Thursday, May 1, 2008

Definitive Forecast of the LT-Sell signal from 20 WMA vs 50 WMA CROSSING

The complete introduction is here:

I will selectively recap what that is:

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.

Now here comes the NEWS. There is GOOD news and BAD news for BEARS following this LT Signal.

I am intrigued at what point, WITHIN ONE QUARTER from May 1, 2008, does the 20 WMA crosses over the 50 WMA, and thus reversing the SELL signal into LT-BUY signal ?

There are basically several scenarios - SEE CHART BELOW - that I consider, and (please don't ask too much details for now), probability of those as implied by SPY Aug option prices. There are things that don't exactly fit any of the description but I "managed" to lump them in one category or the other (and don't ask me how, either).

I also showed:

  1. the end of period SPY prices for each scenario, and
  2. a chart showing 50WMA minus 20WMA (see that the last cross was mid January into LT-SELL, and you can see several projections: ONLY two of them (2% weekly decline and 3% weekly decline over the Qtr, resulted in a crossing).

The Good news: Within the next 3 months, it is UNLIKELY that the LT-SELL signal will change into a LT- BUY signal

The Bad news: It would, for the most part, be like chinese water torture, watching paint dry, and unprofitable expedition for inexperienced Bears.

Look at what happened to BEARS in HIGH probability EVENTS:

  • Whipsaws (the last two scenarios), and
  • FLAT (the first scenario)

Not only do you NOT make money, the signal will also be getting close to cross into LT-Buy.

You are trading $$$! Not trading Signals.

You (BEARS) could be right about the signals.

BUT - 75% of the time, as my estimate indicated, you WONT make much money or even lose.

(That's basically the same as 75% of the time the Bulls are wrong about anticipating the signal to turn into LT-BUY, but they wont lose anything or even make a bit of money!!!!)

This is the where the truest of the true and nimblest of the nimble will rise, while wannabees and emotional, political, religiously motivated people, will FAIL.

Disclosure: The predictive ability of that 20WMA/50WMA is very good, which is why I bother spending some time in looking at it in-depth. Hope you find something useful.


Genesis said...

This signal is NOT intended for shorting.

It is intended ONLY for long-term, long-side index investing.

If you abuse it, you get what you deserve. I have made this clear multiple times, including in the original video and textual presentations.

What part of "Cash" doesn't make sense?

Trading a bear market is entirely different than trading a bull market.

That timing signal is not a trading signal - it is a long-term investing signal.

MTGSPY said...

Thank you for the comment.

From the LT-LONG-only perspective you can take that stance and still find a respectably large (75%) odds that it's cool to stay long with minimal risk if you believe the odds I am producing (or don't have significant dispute about those odds materializing).

From the cash perspectives of course, as you say, it won't make any difference and would still feel like water torture given that there's 94% chance it's not turning to BUY in 3-months, yet there is a significant tail risk (14%) it's going up decently over the next 12 weeks. And like i said, 75% odds of not getting clawed by bear WITH a bear signal ON.

Let's not turn this though, into war of words, because every word above is true and what you say, is also true. Just the viewing angle difference.

Anonymous said...

There's no water torture in holding cash waiting for the timing signal. You definitely aren't losing money, except perhaps relative to price inflation.

MTGSPY said...

Greed vs. Fear my friend. When I am not fearful I am greedy as hell and so should you. The thing that keeps me alive given the two weaknesses is deducing when to switch to the other :)