In my previous post, I mentioned that the year 2013 was highly conducive to my trend following stock trading system, but that this conduciveness was atypical and that whipsaw signals would return.
Thus far in 2014, the general market has turned on a dime and has gone straight down, producing the first change in trend in 14 months.
This signal is purely mechanical and completely reactive (not predictive) and is simply generated when the 20 exponential moving average crosses beneath the 50ema:
Such a moving average crossover is sometimes called a "death cross", but for me, this crossover is not a bearish signal. According to my written rules, it is certainly not a signal to short, since the long term trend is still rising strongly and I would never want to fight the long term trend. Not only that, but this signal is not even a signal to sell my stocks and go into cash. What this signal means, to me, is that I can no longer continue to add new positions.
So, at this moment in time, the short term trend is down, but the long term trend is up, and I have no idea what the market will do next nor have any edge in the market at this moment. Adding new positions without any edge is gambling not speculating.
There are two possibilities going forward for my system: the short term trend will cross back up, in which case I'll continue adding new stocks to my portfolio as before. Or, the market will decline further and eventually cause the long term trend to succumb as well. At this point. all of my trades will be short signals rather than long signals.
The long term trend right now is like a speeding freight train, and it takes a lot to slow it down and even more to have it reverse directions:
This quadruple moving average strategy is not perfect, but it does help keep my trades in the direction of the trend most of the time, and this helps keep the odds in my favour.