Buy! ... Yes ... and No ...
How to Measure Divergences with
Marvelous Precision
to Reduce Risk and Increase Proftits
All Portfolios--3 Charts
Top Chart, current through May 2009
Bottom two, November 28, 2008
Weekly--Hypothetical
See Comments below
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CLARITY & PRECISION
A signal. It says Buy.
You have seen this picture before. It has special resonance today--as we shall see. There are two similar charts below, one each for the Mostly USA ETFs Portfolio and for the Worldwide ETFs Portfolio. All are current and actionable.
You may recognize above the weekly Money Flows chart from the 100 Stocks--3 Portfolios 'system'. It shows the average price of each of the three portfolios from the combined 100 Stocks portfolio. (The original chart of which this one is an extension appeared as a Systems Tips article on April 25th of this year.)
The theory is that when you see a divergence between prices and money flows, you are getting a signal to take action in the direction of the money flow. The action itself takes place when price first moves in the direction of the money flow after the establishment of the divergence.
Notice the divergence between January 25 and March 14, which was resolved into a good, tradeable rise in prices lasting 10 to 12 weeks in the portfolios.
A similar signal in the same direction has just occurred. The present divergence started five weeks ago and was completed this week with prices at new lows but money flows above their own previous low levels (except for Paradigm which seems close enough to count as a divergence). The signal to buy is now in place. Note that the March episode has a down tick week four weeks after the buy signal. Keep that in mind, and we'll come back to it in a minute.
Following here are the remaining portfolios on the website: Mostly USA and Worldwide ETFs.
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Note here above that in both Mostly USA and in 100 Stocks--3 Portfolios (first chart, top of page) the patterns of divergence are virtually identical. Same dates, same forms in both the earlier January--March episode and the one that has just opened this week.
Next below is the remaining portfolio, Worldwide ETFs. Note the near identity of patterns. Everywhere we turn, we see buy, buy, buy.
But, in the case of the ETFs portfolios' weekly letters, there has been no Buy signal. Only the stolid and stubborn Sell. What to do?
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Obey the rule.
Ignore the divergence patterns' buy signals because the 'rules' say stay on Sell. Frankly, I was surprised, even astonished, not to see both Worldwide and USA switch to a Buy this week. But I have been surprised before, often, by the steadfastness of these two systems and the customary deliberateness with which they hold their positions.
There are two other choices, however. Neither is part of the validated systems. Recall, nevertheless, the sub headlines on a couple of my home pages. I call this website "Experimental Notes to Myself ". These choices are notes to myself. I feel I want to share them with you with the usual caveats below. You can do what you want with them.
The choices are, to hedge your portfolio by buying an equal, current, market-value, dollar amount of strongest stocks (either directly or through call options) excluding Ursa and Tbills, or simply to override the rules and buy long the strongest stocks.
I am choosing the latter but probably delaying my actions until Friday at the end of this week for the following reason. Fibonacci. (If you are not familiar with his numbers, Google the name.)
The year 2008 this Friday, is 34, 21, and 13 years away--from the identical day in 1974 and 1987 and the following Monday of 1995, all of which were market lows and turning points to the upside. Also, recall the down-tick week that I mentioned in the first section of this article at the top of the page.
Caution:
without back testing, this approach must be considered conditional. Meantime, you have the rules to rely on, having served you well so far.
Original posted
11/30/2008 7:20 p.m. EDT
Top chart updated
5/29/2009 7:20 p.m. EDT
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