SPX TREAD

The $SPX gave a trend buy signal this morning when it broke through and made a new 55 day high. This is the first buy signal since March 11 which was closed with a sell (but not a short) signal on May 4th. See the chart below, the 55 day Donchian Channel is in blue, the 20 day in yellow.

Without recounting all of the rules this mechanical strategy uses, there aren’t many by the way it’s really simple, here’s what this means in my book. The market has broken through an important level of resistance and is threatening to start a new intermediate term uptrend. This mechanical system is not meant to be used on just one asset, you need to use it simultaneously on a handful in order to be profitable long term because of all the false signals it produces. The idea behind the strategy is that within a given year there are usually one or two assets, be it the equity market, gold, corn, or any other, which trend well, to the upside or downside. This system gets you into that trend and keeps you in that trend. The idea is that more than half of your trades will be losers, many will be scratches, but a few will be huge winners. The point of the system is to get you in so that you don’t miss those big winners.

So does this mean that the market is going higher, no, absolutely not. What it means is that the momentum is picking up here and on the intermediate term time frame there is risk to the upside now based on a good amount of quantitative research done by the developers of this system. If you’re looking to get long here for a trend trade, I would caution you that the market is very overbought here, especially tech which has been leading. Be very prudent about your risk management here, I like to use 2ATR stops for these type of trades.

Good hunting.