Wednesday, July 7, 2010

Long Term Moving Average Crosses…

Recently I’ve been writing about the “Death Crosses” that have just occurred in the primary indices. I watch 3 long term "mechanical" type moving average crosses for buy/sell signals (there are many medium and short term crosses too, like I use the 8/34 on the 5 minute chart if day trading):
-The Death Cross is the 50 and 200 DAY simple moving average cross, it is currently on a SELL signal.

-The 20 and 50 WEEK simple moving average cross (must give it 1% separation to avoid the possibility of whipsaw). It is still on a BUY signal, but converging rapidly.

-The 13 and 34 WEEK exponential moving average cross, it is on a SELL signal.
A death cross occurs when the 50 day simple moving average crosses under the 200 day simple moving average. You can see in this chart that the DOW Industrials just produced the death cross today:

In the next chart you can see that the SPX crossed last week and the 50dma is moving rapidly underneath the 200dma:

The Emerging Markets produced the death cross a couple of weeks ago, this foretold that the odds were that our markets would follow. The separation in the averages is now growing and the 50dma is still acting as resistance for now:

Many of the major financials produced death crosses months ago, JPMorgan, for example crossed early in June, and GS crossed way back in February.

As you look at these charts, note how much differential is occurring on the charts now, the 50dma is pointing down quite steeply. Also note that the 200dma is now down sloping on the SPX, that is another good longer term indicator.

The 50/200 cross is a medium to long term indicator, they do not happen very often and they do not predict short term swings, but rather tell you which direction is primary. The current crosses are telling us that the markets are not healthy – death crosses such as these do not occur in healthy bull markets.

The opposite of a death cross is a “Holly Cross.” Both crosses can produce throwovers or whipsaws and thus if you are using them to play the markets mechanically should let the averages separate by 1% prior to entering. Another method might be to enter on the first significant bounce/pullback following the cross.

The 20/50 WEEK simple moving average cross is still on a buy signal. Had you bought that signal long last year, you would have bought just over 1,000 on the SPX. It is narrowing now, but if the market continues down then you could actually wind up taking a loss on that trade when the sell signal finally does occur as it is not very high in fidelity. Below is a 10 year chart showing how seldom it produces signals. There was a throwunder in 2004, that is why you wait for 1% separation, especially if the averages do not have a large slope differential:

The 13/34 EXPONENTIAL moving average cross is a good indicator that is in-between the fidelity of the previous indicators. Below is a 10 year chart showing its performance over the past decade – it has no false crosses in that timeframe, making it excellent for handling today’s volatility – it would not have made you a ton of money on the trumped up rally last year, but it wouldn’t have lost you money at any time and is way ahead over the long term:

The 13/34 just produced a sell signal cross. This is my personal favorite long term moving average indicator. According to it you should not currently be long stocks.