Monday, February 20, 2017

Introducing A New Market Timer

SGS  Market Timer Status:  LONG 
LONG as of close of  November 11, 2016
SGS is a Long Term (weeks to months) Timer
Current Long Term Portfolio (2017)
Past Long Term Portfolios (2008-2016)

SGS Market Timer

About 15 years ago I developed a long term (weeks to months) market timer called SGS.  SGS is a trend following timer and works well in trending markets either in a uptrend or downtrend because, like many trend following timers, SGS is always in line, albeit a little late, with the primary trend.   The problem with  SGS and similar trend following timers is that they fall apart in a "trading" market.  A detailed and useful discussion of trading versus trending markets are presented at this blog post.

In mid 2014, after a powerful and historic five year bull run, chances were high that major indices enter into a wide trading range for an extended period. I decided it was time to modify SGS so it would fit better for that expected trading market.   I changed SGS to become more of a leading timer instead of a lagging trend following timer.  I primary relied on medium and long term Elliot Wave Theory (EWT) and Fibonacci Ratios (FR) predictions and projections.  

I realized a few months ago  that it was a mistake to us EWT and FR to make long term projections for indices or stocks.  In fact, after looking deeply into EWT and FR, I have concluded now that EWT is not a good tool for long, intermediate (days to weeks) or short (hours to days) term technical analysis because rules governing EWT are many and most are flexible enough that there is always an EWT count that perfectly fits what has happened.  FR ratios in general work well in predicting retracement levels for a given index or stock, but do poorly in projecting higher prices when used in time frames longer than hours.

New SGS Market Timer

Over the course of last few months I have been working on a new market timer that could work in a trading and trending market.  The new timer is not a price based timer and does not use any indicators or derivatives of indicators of an index or a host of indices.  It's purely based on the technical analysis of the number of new highs and new lows of  several discrete time periods (daily, weekly, monthly, etc.) for a pool of nearly 4000 liquid stocks and ETF's  traded on NYSE, NASDAQ and AMEX.

As an important part of the development of new SGS, I also back tested the new timer on several trending and trading markets.  Results are excellent and I will publish them once my testing is completed.  Below is an example of test results for SPX from mid 2015 to present time.  When value of SGS is positive SGS is long and when it is negative SGS is short.  As shown on the chart below, SGS has been long since mid 2015 except for two periods during which SPX suffered sharp sell offs.

An interesting observation is that SGS is diverging from SPX, i.e as SPX has been going higher and higher since mid December, SGS has been going lower and lower.  That divergence signals that the powerful rally since the election has matured and chances are high that indices start a 3% to 5% sell off anytime now.

Long Term Outlook
At this point chances are good for SPX to sell off to tests its AUL around 2310 sometime this coming week and then continues its sell off to test its W-DTL around 2280.

My Plan

I'm still waiting for a minor correction, 3% to 5%.  My plan is to do my first buy of three in SPY in that correction.

SPX: S&P 500 Index    D-SMA: Daily - Simple Moving Average
DJI: Dow Jones Industrial Index    D-EMA: Daily - Exponential Moving Average
DJT: Dow Jones Transportation Index    PDL: Primary Downtrend Line
NAZ: NASDAQ Composite Index    PUL: Primary Uptrend Line
RUT: Russell 2000 Index    ADL: Active Downtrend Line
OEX: S&P 100 Index    AUL: Active Uptrend Line
NDX: NASDAQ 100 Index    DTL: Dynamic Trend Line   
TUL: Tentative Uptrend Line   TDL: Tentative Downtrend Line  

Disclaimer: The views expressed are provided for informational  purposes only and should not be construed in any way as investment advice or recommendation.  Furthermore, the opinions expressed may change without notice.