This particular indicator says:
- Long-term Buy signal if: 20-weekly moving average on the Index goes up OVER the 50-weekly moving average by 1% from UNDERNEATH.
- Long-term Sell signal if: 20-weekly moving average on the index goes down UNDER the 50-weekly moving average by 1% from OVERHEAD.
My skepticism was initially great against filter created of existing/past prices but that quickly went away after I analyzed that this filter hasn't generated a single false signal in the last 40 years. Study carefully the chart below for the SPX index from 1990 to Present time:
The white circles with Buy/Sell signals tracked the point at which the indicator generated a long term buy/sell signal. As you can see it is hardly disappointing. If you had followed this simple strategy, over the past 30 years, you would have outperformed the S&P500 index by 400%. ( Or more if you had choices of different asset class other than SPX. Like Sell the SPX in 2000 and buy real estate in FL instead :D )
Anyway, time for prediction. A question may arise at this point: Why, am I, the fundamentalist and earnings calculator, use techincal indicator as a prediction tool?
Prediction doesn't have anything to do with actual economic reality or earnings. If people started buying again for whatever reason, thinking that not-paying debt is NO PROBLEM. That they can party TWO more years with negative or ever decreasing earnings from here on, then trend-analysis is your friend. And I try pick the most reliable friend, the 20-50 Weekly moving average indicator.
- Look at the RED box and you understand what I mean. The 20-weekly moving average, contrary to your instinct, cannot catch up the 50-weekly from underneath by having a couple of days of massive rally.
- Quite the contrary, the way to get there is meandering with violent whipsaw of 10% up and 10% down for nearly half a year or more, with the final cycle being the big "DOWN", and the Buy signal would have been generated from the indicator.
- This is a feature of any lagging filter. The 50-week average is lagging the 20-week. You first need to stabilize the market at some level, say 1300-1400. And then violent whipsaws - typically down - enough to force the 50-week "catches" the 20-week.
To hell with realities right? Well, I haven't degenerated quite that badly.
At this point there is a glaring inconsistencies in the RED box comparison, in the sense that we are WAY up to the previous RED box in both price but NOT earnings. The fuel is spent back in 2000-2001 for earnings. So where will earnings need to come from? Selling to foreign country will be limited to infrastructures, and if attempted will be simply grabbing LOW HANGING fruit. Since I don't have the answer to this question, I will leave it to your imagination/analysis.
Time will prove that either I am right that the Long-term trend is down, or for some absurd reason it's not about earnings anymore as much as it is pride of ownership "society" when buying stocks and the Long-term trend is actually up.
But what is without a doubt from all the realm of possibilities that I have discussed here, that in the short run (6-months),
- Buying short term call and put would be disastrous.
- Selling long term puts is risky at best.
- Opening a stock position long is still unnecessary given you aren't giving back a whole lot if the indicator is somehow false at this point. And by implication, opening a short stock position other than current positions.
Beware of big 10-15% whipsaws in the coming weeks.
(Credit to Denninger at TickerForum who alerted me first of this indicator, which he said he got from a "grizzled" old trader at CBOE way back.)