I’ve been watching the market closely this week for a break above the long term trendline. Many traders are watching to see if this is a short covering rally post Greek bailout or something more. Ideally I would like to see the market trade above the trendline before initatating any new positions, however I came accross an interesting article from last year’s Technical Analysis of Stocks and Commodities discussing the 4% trend indicator.
Basically, a buy signal occurs when the weekly close is 4% higher than the previous week’s close. A sell signal is generated when the weekly close is 4% lower than the previous week’s close. The results are pretty impressive:
Using “IWM” from 1/1/2001-12/2/2009 the model goes both long and short and gerneated the following return:
S&P500 Index: -21.52%
While obviously not every trade will be a winner (no trading system is 100% correct – only Bernie Madoff was able to claim that and look what happened), traders must be feeling pretty good post Greek crisis and with talks from Washington that the debt ceiling issue may be resolved quickly.
Here is the article from 2010 for further reading – enjoy!