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Trading Secondary Market Trends

This weekend, we would like to focus on the performance of our Secondary Trend Indicator. The origin of this indicator is the name of our website, Technical Indicator Index. When we first started publishing our research and newsletters, back in 2003, we came up with a basket of indicators which we believed in combination would be a useful trend analysis tool, confirming whether or not current trends were significant, and identifying when new multi-week trends were beginning. It was a short-term/intermediate-term trend-finding indicator. We made modifications to which components deserved to be part of that Index and changed its name to our Secondary Trend Indicator in 2005. We have been presenting this indicator for five years in our newsletters using the same component formula that entire time. The components have remained the same since 2005 because this indicator works. It is time this amazing indicator gets more attention.

While our Secondary Trend Indicator is not one of what we call our "key trend-finder" indicators, it is an independent indicator that can be used to confirm the signals we get from our "key trend-finder" indicators. The STI caught most of the significant trends over the past five years. There were a few false signals, but they quickly reversed and caught the next significant trend.

What is our Secondary Trend Indicator? We have identified 8 statistics or indicators that we believe in combination are critical to the underlying strength or weakness of a market trend. Very simply, we assign a value of positive 1, negative 1, or zero to each of these 8 statistics/indicators every night. We total the results and assign that day's summation to a running accumulation of every day's results. Then we subtract from this accumulation a moving average of these summation figures and the difference is our Secondary Trend Indicator. We report this every day in our newsletter to subscribers. For example, for Friday, January 28th, our STI fell 8 points, close to the maximum move that is possible to occur on any given day. We subtracted that from Thursday's accumulated summation and arrived at our Secondary Trend Indicator reading of positive + 13 as of Friday night. STI readings above zero are buys and STI readings below zero are sells. Simple.

This Secondary Trend Indicator is designed to find investable trends that last anywhere from several days to several weeks, and on occasion, several months. This identifies the trends up and down within the larger Primary Trend. Our Primary Trend Indicator is presented after the end of each month, and our other Primary Long Term trend indicator we follow, Dow Theory Buy and Sell Signals, are reported when they occur. Our proprietary Primary Trend Indicator generated a new Buy signal May 31st, 2010, and since that large degree buy signal, the Industrials have risen 1,883 points, or 18.6 percent.

So, within the Primary Trend, which is identified by our Primary Trend Indicator, we have Secondary trends. Long term investors can take long-term positions based upon the Primary Trend Indicator, and intermediate-term traders/investors can conduct market-timed transactions based upon either the Secondary Trend Indicator or our key trend-finder indicators, or both. Our Platinum Trading Service will use these and several other indicators which we have found make excellent filters to keep us on the right side of high momentum trends, leveraging the amount of trading capital at risk into strong returns.

Currently, both the PTI and STI are on buy signals, but with the STI deteriorating, however our key trend-finder indicators have just moved to a sell signal. So, a short-term to intermediate-term investor could be getting ready to move to a short position (or move to cash and stay out of the market if conservative), or perhaps take a light short or light exiting position now, and then move into a heavier short or exiting position once the Secondary Trend Indicator confirms the key indicator sell signal with a sell signal of its own. The best time to enter is right after new signals are generated. Jumping in after these signals have been in place for a while has more risk because every trend has time limitations, and the more time that has passed, the more likely the trend is maturing. The Demand Power/Supply Pressure Indicator shown in a chart on page one of every newsletter is yet another short-to-intermediate term trend indicator that should add confidence to the trend at hand, and to trend turns. It is very nice when the Secondary Trend Indicator, the key trend-finder indicators (all three, the Purchasing Power Indicator, the 30 Day Stochastic, and the 14 Day Stochastic), and the Demand Power/Supply Pressure indicators are all in agreement. We got a new exit long positions signal in the DP/SP indicator Friday, so that is now deteriorating also.

These indicators should be the primary focus of investors and traders using our service. But while these are the objective signals we follow, we also pay attention to studies that give big picture guidance of over-the-horizon risks. Elliott Wave analysis, RSI, MACD, and Full Stochastics, pattern analysis, cycle turn analysis such as phi mate turn dates and Bradley model turn dates, as well as unique developments such as the Hindenburg Omen provide satellite maps of potential market storms and clearings approaching, beyond the vision of our trading/investing indicators. To invest or trade off of these over-the-horizon tools is usually a mistake, especially if the positions taken are in conflict with the STI, DP/SP, or key trend-finder indicators.

Here are the results of our Secondary Trend Indicator over the past five years in the chart that follows:

Secondary Trend Indicator Performance
Signal Date of
Signal
S&P 500
at time
of
Signal
Date
Trend
Ended
(Furthest
Move)
S&P 500
at end
of trend
(FirstExit)
Price
Move
in
Direction
of Signal
Last Date
Signa
lHeld
S&P 500
at
Signal's
End
Price
Gain
at
Final
Exit
Buy 12/16/2010 1242.87 1/27/2011 1299.54 56.67 1/28/2011 1276.34 33.47
Buy 12/2/2010 1221.53 12/14/2010 1241.59 20.06 12/14/2010 1241.59 20.06
Sell 11/12/2010 1199.21 11/16/2010 1178.34 20.87 11/17/2010 1178.59 20.62
Buy 9/1/2010 1080.29 11/5/2010 1225.85 145.56 11/11/2010 1213.54 133.25
Sell 8/19/2010 1075.63 8/26/2010 1047.22 28.41 8/31/2010 1049.33 26.3
Buy 7/22/2010 1093.7 8/9/2010 1127.79 34.09 8/10/2010 1121.06 27.36
Sell 6/16/2010 1114.61 7/2/2010 1022.58 92.03 7/12/2010 1078.75 35.86
Sell 5/18/2010 1120.8 6/7/2010 1050.47 70.33 6/14/2010 1089.63 31.17
Buy 11/3/2009 1045.41 4/23/2010 1217.28 171.87 5/17/2010 1136.94 91.53
Buy 12/26/2008 872.8 10/19/2009 1097.91 225.11 10/27/2009 1063.41 190.61
Sell 10/2/2008 1114.28 11/20/2008 752.44 361.84 12/24/2008 865.42 248.86
Sell 6/17/2008 1350.93 7/15/2008 1214.91 136.02 7/29/2008 1263.19 87.74
Buy 4/24/2008 1388.82 5/19/2008 1426.63 37.81 6/9/2008 1361.76 -27.06
Sell 3/6/2008 1304.34 3/7/2008 1273.37 30.97 4/16/2008 1365.56 -61.22
Buy 2/11/2008 1339.13 2/26/2008 1381.29 42.16 3/3/2008 1331.24 -7.89
Sell 12/13/2007 1488.41 1/22/2008 1310.5 177.91 1/31/2008 1378.55 109.86
Sell 11/2/2007 1509.65 11/26/2007 1407.22 102.43 11/29/2007 1469.72 39.93
Buy 8/21/2007 1447.12 10/9/2007 1565.15 118.03 10/18/2007 1540.08 92.96
Sell 7/18/2007 1546.17 8/15/2007 1406.7 139.47 8/20/2007 1445.51 100.66
Buy 6/27/2007 1506.34 7/13/2007 1552.5 46.16 7/17/2007 1549.37 43.03
Buy 6/13/2007 1515.67 6/15/2007 1532.91 17.24 6/25/2007 1497.74 -17.93
Buy 3/8/2007 1401.89 6/4/2007 1539.18 137.29 6/5/2007 1530.95 129.06
Buy 8/16/2006 1295.43 2/20/2007 1459.68 164.25 2/28/2007 1406.82 111.39
Sell 5/10/2006 1322.85 7/17/2006 1234.49 88.36 8/15/2006 1285.57 37.28
Buy 3/10/2006 1281.58 4/5/2006 1311.56 29.98 4/10/2006 1296.62 15.04
Buy 12/21/2005 1262.79 2/27/2006 1294.12 31.33 3/3/2006 1287.23 24.44

The chart shows the initial date of a new signal, either buy or sell, in our Secondary Trend Indicator, then measures the price move in the S&P 500 in the direction of that signal to the date the trend ended. You can see this indicator found a ton of S&P 500 price movement for most of the significant trends over the past five years. There were occasions when a false signal was generated (which are not included in this chart but occurred between ending and beginning trend dates shown), but in those instances, that signal was quickly reversed. But once a meaningful trend started, this indicator was on board very soon thereafter and rode it most of the way.

The Secondary Trend Indicator is a momentum indicator, just like our key trend-finder indicators (the Purchasing Power Indicator, 30 Day Stochastic, and 14 Day Stochastic) and Demand Power / Supply Pressure Indicators are. We believe strongly that momentum rules markets, thus traders and market timing investors should include momentum indicators in their transaction decision-making process. Momentum catches the powerful mass psychological mood of market participants as well as the unexpected deep pockets intervention that can seem to move markets in bizarre ways and come out of nowhere. Because the STI is a momentum indicator, it will remain on the same signal for a short period of time (usually a few days) after a trend had ended and a new trend is starting. That is because it simply needs the time to gauge when momentum has turned in a powerful way in the opposite direction, versus the possibility that a trend-turn is weak, is a fake-out, and not deserving of a signal change.

But here is what is exciting about this particular indicator. If you were not smart enough to know precisely when the apex of the move occurred, if you were not clairvoyant, and you rode this STI until it changed its signal, you still were able to capture a significant number of S&P 500 points most of the time. In other words, it provides an exit signal, albeit coming slightly after the trend has concluded. In a perfect world, exits come at the furthest point of a trend's move, however that is very difficult to pinpoint most of the time. Exiting is in the eye of the beholder, dependent upon risk appetite, experience, and financial position. Some traders/market-timers exit based upon achievement of a targeted profit level. Others raise stops, hope they do not get stopped out (usually do, more often than not when least desired on a whiplash move) until greater profits are realized, while others ride an indicator until it changes its signal. The problem with the last approach, riding an indicator, is you can lose all your profits if the market turns faster than the signal does. So, if the decision is to ride an indicator and exit on a signal change, that indicator needs to be highly sensitive to a developing trend change. In our experience, most indicators flunk that test. However, based upon the results of the past five years, interestingly, the STI has done a fairly good job of providing a ride'em cowboy exit signal. Not perfect, but the furthermost column on the right shows those results, which are not bad in most cases. We are not recommending any particular exit strategy, as again, that is up to the trader/market-timer and their financial advisor. But we did want you to have the information on this STI for you to consider in your transaction decision-making.

If this is all too much for you, we consider the performance of the Secondary Trend Indicator, our Blue Chip key trend-finder indicators, our Demand Power/Supply Pressure indicators and certain relevant backdrop indicators and market patterns in our new Platinum Trading Service, now available at www.technicalindicatorindex.com.

Over-the-horizon, we remain on high alert based upon Elliott Wave count, phi mate turn dates, Daily, Weekly and Monthly Full Stochastics, contrary readings from overly Bullish investor and advisor sentiment readings, Bearish Divergences between the 10 day average Advance/Decline Line Indicators for the NYSE, NDX and RUT versus prices, a confirmed Hindenburg Omen from December on the clock, and pattern. This is a high risk Bearish set up. Once momentum turns down sufficiently to trigger our STI and key trend-finder indicators, we will be convinced a multi-week decline has started.

We recommend that trial subscribers visit our Glossary button at the left of the home page, as well as our other Guest Articles, especially the article regarding our Primary Trend Indicator, which is a major component of our "key trend-finder" indicator.

 


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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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