Thursday, May 1, 2008

May Day and Moving Averages



The first day of May lived up to its reputation with a nice 3.16% gain in the Qs as expected. The employment report tomorrow may be its undoing, but with the nice action in leading stocks it is not likely. While the Qs are approaching the upper channel line which may provide resistance, other measures such as the equity only put/call ratio have not yet hit an extreme level. Currently it stands at .58 and the 5ma is .69. We would expect these to fall to .50 and .60 respectively to signal a top, which may take 2 to 4 more days.

Today I will introduce a "simple" moving average method. The rules are as follows:

Longs

After the 15dema crosses up the 30dema, wait for a minimum of a one day pullback. If the market is extended, wait for a deeper pullback. Enter long above a 3 day high with a stop under the pullback low or 1% under the 30dema, whichever is lower. Trail a stop at penetrations of the 30dema on pullbacks until stopped out.

Shorts

After the 15dema crosses down the 30dema, and the market is below the 50dema, wait for a minimum of a one day pullback. If the market is extended, wait for a deeper pullback. Enter short below a 3 day low with a stop above the pullback high or 1% above the 30dema, whichever is greater. Trail a stop at penetrations of the 30dema on pullbacks until stopped out.

Looking at the chart above, there have been two trades to date this year. First, a short, and now a long. Notice how using the pullback filter kept you out of the market in November and December preventing whipsaws.

The realized gain year to date for this system is 12.43% with an additional unrealized gain of 11.70%. Not bad for such a "simple" system.

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