Timing the Market

A while back wrote a post about a method for timing the market that I read in an old article of Active Trader (Mebane Faber - April 2009). The author claimed that using a simple moving average on a monthly chart would yield better returns over time and reduce drawdowns. The strategy between 1900 and 2008 returned 10.45% a year versus 9.21% with no timing but the big difference is the 50.31% drawdown as opposed to 83.66% without timing!


Here are some illustrations of the equity curves comparison:

Keep in mind that the vertical axis is a log scale - the difference today is between $1 million for the non-timing system and $5 million with timing!


The next graphic shows the same comparison since 1972, but also adds a curve for a margin portfolio with 2x leverage (non-IRA for example)

Once again, the vertical axis is a log scale. Clearly, the Internet bubble years between 1996 and 2001 were favorable to the non-timing system, but the subsequent crash helped the timing system recover nicely - lower drawdown do help! A leverage portfolio performs much better than its 2x leverage would indicate!


With that in mind, I though that I would refresh my charts to see where we stand. So below is the latest monthly chart with a 10 period SMA as recommended by the author. 

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I have circled in green the month where the system would have put us in cash. It's not perfect as for example in mid-2004 and mid-2010, we would have been kicked out in the middle of a rally. But otherwise, the system keeps up out of big bear markets! And the last signal to get out comes at the end of last month when the August monthly bar closed below the 10 period SMA! And pretty convincingly. September did nothing to help either so this might signal the start of a correction!

So, where does that take us - let's look at the 2008/2009 correction in relation to the previous rally:

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We retraced over 100% of the gain with a congestion zone around the 38.2% line. Now, let's look at where we stand now:

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We have retraced to the 23.6% line so far, but broken it. The next line which proved temporary resistance (38.2%) stands at around 102 on SPY. I am not making any predictions, but this would be the most logical point of resistance. In 2010, we had a mini-corrections but the 23.6% line held:

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That has not been the case this time, so we might need take this more seriously!


In my next post I will outline a timing method used by another market analyst with a good track record! His method also indicates that we should have moved to cash a while back!

Dollar Fibonacci Retracement - 9-22-2011

79 looks like a good resistance line from now when looking at a 2 year chart:

It has been both support and resistance between 2010 and 2011! The next line is at around 80!

It has to be a new candlestick pattern...

Strange pattern in the S&P Futures over the last 4 days!

Not sure what to call that pattern!

S&P Futures - These are big candles

Pretty amazing pattern in the S&P futures - matching black and white candles in consecutive days. And big ones at that! This does not happen in a rational market though!

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We also happened to run almost exactly into a Fibonacci retracement yesterday (and crossed another one rather abruptly). There is a 50% retracement over our head at 1188 that served as confluence line back last November. Resistance level was more around 1200 though and it is of course a psychological line!

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Oil 8/7/2011

Here are some quick charts for oil. First a retracement chart anchored on the lows of last May and the highs and May 2011 (interesting, exactly one year between lows and highs).

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I have circled in green the congestion points around Fibonacci lines. On Friday we bounced off the 61.8% line (traditionally the best retracement target) at around $85. That line (not a retracement line then) had acted as support back in February!


Looking at the standard set of indicators (Stochastics (15.3), MACD (12,26), RSI (15) and OBV), we can see some positive signs as both the Stochastics and RSI made turns on Friday's price action. 

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As an aside, I circled in green where OBV punched through the support line on August 1 (pretty decisively actually) which was a giveaway that we should have expected a bad correction! The other indicators were pointing down already, but the volume action was very telling and confirmation!

SPY - August 7, 2011

Here are some quick charts for SPY on this Sunday before what could be a very interesting Monday!


The first chart show the Fibonacci lines anchored on the lows of 2010 and highs of this year. We can see that on Friday we bounced off the 50% retracement line after a very shaky day. A correction to the 61.8% line (around 115) would actually make sense historically.

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On the technical side, we have some positive signs and some scary negative ones. Below are charts for Stochastics (15,3), MACD (12,26), RSI (15) and OBV. 

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Stochastics are showing a bounce after Friday's action which reflects the fact that we finished way off the lows of the day. But the other indicators are not so optimistic. Clearly, MACD is usually lagging. But look how OBV cratered on Friday! We are at lows going back to July 2009 except that OBV was on the way up then, not down!


At the same time, we are clearly way oversold and indicators such as RSI are at level not seen since last July and we did bounce from there. But I could not predict a bottom here. This is looking very much like last May and June when we had a couple of big down days (4 days with over 3% losses including 2 over 4%) and then some rallies, but it took 4 attempts to make a bottom and we lost more than 15%... A similar loss would put us around 117. 


[Update] - One more chart to illustrate where we are now:

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The dotted parallel lines are a standard regression channel with a width of 1 Standard Error on each side. This covers 200 days. The red, blue and green lines are associated with a n-th order Polynomial fit (in this case 3rd order) with channels at 1 and 2 Standard Errors on each side. In both cases, we are way outside the channels which does not happen that often. 

BAC in a freefall

I have read multiple articles related the current Bank of America troubles and looking at the chart, we see a scary looking future! Here are the links to the articles I refer to:


Bank of America Death Watch
Is Bank of America at Risk of a Death Spiral


Here is the latest chart of BAC with a Fibonacci retracement coming from the lows of 2009 to the highs of 2010. I have circled in red where the lines acted as resistance and support. Last week, we punched decisively through the 61.8% retracement. This could act as resistance ($9.28) should we experience a rally while the next line of support is at $6.31. 


The stock is in technical hell, oversold in just about all the indicators, but amazingly enough, even with last week's huge move, it has not bottomed out in some indicators yet. This could indicate more pain to come!

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I would certainly stay away from that stock while the legal and financial dust clear up!