The Flattening Trend Line—Part I

One reader pointed to a CNBC video featuring a short presentation about a “flattening trend line.” Take a look but disregard the useless chatter afterwards:

While I don’t use the 150-day moving average as shown in this demonstration, this nevertheless poses an interesting question. Does entering the market (using our entry rules), after the trend line of the Trend Tracking Index (TTI) has flattened, enhance the chances of success?

In other words, are the odds of the price trend continuing to the upside greater when a trend line has flattened as opposed to getting a buy signal while it is still falling?

To find an answer, I had to look back to the last bear market of 2000, where our sell signal kept us out of domestic equities from 10/13/2000 until 4/29/2003.

However, that time frame was interrupted by a short whip-saw period (which was long enough to result in a profit) from 3/7/02 until 6/12/02. Take a look at that enlarged portion of the chart:




As you can clearly see, the trend line (red) was still descending as the ‘Buy’ on 3/7/02 was generated. At the moment the ‘Sell’ was triggered on 6/12/02, it had actually turned up slightly.

Since this is the only example I could find, it certainly is not conclusive to say that buy signals, while the trend line is still descending, will always lead to whip saws.

To gain more insight, let’s look at the opposite tomorrow: The effect of selling when the trend line is still rising. Maybe that will lead us to a better conclusion.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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