From the September 01, 2012 issue of Futures Magazine • Subscribe!

System development with MAAD line

Analysis in context

The 50-plus years of data included in this article reveal three general periods of stock market activity. 

The first phase was the broad stock market “consolidation” beginning in the mid-1960s that lasted until index prices broke out to new all-time highs: The Nasdaq Composite index in September 1978, S&P 500 index in July 1980 and the Dow Jones Industrial Average in November 1982. MAAD held substantially above its June 1962 bottom into the 1974 lows to suggest accumulation. But NYAD made a lower-low in 1974 to erroneously indicate distribution and actually was more bearish than index pricing going into the major low in 1974. MAAD broke to new highs in December 1976 following its May 1969 high, while it took NYAD more than 17 years, until June 1983, to better its January 1966 peak.

The second phase was bullish, persisted until early 2000 and includes the primary bull market that lasted from October 1974 until March 2000. MAAD not only predicted that uptrend by highlighting big money accumulation preceding the 1974 lows, but it also generated a long-term sell signal in October 2000 at the onset of a two-year bear market. During that 26-year advance from 1974 to 2000, MAAD remained consistently bullish and was not shaken out despite market weakness in 1984, 1987 and 1990. By contrast, NYAD predicted a market top in April 1998, nearly two years too early. 

The third phase that began in 2000 includes two bear markets, in 2000-02 and 2007-09, and two bull markets. During the first bear market, NYAD prematurely was bullish two years before the bear market lows of October 2002. The first bull trend lasted from 2002 to 2007, while the second, begun in March 2009, yet has to be fully resolved.

While our trading algorithm forgave NYAD the drawdown from 2000 to 2002 to the extent the S&P 500 eventually recovered, not many investors would have been able to suffer through the ensuing 64% drawdown in equity during that period. MAAD suffered no such drawdown because it remained in sync with the market.

The equity curves for each indicator are shown in “Equity curve analysis” (below).

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