On Friday I mentioned that my market timing system got a buy signal on Friday and while I can’t give exact specifics as to the parameters I use, I can tell my theory behind my system and how it’s fared since I developed it last February. It’s really simple and I suggest that everyone play around with their own parameters to find a crossover that suits you, your investing style and timeframe.
I prefer using a daily timeframe and a simple moving average crossover to confirm a buy signal, but it has to be confirmed on both the Djia and Nasdaq, and I always wait until the close to make sure the signals don’t reverse in the final hours or even minutes. I can say that it has given a few false buy signals lately as the markets have been very volatile, but it has kept me out of every major market decline for almost 2 years now. I then use secondary indicators to determine how long or how short I want to be gauging the strength of the trend or if a trend may be about to reverse.
Two things I was watching on Friday to determine if the markets were going to rally was how they reacted to negative news, and how the XLF (Financial SPDR) behaved relative to the DJIA (seen below in a 5day-5min chart). As you can see the XLF remained quite strong and eventually pulled the DJIA up with it in the afternoon spurring on a big rally. Without the financials this rally isn’t going anywhere and so far they’ve been leading the way.
If the markets collapse on Monday it will most likely turn negative so how I get around the whipsaws is I scale into positions and if they prove successful and the buy signal remains intact I’ll add to my positions or look for other opportunities. Right now I believe we’re in an enviornment where the markets want to go up, but they’re going to do their best to trick everybody out of their positions. I’ll be watching to see how the markets close on Monday rather than were they open.