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Tastylunch (29.93)

Moving Average Crossover Paper

Recs

19

June 22, 2009 – Comments (27) | RELATED TICKERS: SPY

Since we have a possible 50/200 DMA Golden Cross happening right now on the S&P 500(well on the simple moving averages anyway )

I thought this semi-related paper might be worth sharing.


Moving_Average-Holy_Grail_or_Fairy_Tale-Part_1 -

It's one of the few papers I've seen suggesting that TA may actually work and in this case actually be safer than buy and Hold (!) (check out those drawdown numbers).

We'll have to see if that holds true in " Part II" or if the good Dr Wong was just teasing us, assuming I can find it when it's published. :) Based on what else I've read by him he does have an agenda (he's deinitely pro-market timing and seems to give advice based off that premise) so take that into consideration however you wish.

In any event the more I look the more it seems likely that the simplest TA systems have the greatest chance of being meaningfully tradeable

 

 

27 Comments – Post Your Own

#1) On June 22, 2009 at 1:30 AM, WHOinvestor (60.50) wrote:

Entering a transaction based solely based on MAC is not good if you're buying individual stock. TA works as probabilities, never certainties. Hence, it is best if a decision is derived from a consensus of TA Indicators, instead of just one of them.

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#2) On June 22, 2009 at 1:40 AM, portefeuille (99.75) wrote:

that crossing is rather old news for some other indices, like the bovespa ...

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#3) On June 22, 2009 at 2:05 AM, GoodVibe4Ever wrote:

Hi Tasty -

It has been long time since we posted on each other blogs. I read most if not all of your blogs. Learning mostly a new thing from the conversation. Keep them coming.

I was planning a blog for the topic of your blog but I think yours will do so I will add here what I think might complement yours.

The golden cross is a bullish technical indicator. It occurs when the 50-day simple moving average crosses above the 200-day simple moving average. The opposite of it is called the "death cross". Both shown here on this chart. (plus EMA 50/200)

We already made a golden cross in many of the other indexes such as NDX, COMPAQ, MID, XBD, DAX, HSI, and as many beta stocks such as AAPL, GOOG, RIMM, GS, and AMZN among many others and we did it on both MA and EMA** at times So I believe SPX making a golden cross is non event in my opinions. Actually INDU, SPX, TRAN, and BKX lagging behind the horsemen is a bearish sign in my book. Okay, I am little bearish lately anyway. :)

As you mention above, the cross was on the MA not EMA for most indices. If you look to this chart, you will see that we didn't cross at all if we take into account using EMA instead of MA. Sometimes even we never closed above the 200MA like the first chart!

One important point to consider a golden cross true cross is two things: It doesn’t rollover back again shortly generating the death cross! :) (shown back in 2007 in the two previous charts). Second the 200 MA must start rising instead of falling, which is the case here (falling) due to the steep decline of the 200MA from the all time high, which will be the tough job if further steady decline presist in the coming weeks. Other wise, I will say that the golden cross can carry potential long term bullish return.

By any chance did you check my last blog? I believe this is my best long term indicator that is plotted on monthly basis instead of daily. Wish you a good night sleep.

GoodVibe

* Simple Moving Average

We get SMA by taking the daily closing price of a security or index over a specific number of days, add them, and then divide by the total number of days. Every day, the calculation is repeated by adding the current closing price while dropping the first day closing price to get the new average value.

** Exponential Moving Average

In an effort to reduce the lag in the SMA, we can use EMA where we apply more weight to recent prices relative to older prices in a specific formula. The formula can be based on a percentage-based EMA or period-based. The most common is the period-based.

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#4) On June 22, 2009 at 11:09 AM, anchak (99.84) wrote:

This is a simple Technical indicator which seemed to have worked in the past.

However 2 key points need to be kept in mind and the first one is the MOST CRITICIAL - IMHO - which Goodvibe raised ( I have talked about my tweak on the 50/200 MA system - and this is the point I tried to cover)

(1)GV said

"One important point to consider a golden cross true cross is two things: It doesn’t rollover back again shortly generating the death cross! :) "

This is essentially  a stability check. Visually if you think thru the things for two of these lines to cross - they can happpen in the following cases - and they all got to do with direction ( slope also comes in play - which is the first derivative- but lets keep it simple)

Sign : +/- ( Ie Up/Down) . 2 lines ie 2x2=4 possible combinations......However "Golden Cross" is only 2 of these outcomes ie 50 MA rising so both +

1. 

50/200 : +/+ This "the" best outcome. Both series rising AND a golden cross. Strength in market.

This is almost impossible for now - due to the decimation - best outcome is 200 MA to start "stalling" and 50 comes up to envelope

2. 

50/200 : +/-  What GV is  referring here....we have a cross potential merely because 200 MA is still falling -while 50 came up sharply due to the V shaped rally.

3. 50/200: -/+  and -/- are  the "Death Cross"  scenarios.

One thing though - do not discount this indicator - but typically if there is an immediate reversal ie "false" signal - it happens in the next few weeks.

Also the 50/200 EMAs are additional confirmation.

GV's indicators , which are on a monthly basis - are much more difficult to be manipulated/diluted by daily abberrations

Hope this added value

 

 

 

 

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#5) On June 22, 2009 at 3:35 PM, Tastylunch (29.93) wrote:

WHOinvestor

hmm don't know if I agree with that, especially since there is lack of empirical evidence for many TA tools and some tools are readily intrepretable in contradictory manners.

I do agre it nevers hurts to have multiple indicators in agreement.

I alos agree that TA is also about probabilities. When I use it I use it as a timing mechinsim for purchases I've determined by FA rationale.

portefeuille 

You, me and about 50-100 other guys on CAPS maybe know what the bovespa is. :) That's why I went with the S&P.

I still like Brazilian equities the best of any country out right there right now, funny you brought it up.

I personally believe the Bovespa will likely become regularly reported in US in the decades to come like the Nikkei, FTSE, DAX are now...

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#6) On June 22, 2009 at 3:45 PM, Tastylunch (29.93) wrote:

GoodVibe4Ever

hi nice to see ya GV, Yeah my 9-5 keeps me pretty busy. I can't keep with you guys on the CIL  but I do usually read the recaps etc at  least weekly. I had read and recc'ed that one you linked already. I just had nothing useful to add other than what you guys probably know (transports, rail, copper, chinese electricity usage etc)

I'm inclined to agree with your interpretation, I think it's a fakeout this time for a variety of reasons (the macro situation is v v bad and other things I watch are conflicting with the cross like the put/call situation and Vlaue Line's stance). But mainlyI think it's being messed up into a false positive by the scale of the retracement rally.

As I said in my blog I use the EMA myself, but I still think many people use the SMA which makes it worh talking about. The problem with using the EMA in my point of view is that I'm not necessarily sold on TA indicators that popular public doesn't readily use. I doubt if you showed my old man the EMA he'd know what it is, but he'd know the SMA.

So I am a touch conflicted there and usualy they aren't this far apart in my experience, but we live in interesting times.

If people reading this want to understand why the EMA is mathematically better please read the paper attached in the blog, I belive the author explains it pretty well on page 3. Or of course GV's explanantion.

BTW do you follow Larry Summers at all? The "Will GO" flashed a pretty hard sell signal too.  It does seem like the smart money crowd is done for the summer. (steven Leuthold is another bull turned bear)

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#7) On June 22, 2009 at 3:50 PM, Tastylunch (29.93) wrote:

anchak

I also wait for a volume confirmation surge Anchak. I think we are unlikely to get one given the seasonality and crapitude of the macro situation, so mark that down as another factor suggesting this is a fakeout not a breakout.

Yeah I'm all too familiar with Death crosses. I guess I should have elaborated on that in the blog to save you guys the time. Sorry about that. :(

What was mainly interesting to me was the paper by Dr Wong. Im hoping I get my hands on part II to see where he goes with his conclusion from part 1.

Thanks for the alwasy valuable input, it's always nice to have it laid out so clearly!

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#8) On June 22, 2009 at 9:52 PM, binve (< 20) wrote:

Tasty, Hey man, thanks for the post! GV and anchak's comments were great, and I agree with your responses to them. I actually referenced this post in my lastest one.

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#9) On June 22, 2009 at 11:48 PM, Tastylunch (29.93) wrote:

binve

hey cool !

Yeah I knew you were a bear so I'm not surprised you aren't buying into this Golden Cross.

I think Oil is due for more shellacking as well...

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#10) On June 23, 2009 at 2:15 AM, JonBarleycorn (68.45) wrote:

Great posts guys. I cant wait for Part II of the Wong series.

Keep up the good work.

 

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#11) On June 23, 2009 at 3:28 AM, checklist34 (99.80) wrote:

ok i'm an interested buyer, almost sold. 

my question is, ... which moving averages does one watch for a crossover with?  200/50?  

this seemed to describe a crossover of the same average, one shifted and one not.  Its late and i'm exhaustd and I have malfunctioning smoke detectors which have for 2 nights in a row prevented sleep of any significant kind.  

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#12) On June 23, 2009 at 9:06 AM, portefeuille (99.75) wrote:

Figure 2 of the document shows what I thought when I first heard of moving averages. They lag by construction. If you shift them back ("centered MA") they smooth things out. If you do not shift them back they show "momentum". There is probably not much more to it. There importance comes from "go with the flow (momentum)" and the self-fulfilling prophecy aspect.

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#13) On June 23, 2009 at 6:07 PM, TigerPackFund (< 20) wrote:

Tastylunch- 

I hope you can participate in the new "collective" picking system portfolio we have devised for a small group of Top CAPS members.  Click below to read the blog under the new TigerPackFund member name explaining our effort: 

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=215551&t=01008389776301665428

We could absolutely use your smarts and experience to generate a higher return for readers.

We are basically asking you to pick up to 5 stocks at time, under the normal CAPS rules and scoring system.  Our goal is to find a solid group of 40 members who have proven themselves already, to be our regular contributing stock pickers.

-TigerPack

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#14) On June 24, 2009 at 1:01 PM, WHOinvestor (60.50) wrote:

 

 

The 50MA crosses the 200MA at a shallow angle, other than that the 200 is on a downward sloping.

 

RSI is heading towards the oversold level from near the overbought.

 

Slow stochastic is bearish too.

 

Other indicators do not agree with th MAC.

This crossover could be a whipsaw.

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#15) On June 25, 2009 at 1:28 AM, Tastylunch (29.93) wrote:

JonBarleycorn

hey thanks Jon, if I see the second Wong paper I'll post it.

checklist34 

Yes that's tge one I use for broad market timing.

portefeuille 

right, that's how I see it as well. It only works because the crowd all interprets it the same way. Self fuifilling indeed

WHOinvestor

I agree I think this is likely a whipsaw.

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#16) On June 25, 2009 at 1:31 AM, Tastylunch (29.93) wrote:

TigerPackFund

Hey thanks for the gracious invite! Sure I'll submit some ideas and see if they are useful to the TP fund.

I'm pretty jammed up this week going over new hires, but I'll try to get to it this weekend.

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#17) On June 25, 2009 at 2:54 PM, WHOinvestor (60.50) wrote:

Tastylunch...

 

as of this writing, the S&P, DJIA adn NASDAQ all went up today, which had not happen during the past few periods of non-confirmation.

In this uncertain times, I am long on defensive sector and short on lousy stocks with bad TA and fundamentals. Im avoiding Mining and Energy stocks except for Technip.

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#18) On June 25, 2009 at 6:00 PM, TigerPackFund (< 20) wrote:

I will add your member name to the TigerPackFund Favorites list to reserve a spot.

No hurry on the picks, and you can select up to 5 total as you like for timing. You do not need to keep 5 open at all times.

We had a good day for the picks on a whole in the Fund, excluding my own of course!

-Tiger

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#19) On June 30, 2009 at 5:41 AM, GoodVibe4Ever wrote:

Check out some updates here.

GoodVibe

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#20) On June 30, 2009 at 5:44 AM, GoodVibe4Ever wrote:

I should added a note that the related updates is from comment # 27 and below.

GoodVibe

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#21) On July 02, 2009 at 10:49 PM, d1david (29.86) wrote:

great discussion

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#22) On July 04, 2009 at 12:52 AM, TheGarcipian (87.68) wrote:

Hey Tasty, long time, no talk to. Over these past 3-4 months, I've been busy protecting the only investment I've got these days that worth a damn anymore: my job. And it's had me flying all over this country. This whole sideways market has just taken the wind out of my sails, and I'm content (well, no, actually "lazy") enough to let it ride as it is now. Dangerous, I know, but I'm still reeling from the crotch kicks I got in Feb/March when I was out of the market and missed the whole run-up thing. Pisses me off. But I know as soon as I jump back in, the market's gonna tank. After all, I am the Ultimate Contrarian Indicator, the anti-Christ of stock picking (or so it seems).

Anyway, your post here and Dr. Wong's paper is the first I've read since I've been back on CAPS. And it was a good one! Keep up the great work. I always like reading the stuff you've found. And like you, I am interested in Wong's "Part 2". Hope all is well in your part of the world.

Cheers,
--Gar

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#23) On July 04, 2009 at 12:53 AM, TheGarcipian (87.68) wrote:

Oh, and Happy Fourth of July too!

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#24) On July 05, 2009 at 8:08 PM, Tastylunch (29.93) wrote:

WHOinvestor

sounds like a decent plan

GoodVibe4Ever

I'm included to agree with you for macro fundamental reasons.

d1david 

thanks man alwasy ncie to see you.

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#25) On July 05, 2009 at 8:12 PM, anchak (99.84) wrote:

Hey Tasty...Happy 4th man!

Just reading the Lynch synopsis - GREAT! on CIL Also

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#26) On July 05, 2009 at 8:13 PM, Tastylunch (29.93) wrote:

TheGarcipian

I was wondering about that after I learned more about your job man. 

I'm glad you are ok and I agree man invetsments are very secondary compared to the 9-5. I hope things continue tobe ok on that front. My cousin wasn't so lucky, he lost everything about 45 days ago :(

I feel you on the market too, I was right with you in missing most of it. I made some good bank on HBAN but I blew most of the gain on a dumb FAZ trade. Might as well just the dang thing out.

Personally I'm expecting weakness till fall then either a blowup or blowout. Not sure which right now, I'm inclined to think it will be a blowup (menaing rally) but I'm not going to trade it until I see it.

Hope you had a great fourth too!

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#27) On July 05, 2009 at 8:14 PM, Tastylunch (29.93) wrote:

TheGarcipian

oh and wb!

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