The Nodes Have It
How to Use Simple Momentum
To Determine Trend Direction
Worldwide and Mostly USA ETFs Portfolios
56 weeks--November 16, 2007--December 12, 2008
Charts Below: Weekly--Hypothetical
PREVIOUS SYSTEMS TIPS' LETTER
A signal. It said Buy.
Now, two weeks later, a similar system repeats the 'buy'. The remarks that follow apply equally to the 100 Stocks--3 Portfolios groups. The two ETFs portfolios are the ones researched for today's article. I think that what they show are probably actionable across the board.
They are saying to me--buy this coming week.
NODES & TRENDS
See the chart below. Look for nodes. A node here is defined as a data point (any square on any curve) which is preceded and followed by points both of which are either higher or lower than the observed point.
When a subsequent point exceeds a node in either direction, the trend of the points is defined as having changed into the direction in which the node has been exceeded. The theory of trends is that they will continue in the current direction of movement until clear evidence appears to the contrary. The corollary is that associated primary data, such as, in this instance, ETF prices, will correspond in the direction of movement with the directional movements of momentum, which measures here the rate of change of the prices themselves.
An example will make this clear for you in the chart below, Worldwide ETFs vs Price Momentum. Note the node in the 90-day price momentum line (aqua boxes, lowest curve) on November 23, 2007. That momentum point is preceded and followed by points both of which are on the same side above the 11/23 point. That defines the 11/23 point as a low node which, if succeeded by a point lower, signals that the trend has turned down--a signal to sell.
The ensuing trend remains down until evidence appears that the trend has reversed to upward. This occurs on April 4, 2008, when the momentum point clearly moves above the node formed at March 14, 2008. And so on. Both momentum series should be observed. Act on whichever is the clearer and/or occurs first.
The most recent confirmed change of trend has occurred this week, December 12, 2008, when the 180-day momentum line breaks above its high node of November 28. The signal is to buy ETFs (and stocks acting similarly).
In the second chart below, Mostly USA vs Price Momentum,
the top node occurs March 14, same as in the chart above, but is broken a week earlier, giving a more favorable price advantage. Its most recent pattern ending Friday is nearly identical with the Worldwide chart. Buy, it says.
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These notes from two weeks ago bear repeating and amplifying.
I wrote:
I call this website "Experimental Notes to Myself ". The systems tips environment is kind of a test laboratory where I briefly test new ideas and evolutions of current systems.
Complete validation testing, with full sets of risk data and profit-and-loss statistics, is required before I modify an existing system or release a new one into the public-subscription arena.
This nodes-trend-change article falls short of that, but I find this type of analysis so persuasive to me personally and to the way I think about the markets, that I mentioned a course of action which I planned to take two weeks ago.
I said that I was considering hedging my portfolio by buying an equal, current, market-value, dollar amount of strongest stocks (either directly or through call options) excluding Ursa and Tbills, contrary to system rules, or simply to override the rules and buy long the strongest stocks.
I said I was choosing the latter, but I did not do it. I hedged instead, with a slight edge toward net long rather than neutral balance.
Because of the analysis and conclusions drawn from the nodal-trend analysis above, I intend to cover my open short positions this week and take my long positions to customary entry levels. I will probably wait for lower prices during the week.
Notes.
In my pattern recognition experiments dating back to the early 1990s, I developed the use of small boxes to deliver visual granularity for clear-cut observation of trend-node changes. The clarity does nothing to counterbalance the inherent subjectivity of judging pattern change. But it tells with great precision where you have been right or wrong.
Caveat.
Without thorough back testing, this approach must be considered conditional as far as the website goes. Existing systems rules remain intact. They will continue to govern the posting of all real-time buys and sells.
Posted
12/14//2008 10:39 p.m. EST
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