I am going to start a journal where I attempt to profit from long-term moves in the markets. My basic technique is going to be very simple: 1 If the market appears to be in a major uptrend, get long 2 If it appears to be in a major downtrend, get short 3 If the market is unclear or appears to be reversing trend, get flat Any thoughts or comments would be appreciated.
My initial task is to judge which markets are in major up or down trends. I do this by looking at a multi-year chart, then assessing the interplay between sentiment, price action, and dynamic fundamentals (i.e. not stuff that is clearly priced in already). E.g. a market where the price is moving up longer term, but which experiences extreme bearish sentiment at the lows of intermediate term corrections, then reverses, is behaving bullishly. A market which keeps surging to new highs whilst sentiment is broadly sceptical, is also bullish. A market which fails at major highs where sentiment is bullish, but then rapidly falls and makes major new lows, whilst sentiment remains bullish or in denial, is indicating a major downtrend, and so on. Secondly, once I have identified a major trend which I might be able to exploit, I have to decide when to enter the trend. You can make money by buying intermediate highs in long-term bull markets, but obviously that is much less profitable and more risky than buying short or intermediate-term lows in the same bull market. So, I will look to enter long-term bull moves during short/intermediate-term price weakness, and try to avoid heavy commitments when the short-term trend has already moved far and appears overextended, with excessive bullish sentiment and too many weak longs in the market. As a contingency in case I fail to enter on a correction low and the market starts to run away from me, I will enter on sustained new breakout highs, rather than remain flat while the trend continues without me. In addition, I will also exit temporarily if the market makes a major reversal signal.
That seems to be a good description of the US (and world) stockmarket at the moment, yes. I am not going to try and be a market pundit, but rather to observe how each market is behaving and act accordingly. Fundamentals & valuation may play some part, but the market action is always paramount. My next post will list markets I currently see as being in major uptrend or downtrend markets. I intend to focus on all major liquid world markets, including currencies, bonds, stock indices, short-term interest rate contracts, commodities, and FX. I invite people to make their own suggestions as to which markets are trending up or down, on an longer-term timeframe.
OK - its a momentum strategy. Is this a system? Or is this discretionary? Are you only relying on the price of the underlying? Or will there be a concert of indicators? (eg volume, price of oil, number of dead birds in Central Park)