Where's the Sell Signal?
by Carl Swenlin
May 21, 2010
(This is an excerpt from Friday's blog for Decision Point subscribers.)
With the market in a dizzying decline, some of our subscribers are wondering why our market posture is only neutral. Where's the sell signal? The short answer is that the Thrust/Trend Model (T/TM) can only give a intermediate-term neutral signal if the long-term signal is still on a buy (the 50-EMA is above the 200-EMA).
This decision is based upon the conservative assumption that bull market declines will be short-lived, and that a neutral signal eliminates market exposure during a correction, while at the same time addressing the lower probability outcome of a full bear market decline. In other words, we never know if a bull market correction will actually be the beginning of a new bear market, but we do know that most of the time it won't be, so we bet with the odds and go neutral.To answer the question of when a new sell signal will be generated: Not for a very long time. First a long-term sell signal must be generated (50-EMA crosses down through the 200-EMA), which, based upon the current positions of the 50- and 200-EMAs, won't happen any time soon. Once the LT sell signal is generated, we then have to wait for another intermediate-term buy signal. After/if that IT buy signal fails, AND the LT sell is still in effect, an intermediate-term sell signal will then be generated.
The point is that we wait until LT conditions are negative, THEN we wait for intermediate-term rules to generate a sell signal within the negative long-term environment. Our foremost objective is to avoid losing money during declines. Short selling losses can have a double negative effect regarding our performance versus the market, so we try to limit it to only those times where the odds favor success.
This doesn't prevent individuals developing techniques that allow them to be more aggressive, but the parameters of the T/TM are intended to function within an intermediate time frame, with the hope of filtering out shorter-term swings.
Bottom Line: There is no need to expect a signal change for at least a couple of weeks. We think that the most likely next signal will be a new buy signal, resulting from a rally that ends the correction; however, the market needs to stop going down before it can go up.
Click the link to learn more about the Thrust/Trend Model.
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Technical analysis is a windsock, not a crystal ball.
© 2010 Carl Swenlin