Market Timing and Understanding Short-Term Signals

Jun 13, 2012 | Stock Market Outlook

Market timing has always perplexed a lot of investors and I do believe it is because they do not understand what market timing is telling them. There are varying types of market timing. There are very long-term market timing signals such as those that look at several years. Then there is long-term market timing signals such as the 200 day moving average or the rate of change market timing system. Next there are the mid-term signals such as MACD Histogram (Moving Average Convergence / Divergence) which look out a period of a few months to a quarter of the year. Then there are short-term market signals which is what I post here on my website.

Market Timing And How I Combine Them

Short-Term Stock Market Timing Indicators

Every day on my website I show my market timing outlook through the use of my market timing tools. I use Momentum, MACD Histogram also known by its full name of Moving Average Convergence / Divergence, the Ultimate Oscillator, Rate Of Change, Slow Stochastic and Fast Stochastic. I take these tools and review them every evening after the market closes to get a consensus among the indicators as to what is the underlying market direction. These are short-term market timing indicators. Often I will indicate that I am looking out just a day or two at most and other times I indicate a week or slightly longer.

Market timing indicators being used for short-term outlook

I use market timing indicators for short-term market direction to assist in put selling as well as stock trades and trading options.

Short-term market timing indicators are important because my main method of income and profit is through selling options and trading stocks. Some trades in stocks are for a day or two at most. Put selling on the other hand may last up to a month or longer. Covered Calls are the same and spreads can be anywhere from a week to a month.

In order for such trades to be successful I need to have a barometer of where support sits within the market direction. If the market direction is down and confirmed down by my market timing indicators, then it is obviously time to adjust trades. If the short-term direction is up I need to know if it is up for just a day or two or longer to profit from it.

Mid-Term Stock Market Timing Is Essential

But while I am busy daily with my short-term market timing indicators, I am always aware of the mid-term signals. For example the MACD Histogram gave a solid market down signal around April 4 2012 which coincided with the start of the present correction. That mid-term market timing signal announcing the change in market direction was important because it advised me to return to my SPY PUT for hedging my portfolio.

But throughout my short-term market timing signals I am aware that the overall mid-term direction is lower and this is always taken into account when placing trades. If for example the short-term signals show a market direction up, I look for opportunities to close sold puts or to sell stock that I have picked up in the last downturn.

Consistency In Following Market Timing

With my market timing indicators I am following them in order to place trades. For example, yesterday my market timing indicators general consensus was that the S&P 500 should move higher. This tells me that there could be a chance to close some puts early if stocks can move up just prior to options expiration. It also tells me to be on the watch for opportunities to sell naked calls or covered calls depending on what I am holding in the way of stocks.

But when the market timing indicators I use say that market direction is up and the market does not follow, I stay with my market timing indicators. I don’t try to second guess them. They could be wrong today, but through experience I know that my market timing indicators in general have been accurate enough that is should not bet against them. For example on Friday June 8, my market timing column indicated that the general consensus was market direction up. On Monday the market was up for only a short time and then sold off. But what the market timing indicators were advising is that there is strength in the market and buyers are waiting in the wings. If by chance anything positive had occurred on Monday, the market could have risen dramatically. Even though it did not, does not mean the market timing indicators should be ignored. It means to be careful because even though there was selling, it was muted and on Tuesday it was reversed.

Last night the market timing indicators were somewhat mixed but MACD in particular showed a continuation of the rise in readings. The MACD Histogram was warning me that there is underlying strength and to be careful when selling options or trading positions. The MACD Histogram is both an oscillator and a momentum indicator so it holds a lot of credence when it comes to making market direction predictions.

It is important for my successful trades then to remain consistent in following my market timing indicators.

It’s Not A Score Card But Investing

When it comes to my market timing indicators, it is not a score card. I am not keeping track of how often they are right or wrong for the preceding day. Market timing is a tool being used to weigh the underlying strength in the overall market direction. It is a method to assist in investing in order to earn high premiums on option positions while at the same time being aware of possible market direction changes that could adversely affect my portfolio.

Market Timing Summation

My market timing indicators then should not be used to decide when to go all in or all out. They are not designed to pick a market selloff bottom. They are designed to assist in looking for opportunity. When I indicate market up, I am not saying big rally of hundreds of points. I am saying, chance for an opportunity to profit and be careful to the downside.When these same market timing indicators signal market down, they are not saying plunge about to occur. They are saying watch for put selling opportunities, out of the money because when stocks fall put premiums rise and opportunities abound continually in the market. With a market down signal there could also be opportunities to close naked calls or covered calls for good profits. There is also the possibility to buy stocks and trade them sometimes in the same day.

I don’t worry when my market timing indicators pick the wrong side of the market direction. Instead I use them to assist in be on the right side with my trades most of the time and that is all it takes to have consistent earnings and profits which allows me to grow my capital and protect it from losses. It is a careful balancing act which through the use of short-term market timing combined with mid-term and long-term signals allows me to continue to invest in volatile markets during corrections in order to earn the very best option premiums and often earn good returns on stock moves that during less volatile times would not see the same one day or two day percent returns.

So the goal isn’t to be right all the time. The goal is to stay invested, earn income and profit, know when to not take chances and continue to profit thanks to consistently following short-term market timing signals.


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