Bull & bear configs 4/16/2013

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Daniela Ford
5 years ago
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Bull & bear configs 4/16/2013 Our trading model is based on moving averages, and our definition of a bull and bear market differs greatly from the conventional.

1 Bull & bear configs 4/16/2013 Our trading model is based on moving averages, and our definition of a bull and bear market differs greatly from the conventional. This simple strategy allows us to take positions with the trend, and not to predict or forecast market directions. First, lets look at what a bull market and a bear market looks like. And what the definitions are. A bull config A bull config is confirmed when 50ema is above 200ema, as is the case currently with our benchmark SP500.

2 A bear config A bear config is confirmed when 50ema is below 200ema, as is the case currently with our gold stock index. Our trading model and strategy So, $SPX is in a bull market, and ideally, we want to be buyers at cycle bottoms when prices have corrected to the 200ema support. $HUI is in a bear market, and ideally, we want to be sellers at cycle tops when prices have corrected to the 200ema resistance. But, some may ask, why are these EMAs important, and why do we utilize them in our trading models? They are important because moving averages represent the average closing price, and therefore, the 50ema represents the average price of the past 50 trading sessions, which is ten weeks. Ten weeks these days is considered short term, belonging to mainly active traders. The 200ema represents the average price of the past 200 trading sessions, which is forty weeks. Forty weeks is considered long term, belonging to mainly investors.

3 We utilize the EMAs in our models because these EMAs represent support & resistance. If we look at the $SPX chart above again, we see that the current 50ema is at 1540, and 200ema is at What does that mean? 50ema is the average closing price of the past 50 sessions, therefore, traders paid an average price of 1540, and at today s closing price of 1552, traders are in the black on average. 200ema is the average closing price of the past 200 sessions, therefore, investors paid an average price of 1460, and at today s closing prices of 1552, investors are comfortably in the black on average. Implications During a down cycle when prices are correcting, and when prices dip below the 50ema, traders may liquidate causing more selling pressure and often, prices will correct all the way down and even exceed the 200ema. During a bull market, this is when the cycle bottoms and investors add to positions. 200ema is major support during a bull market.

4 Lets look at the $HUI again, because it is the exact opposite of $SPX. 50ema - is the average closing price of the past 50 sessions, therefore, traders paid an average price of 356 and at today s closing price of 273, traders are deeply in the red on average. 200ema is the average closing price of the past 200 sessions, therefore, investors paid an average price of 417, and at today s closing price of 273, investors are suffering huge drawdowns on average. Implications During an up cycle when prices are correcting, and when prices rally to the 50ema and with traders at break even on average, liquidation may occur thus resulting the 50ema as resistance. However, if the up cycle has legs, prices can correct all the way to the 200ema, and with investors at break even on average, more liquidations occur thus resulting the 200ema as major resistance. 200ema is major resistance during a bear market. Of course, when 50ema is deep below 200ema, profit potential for a counter trend rally increases, and that is why we may consider some positions if risks are manageable.

5 Gold has been brutal lately, but despite collapsing prices, some are trying to pick a bottom. Should you? Lets have a look: Gold had a bear cross in Feb, qualifying any buying as a counter trend trade, and as such, risks must be managed and risks must be manageable. Currently, the 50ema is at 1590, suggesting that traders paid an average price of 1590, and at today s closing price of 1351, they are deeply in the red. 200ema is at 1643, indicating that investors paid an average price of 1643, and at today s closing price of 1351, they are suffering from a huge drawdown. Notice that these charts have no price bars or candlesticks? That is because I want to remove emotion when analyzing the markets. With prices currently at 1351 and the 50ema at 1590, counter trend rallies can be quite profitable and if you can handle the risk, you may consider picking the bottom. Summary Before the internet days, trading and investing had a much longer time frame. Some may remember the days of reading stock quotes in newspapers, and buying/selling equities may take days to complete. Nowadays, it takes seconds. That is why our entries and exits are based on the daily charts, and only use the monthly charts for a longer term view. However, the bull/bear configs work in all time frames, therefore, if you are a day or swing trader, you can consider the hourly & 15 minute charts, buying at 200ema support & selling at 200ema resistance. Whatever you do, always manage your risk. Remember Warren Buffett s two rules on investing: Rule #1 do not lose money Rule #2 never forget rule #1. End of tutorial

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