Carl Swenlin:EMA cross over signals Long Term Bull
Markets look tremendously overbought in the short term, but as this article points out, it is very similar to formations that precede the 2003 run.
by Carl Swenlin
August 14, 2009
On Tuesday of this week our long-term model for the S&P 500 switched from a sell to a buy signal. While it is a simple model — the signals are generated by the 50-EMA crossing over the 200-EMA — it can also be very effective, capturing a gain of 28.7% over a period of 580 calendar days. During that period the S&P 500 lost -28.5%. Past performance is no guarantee of future results. In fact, like any trend following model it is subject to whipsaw, and will be unprofitable in some cases. It probably will not be fast enough to sidestep to sidestep a surprise crash, such as we had in 1987.
In fact, my recommendation regarding this signal is to use it as an information flag rather than an action flag. For example, we use the long-term signals to determine whether or not the market is in a bull phase or a bear phase. As of Tuesday we consider that we are in a bull market, and this is the long-term context within which we will interpret medium-term price action and technical indicators. Bull market rules apply. The market will tend to stay overbought, and, while overbought conditions require increased caution, they are not necessarily selling opportunities in a bull market.
Prices are still pressing the top of an ascending wedge formation. A pullback is possible, but I think, if it happens, it will be quick.
While price action and indicators continue to confirm our bull market assumptions, one indicator that is not confirming is 52-Week New Highs — they are hardly expanding at all. I was concerned about this until I looked a little deeper into the matter. On the chart below I have drawn a brown rectangle to encompass the 52-week period in 2002-2003 preceeding and including the expansion of new highs that accompanied the initial breakout of the bull market. Note that the vertical price range inside the rectangle is about 250 points.
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