Weekend Review 04/08/2017

This weekend I decided to revisit an old chart template representing a trading idea I had long ago to see if my perspective has changed, there is something I understand now that I didn't gleam then, or if it is wroth considering given what I know now.  One concept I never underestimate in trading is that it takes time to find one's time frame as well as constant reevaluation of previous ideas to see if what was muddy waters is now morning coffee.

The system I devised was a trend trading concept based upon two signals, a Guppy Multiple Moving Average cross over coupled with a two month momentum indicator.  From these two signals I documented three zones: green for aggressive trading, yellow for cautious trading, and red for avoidance or short oriented trading.  The green zone consisted of positive momentum and positive GMMA.  The yellow zone consisted of three potential signals:  a transition from positive to neutral momentum, a GMMA flip while momentum is positive, or a positive GMMA crossover with waning momentum.  The red zone is waning momentum with a negative GMMA crossover.  When momentum itself inverts this suggest severe market weakness.

One of the things that has held me back from implementing this is that I have yet to be able to marry a holding period with a reasonable position size and stop to allow for the weeks to months required for a trend to unfold.  Regardless, it is still an idea that I return to every so often and take notes of for future reference.  Something that stood out for me this weekend, though, was that it actually translates well with breadth metrics, divergence, as well as strength and weakness.

QQQ

First up is strength.  Based upon the analysis criteria, the QQQ is in a zone of caution.  Taken from a positive, the only detriment is waning momentum.  Neither has the GMMA flipped nor momentum turned red.  I see no evidence from this chart that there is much to be overly cautious about.  However...

SPY

The S&P is suggesting a more confusing narrative.  For one, there has been a GMMA flip from positive to negative to positive.  These flips were concurrent while momentum is waning.  Also, the frequency of horizontal bars has is higher over the last two months.

IWM

The IWM is showing the worst of the lot.  Over the past few months momentum has been in a zone I quantify as neutral, there have been multiple GMMA crossovers, and the frequency of horizontal bars is the highest of the three indexes as ETFs.  Given that this index is considered to be the geiger counter of riskiness of market participants, the current consensus a belief of risk off.

So... from a breadth perspective I'm beginning to see the value of this analysis.  There are clean points of quantified reference indicating distinct periods of aggressiveness as well as  long, short, or neutral bias.  There are also clean references when one index is outperforming the others as well as distinctions when it's preferable to rotate into one or the other for long/short or both.  Now to throw it back into the cookie jar and see what I think down the road.