Monthly Breakouts

I'm following up my discussion on Dec. 31 on long-term trading.

In my year-end review, I showed the blue chips (SPY) on a chart showing prices by month and analyzed them using a 12-month simple moving average.

The result showed that four trades based on that method would have turned what was a 23% loss for the decade of the 20-zeroes into a 78% gain.

The rules are:

• If  the bar (or candlestick) during a month crosses the 12-month moving average, then 
• Open a bull position if the closing price on the last day of the month is above the moving average.
• Open a bear position if the closing price on the last day of the month is below the 12-month moving average.
• Close the position under one or more of these circumstances:
  
• The price closes on the opposite side of the moving average from the price at which the position was opened.
• The price crosses a stop/loss set at a distance from the opening price of twice the average trading range over the last three months.

I scanned the high-volume etfs and company shares for new signals:

• etfs:
• TBT, bull
• shares:
• XOM, bear
• KR, bear
• RIMM, bull

I also scanned for etfs and shares that, having given signals within the last nine months, were trading around the entry price:

• etfs:
• EWJ, bull
• USO, bull
• shares:
• WFC, bull
• MS, bull
• WMT, bull
• USB, bull
• KFT, bull

I haven't done a rigorous back-testing of this method. It looked like a pretty good match on SPY, but any moving-average crossover method will give whipsaws on occasion, and of course entering months after any signal is a riskier proposition.

Still, I think it's an interesting approach, and one worth looking at if you have some money that you're wanting to park for the longer term.

One ideal use would be to enter and exit a high-dividend fund, like JNK, which tracks junk bonds and is presently yielding 11.18% in dividends, or AOD, which also seeks dividend income and is yielding 16.14%.

You would profit from the dividends during bull periods, as well as, in theory, from capital gains, and also avoid the capital losses that wipe out dividend profits.

(I own both AOD and JNK for the longer-term money that I don't use for trading. My entry was after the bull signals, with little price gain between signal and entry for AOD and an 11% gain for JNK.)

Topics: Exxon-Mobil, Kroger, Research in Motion, Wells Fargo, Morgan Stanley, U.S. Bancorp, Kraft, oil, petroleum, groceries, Blackberry, bank, bonds, Ultrashort Treasuries, SPDR, Spiders, S&P 500, 401(k), IRA, Individual Retirement Account.