Market Timing / Market Direction – Forget The Debate

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A recent comment from a reader, I felt deserved an article as a reply. On Dec 10 Toby wrote this comment on the article Financial Investment Using Market Timing Indicators Part 1 . 

I liked his comment and decided to reply in a short article on market timing / market direction indicators.

Here is Toby’s comment on market timing indicators and charting:

“Chartists use technical indicators to help them discern patterns in the market, and thus increase their chances of determining the next direction of the market.

The problem is, those indicators measure what the market has been doing, and assume that trend will continue. But the market can be irrational, witness the fact that pundits often try to explain why the market is behaving so ridiculously (but will soon behave according to their charts) , and why serious chartists (like Teddi) admit that they get it wrong as often as they get it right.

For example, determining that a resistance level of a particular stock is at the (say) 20 DMA is only — can only — be evident after the fact. And today’s resistance level can become tomorrow’s support level. We see this all the time. But we also see a stock break above the resistance line, stay up for a few days, then plunge down below again.

So what help is the chart?

Add to this confusion the fact that exogenous events (off the radar screen) like the latest speech from a Euro zone politician can move markets 4% in a few minutes, and you have a perplexing picture. While technical indicators may help clarify some of the confusion, they still amount to guesswork.”

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My Comment:

Thank you Toby for your excellent perspective on market timing indicators and charting.

Market timing Is Not Understood By Most Investors

I think overall most investors do not understand market timing indicators and charting in general and as result they continually enter into love / hate relationships with charting. The problem that most investors have is they are looking for an absolute technique which in investing does not exist.

When I started investing the gentleman who mentored me explained that market timing indicators are reviewing the past to analyze the future. That in a nutshell is what market timing is all about. Charting is also part of market timing as through charting many investors gain an understanding of what has happened and what may occur in the future.

I had a hard time at the start in believing there was any value to either market timing indicators or charting. However as time went on and my mentored showed me how to comprehend what the indicators were saying, it became more and more obvious to me that my mentor was correct. Today I often wonder how anyone can invest without market timing indicators, market direction predicting and charting. They are the key to my success.

I do not know how old you are, but I started invested in the 1970’s when the world was falling apart. Volatility was incredible and we felt markets would collapse, a world war might erupt and the Middle East would explode. By the time the 1980’s arrived interest rates were already double digits as was inflation. The media was filled with articles about the end of equities. Pictures everywhere showed people lined up trying to pump gas and signs were up on gas stations everywhere proclaiming “SOLD OUT”.  My mentor explained that events (such as Europe today) influence market timing indicators but which indicators take into account.

Market timing indicators do not look at the past 3 days and say, “This trend will continue”. Instead they look at the past day and compare it to the previous day and say “If this trend continues here is what is probably going to happen”. For example on Thursday last week the market sold off. On Friday it rebounded in what appeared like a strong positive reaction to the European meeting. However as I pointed out at noon on that day, my market timing indicators absolutely refuted the move up and indicated that the trend remained lower.

Investors Do Not Understand What Market Timing Indicators Are Saying

Investors believe that when a market timing indicator says “market up”, they think, “Ok, tomorrow the market should move up and I will buy and make money”. But that is not what market timing indicators are saying. They are saying that the general trend of the market is sideways, higher or lower. If the market the following day moves lower, investors say “market timing doesn’t work”. But a couple of days later the market trend moves higher and then continues higher. At that point investors think “How can anyone invest in this market. One day up, next day down.” But investors did not have the confidence in the market timing indicators. When they said market up, then the strategy is to NOT buy immediately but to watch the next couple of days to see IS the trend CONTINUING and ARE the market timing indicators CONFIRMING the trend.

It is not market timing indicators that have failed but investors fail to follow what the market timing indicators are saying.

Market Timing Indicators Fails Because Investors Fail To Follow Them

There are dozens upon dozens of market timing indicators and many have incredible records of accuracy. Charting and market timing indicators fail because investors are not consistent and they fail to understand fully the indicators and charting tools they are using.

The 200 Day Simple Moving Average Has Been An Excellent Market Timing Indicator

For example the 200 day moving average is actually a very simple and excellent market timing indicator. Lately it has come under attack by many analysts as “no longer functioning”. But they are wrong.

Look at the charts below. Any investor who consistently follows the 200 day moving average would have missed the worst the markets have to offer. They also would have enjoyed the best gains on the markets.

I have a friend of 30 years who has invested ONLY by the 200 day moving average. He only buys the index, both the TSX (Toronto Stock Exchange) and the S&P 500 index. That’s it. That’s all he invests in. He does not do bonds. When the 200 day tells him to go back to the market, he goes back to the market. Everything goes in. Every single penny in his portfolio is invested. When the 200 day tells him to cash out, he cashes out. Period. He is consistent to a penny. His returns have been truly phenomenal for over 3 decades and he has missed every major market collapse including the latest one.

Market timing using the 200 day since 2009 shows remarkable profits while avoiding market pullbacks.

Market timing using the 200 day since 2009 shows remarkable profits while avoiding market pullbacks.

The chart below shows that the 200 day as a market timing indicator would have avoided the 2008 market collapse. It warned investors to get out in December of 2007. Not many investors did because truthfully, investors are not consistent and second guess market timing indicators and charting all the time. Investors are always wanting big returns and refuse to follow common market timing indicators. Then when losses mount they blame market timing and charting as inadequate where it was investors who were at fault.

The 200 day market timing indicator warned every investor to get out of the market in Dec 2007.

The 200 day market timing indicator warned every investor to get out of the market in Dec 2007. Any investor following the 200 day would have been out of the market and avoided the entire market collapse of 2008 - 2009.

The chart below from 2002 is even more telling. Every single major correction was avoided by the 200 day moving average market timing indicator. Most major moves higher have the investor fully invested.

The 200 day moving average as a technical indicator from 2002 to 2011.

This chart is even more telling. Every single market correction would have been avoided by investors who followed the 200 day moving average. Every major move in the markets brought profit to those investors who followed the 200 day market timing indicator.

My investor friend read your comment yesterday and told me I should reply and explain that it is investors who are not consistent. They absolutely refuse to believe in their market timing indicators and continually second guess. Most investors, he told me, are more gamblers than investors. On Dec 31 2007, my investor friend sold out of the market because the 200 day told him to sell. He was out of the market until June 9 2009 when the 200 day moving average told him to get back in. For 18 months he sat in cash. How many investors would wait that long to go back into the market? I can tell you personally, very few.

Today my friend has been out of the market since August 2 2011. He is entering his 5th month in cash. He laughed when I mentioned to him that so many investors are still in the market. He wonders why, when the market timing indicators all say, bear market, get out.

Yet today analysts claim the 200 day moving average no longer works. It IS working, but investors cannot or will not follow the market timing indicator consistently. Select this market timing link to read exactly what the 200 day moving average market timing indicator is all about. It’s a short article and well worth the read.

It Is The Chart That Matters For My Stocks NOT THE PROFIT

When I chart a stock for selling options, I look at many factors and consider the premium being received as a LAST reason. I have repeatedly discussed the importance of having a plan as well as the importance of strategy. Yet every day I receive emails from investors who sold at the money to receive 3%, 4% or even 6% return on an option and now find they are deep in the money with their put or call and worried they will have to pick up the stock or close for large losses. They complain that selling puts just doesn’t work. But they are not following any plan. They have no strategy and they refuse to check charts on the stocks they are selling options against.

Why did they do this? Why did they not look at the stock charts to determine what strike they should seriously consider for selling their options to reduce the risk of assignment? Why not look to see where support probably is. Why not determine where a stock could easily fall.

Investing Successfully Is Hard Work

Most investors do not have a plan because investing is hard work. They refuse to consistently follow every day their market timing indicators because it takes time and effort. Investors have to read articles, company earnings reports and study market timing indicators and charts. The majority of investors do not want to do this. They just want returns. They just want profit. When an investor sells an option for one month and earns 2% they rarely tell their friends they made 2% on 5 or 10 put contracts.  No, they tell them they earned ANNUALIZED 24% on that trade, or some ridiculous number. But in fact, it was a single trade of a handful of puts or calls and that’s it. You do not hear investors tell friends, that they examined the stock and determined that the chance of it falling to their strike was less than 25% based on market timing indicators, volume, breadth, cash flow and that after consulting the 10-20-30 moving averages strategy they determined that the chance of assignment was low and they sold the put based on sound technical and charting indicators.

It’s Not Gambling, It’s Investing

Investing is not gambling. Market timing indicators and charts work. My website is a testament to that fact. Every single put strike I sell on my website are all determined by studying the charts, and applying market timing indicators to select when to get in, when to get out, what strikes may be safer than other strikes and what to expect down the road. Every one of my trades discusses that particular stocks’ chart and market timing indicators.

My RIM Stock Trade Was All Market Timing And Charting

For two years I traded RIM Stock through charting the 10-20-30 moving averages trading strategy and Ultimate Oscillator and when the market timing and chart indicators said the strategy was finished and the risk of assignment was too high, I stopped. I was assigned shares once in 2 years and for a few months. But I checked my market timing and stock chart for RIM every single day. If market timing and charts didn’t work, why would I use them?

Market Timing and Charting – Forget The Debate

To close all I can say is that market timing and charting will always endure heated debates, but I urge investors to forget the debate and instead think to yourself if you have consistently, every single day, taken time to study your charts and reviewed your market timing indicators to determine the next course of action for your portfolio.

If you have not, if you have simply dismissed market timing indicators and charting as “they do not work”, then review all my trades going back to 2008 and ask yourself, could I make over 20% a year with my trades without ever reviewing a chart or using a market timing indicator. After 35 years I have to say, it would be impossible to see the kinds of returns I have without them. My SPY PUT hedge is based on market timing and charting and the returns each year speak for themselves.

Charting fails because investors do not review them daily. Morning, noon and at the close and then compare them and draw upon your own trading knowledge to get an understanding of what is going on in the markets.

When market timing says market up, investors think “OK tomorrow, market up.

View More Market Timing Articles

  • Inquisitive

    I noticed that there are some headfakes with the charts? For example, between May and Sept of 2010. How does one handle the headfakes? Also, does this strategy consider stop losses and what happens if you can only get in after the 200 ma has been up for awhile (due to circumstances)?

  • Mario

    There is a lot of rigorous research showing that consistently following a simple strategy such as the 200 day MA does not beat buy and hold over long periods of time, especially when you factor in missing dividends, transaction costs, etc. I bet it would be easy to find a chart where this strategy has you buy right after the market goes above the MA just to see it collapse afterward, forcing you to sell at a loss, then repeat… In my opinion, the strategy should be adapted to the overall macro environment. If the economy is very fragile as it is now, and big moves down can be expected, then it makes sense to get out when things look bad, and perhaps to try timing the market. If you are in a long term bull market like in the 90s, then there is no point.

  • Prburks

    Teddy, this is my favorite article yet! I read and study your methods over and over, as I can see from your well-written and detailed articles that you have had great success. I have purchased many books on put selling, but your website is written with such detail that I can understand what I need to do to have as good of a chance at success as you have had. This type of detail and honesty can’t be found in any book! Thanks for being such a great mentor to those of us who are studying your methods, learning from your experiences and doing the hard work needed to be a success as well. I needed a mentor to learn from; not a guru to follow!

  • The concept behind 200 day moving average investing is simple and straight forward. As it is a lagging indicator (ie checked after the market) investors always wait for a day or two to be certain the indicator continues along its course. Then they go back into the market. Same with the move out of the market. They usually wait a day or two and then sell out. Teddi

  • As the 200 day moving average strategy is a lagging indicator, most investors wait a day or two to get in and to get out. The reduces a lot of the volatility and head fakes. I know from investors that do use the 200 day strategy that they have beat buy and hold constantly over the past 11 years primarily because the market is obviously in a secular bear market. Therefore buy and hold investors in general are simply breaking even or taking losses by staying in the market since 1999. Meanwhile the 200 day moving average investors are doing well since they have missed all the big drops over the past 11 years and are continuing to hold during the upswing in the market. In general I do not believe that anyone can do well without being aware of investing and running their investing like a business. You can read my article about how I run my investing like a business here: http://www.fullyinformed.com/about-me-my-strategy/treat-investing-business/
    Knowledge builds the skills necessary to invest properly and understand risk and reward principles. You idea of using the 200 day strategy along with adapting it to the macro economic environment makes a lot of sense and again takes the principles of treating your investing like a business.
    Teddi

  • Thank you for your very kind comments.
    Teddi

  • Lenpetry

    Interesting. Obviously you use charts, Teddi, and use them well, to get the returns you do.

    But there must be a talent as well as intelligence involved, because in some of your charts you draw what you consider to be a “resistance line”, while to me it looks like an arbitrary line drawn through the middle of a stock price rise then decline. Imagine (in absence of a chart, which would make things much clearer) a mountain — the trajectory of a stock price that rose then declined. Sometimes your resistance line cuts through that mountain, leaving price points above and below the line, and I wonder why you picked that particular spot to draw the line.

    Maybe if I could see the internal logic of drawing those lines, they might seem less arbitrary. I say “seem” arbitrary, not “are” arbitrary, because evidently you make them work for you.

    I like the idea of waiting to see if the market confirms what the charts are saying, but on the other hand have you not said before that you have to act quickly to get the best of an option trade? If you wait for confirmation, you are not acting quickly.

    On the 200 DMA, I once loved that principle, but when I back-tested it, I found that it outperformed buy and hold ONLY because it avoided a major calamity like 2008-2009. Without that type of calamity, in normal or sideways markets, the 200 DMA got me in late, and out late (whipsawing). At least that was my calculation, using the S&P 500, going back as many years as I could bear, back before 2008.

    There must be an art to applying that strategy too.