further rally to new all-time nominal highs on October 11th, 2007 at 14,198.10. We got a near "sell" signal in mid-2005, but the rally rejuvenated itself, continuing on its "buy."

As of December 31st, 2010, our PTI is now on a "buy." The spread between the Fast and the Slow went positive in January 2010 for the first time in 20 months. It improved to positive + 410 in April, 2010, and came in at 417 in May, 2010, but interestingly, has fallen to + 231 as of December 31st, perhaps an early indication this buy signal will not last much longer. This compares to a 1,744 positive spread in December 2003. We require a 5 month moving average of the Spread between the Fast and Slow to reverse in a new direction for 3 consecutive months in order to declare that a new primary trend, a new multi-year trend, is underway. March 2010 generated the first of the three required consecutive positive readings in the 5 month moving average for a buy, April generated the second, and May 2010 generated the third, so a new buy signal was triggered. While we need to respect this new buy signal, the 20 Month/40 Month has not confirmed, and there are a host of dangerous warnings suggesting prices could turn back down hard. If so, this new buy signal could reverse to a new sell signal by early 2011.

There had only been three signals since 1997 before the new buy signal in May 2010, so this tool is useful for long-term investors, as it filters out the noise of up and down corrections of significance in favor of the primary trend. September 2008 was the third signal, and May 2010's was the fourth.

This chart is useful for our Conservative Balanced Investment Portfolio since once we get a new signal, in the past we have been able to rely upon that signal for years. Further, it tells us which direction surprises are likely to occur, so when playing speculative options or futures, we will know the direction where a surprise trend turn is most likely. Knowledge of the primary trend is also useful for trading. In this case, we can be more aggressive when entering a position in the same direction as the primary trend, and less aggressive when entering a short-term trend play against the primary trend.

Next, we look at the chart at the top of the next page as a confirming indicator of the Primary Trend Indicator shownon the previous page. It is a comparison of the position of the 20 Month Moving average versus the 40 month. As of February 28th, 2009, the 20 Month/40 Month Spread went negative, which was the first time that happened since August 2004. In February 2009 the 20 Month fell 145 points below the 40 month, down from May 2008's peak positive 1,026 spread. It worsened to negative -345 March 31st, 2009, to negative -751 in May 2009, and worsened to negative -1,723 in March 2010. It remains negative in December 2010, at -425, but is moving toward confirming the May 2010 Bull Market Signal. Unless stocks fall soon and hard, this signal could confirm a Bull Market signal by March or April. What is helpful about this indicator, is that once we get this indicator's confirming "buy" or "sell," we can look forward with high confidence to a large chunk of the primary trend's move still being ahead of us.

For example, the 20 month MA crossed below the 40 month MA in February 2002, with the Dow Industrials at 10,106. From that "sell" signal point, the DJIA dropped 2,909 points, or 28.8 percent. That suggested a great spot to purchase Leaps Put options.

Then, going the other way, the 20 month MA rose above the 40 month MA in August 2004, at DJIA 10,174. The Dow Industrials then rose 4,106 points, or 40.35 percent. Here, your strategy could have been to either play long-term leaps call options, or to simply go long in the cash market and stay there, in other words, increase your long investment position.

There were no false crossovers or cross-unders with this confirming 20 Month/40 Month MA measure. Once it turned negative, the trend was down. Once it went positive, the trend was up. Short-term countertrend moves can occur within the primary trend.

So, what we can conclude is there are now conflicting signals between the PTI and the confirming 20 Month/40 Month, so conservative investors may want to seek a neutral corner until the picture clears up.

 


Available now, McHugh's exclusive Platinum Trading Service. Follow us as we make up to 30 trades per year, all for the low price of $2,995. We tell you what we buy, when and at what price, and when we sell, and at what price. We will post trading alerts at the top of our home page and send emails to members within 15 minutes of our trades, and post details at our Platinum Current Trade button at the home page. We plan to make money playing both rising and falling trends in 2011. Why not join us? Email us now with questions and comments at www.technicalindicatorindex.com

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"Jesus said to them, "I am the bread of life; he who comes to Me
shall not hunger, and he who believes in Me shall never thirst.
For I have come down from heaven,
For this is the will of My Father, that everyone who beholds
the Son and believes in Him, may have eternal life;
and I Myself will raise him up on the last day."

John 6: 35, 38, 40

 

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