Friday, October 22, 2010

10/22 Slow Trading Alert

The exchange-traded fund that tracks the S&P 500, SPY, turned bullish as the 50-day moving average crossed above the 200-day moving average.

This is a very long-term strategy, suitable for mutual funds and other restricted-trading environments, or for people who really have better things to do with their lives than monitor the market every day.

This is only the third bullish crossover on SPY in the past five years, so it is a v-e-r-r-r-y s-l-o-o-o-w strategy.

The previous bull phase produced a 15% price rise in 13 months. Certainly, that yield beats certificates of deposit, or even junk bond funds.

Traders playing bear-side as well as bull-side would have been disappointed in the bear phase that followed. It lasted four months and produced a 15% price rise, so the trader would have lost.

However, one variation on the strategy is to enter on the crossover and exit when the 50-day moving average turns. In this instance, that jump-the-gun exit strategy would have reduced the loss to 6%.

For my own account, I trade the bull side only, as I find that to be more reliable over the longer term. (Also, most 401(k) accounts don't allow short-selling, which hinders bear plays to say the least.)

My strategy for slow trading uses the 50-day moving average (a quarter) and the 200-day moving average (a year). It has these rules:

a) When the 50-day moving average crosses above the 200-day moving average, open a bull position.

b) When the 50-day moving average crosses below the 200-day moving average, either move to cash or open a bear position.

The short version: 50-day-ma above the 200-day ma = bull phase. 50-day-ma below the 200-day ma = bear phase. Simplicity itself. It is important to note that new positions should be opened at the time the signal is given. If the stock is in the midst of a phase, then keep your money on the sidelines until a new phase kicks in.

Tim Bovee, Private Trader tracks the trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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