Markets move in cycles of varying lengths. Some indicators, like
therelative strength index (RSI) , are based on that idea.RSI was
designed by J. Welles Wilder for the commodity markets and some
traders believe that commodities move in line with a 28-day cycle.
In fact, some traders, including Wilder, believed that the phase of
the moon had a large effect oncommodity market prices. Default
values for calculating RSI are set to 14 days, one-half of the
cycle length or about one-half the length of a lunar month.
I'm not convinced a lunar calendar can help anyone time trades,
but the idea of cycle analysis does make sense. In particular,
there is abusiness cycle where theeconomy alternates between
contraction and expansion. This cycle varies in length but averages
about four years.
Martin Pring recognized the importance of considering several
cycles and developed an indicator he called Know Sure Thing (
) to look at short-term, intermediate-term and long-term cycles.
"I've learned after all my years trading that nothing is a
sure thing, but the indicator doesoffer a good charting rendition
of the economic growth path that revolves around the business
cycle, " Pring wrote.
KST shows a smoothed andweighted rate of change (ROC ) during
four different periods of time. It is calculated using weekly data
and usesROC for times as short as three weeks to as long as 104
weeks. Trade signals can be generated by adding amoving average (
) to KST and using moving average crossovers to buy and sell. Pring
recommended different MA lengths for each time frame.
An example of KST, using the default parameters, is shown in the
SPDR Gold Trust (NYSE
GLD itself is trading near the 26-week MA and a break below that
level would bebearish . By themselves, MA crossover strategies
suffer fromwhipsaw trades, which are the frequent and small wins or
losses that build up when the price is near the MA. These trades
are the reasons confirmation indicators are often added to any MA
strategy. KST is shown in the bottom half of the chart as the
momentum indicator we can use with the 26-week MA.
Starting at the bottom of the chart, GLD has been bearish since
the long-term (LT) KST fell below its MA in January last year. This
is only the second LT KST short signal for GLD and both have been
winners. Using goldfutures to provide a longer history and more
trading signals, we see the same pattern and shorting gold when LT
KST is bearish would have been profitable over holding periods of
one, two and three months.
) KST turned bearish more recently, in the last week of 2012. The
) KST is also bearish. Individually, both of these indicators are
profitable. When all three time frames agree, the market moves tend
to be large. Unfortunately, the signals are rare.
The chart below highlights one example from the past: thestock
market crash that occurred in the spring of 1962. LT KST was the
last of the three to signal a sell and it came more than 9% below
the top of the Dow Jones Industrial Average, but stock prices fell
as much as 21.8% in the two months after the sell signal.
In addition tooffering a sell signal in GLD, KST shows a similar
bearish chart pattern for
Silver Trust (NYSE
. GLD and SLV generally move in the same direction, and with many
indicators pointing to a potential drop, now seems to be a good
time to short the metals.
Action to take -->
Reduce holdings in GLD and SLV or consider short trades in the
precious metals. DGZ) to benefit from a drop in gold.
This article originally appeared on ProfitableTrading.com:
Rare 'Sell' Signal Saying it is Time to Short
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