Long term investing with technicals

Must include dividend adjusted charts for long term investing. Stockcharts does this by default.

This is a simple system based on:

1. Yearly pivot (YP)
2. 50 week moving average (MA)
3. Slope of 50 week moving average

If all 3 are in the clear, the asset class is a hold. This system does not try to pick tops. It only attempts to get out of the way of an asset class in a yearly downtrend. See, yearly pivot and 50 week average are both yearly technical indicators. The slope of the average also adds a timing factor of of larger trend. There are other ways of doing this using pure % return but this is my way.

If an asset class makes a weekly close below its YP, below its 50 week average, especially with a negative slope, then it is time to reduce, hedge or exit.

If an asset class that has been on a sell recovers its YP, 50 week average, especially with rising slope, then it is time to buy back. 

Do i have a backtest on this system? No. At times there can be exits that don't seem to protect one from much hard such as XLE last year. But just as likely you will avoid major drawdowns like IBB in 2016, EEM and IWM in 2015, USO and XLE in 2014-15, GLD in 2013+, etc. You might even buy back at a somewhat higher price if technicals have turned around. But a proper backtest would also have to include the gains made from reallocating to other vehicles that are going up. Then there is psychological factor of not holding your money in things that are dropping -20%, -30%, or more. Now you won't exit at the high but still one can avoid most significant declines with this system. This can also be used with individual stocks. 

This system won't work with a flash crash from high levels like 1987 or 2011.

The worst possible circumstance would be chop, like an exit, recovery another exit followed by another entry. To be fair this did happen in 2011 and that would have resulted in losses more than the index. But consider being totally out of the way from 2008 from the end of 2007 and fully committing to stocks in September 2009. Not out at highs nor in at lows, (unless you want to add some speculative buys on YS1s etc), but avoiding that year would have been massive for the account and psychology. 

Sometimes things will be mixed like above its YP but below its 50MA. In that case maybe a partial exit is better or if the slope of the 50MA is increasing one could take a wait and see approach. But when there is a clear signal it is time for action.

Of course stocks are all in uptrends so most indexes could have a -10% drop and not be threatened at all. Bonds are another story. Here's AGG.

20 1.PNG

YP is 108.10; just look for the numbers under the basic info in the upper left. The system will go like this: S2, S1, YP, R1, R2 so all we need is the YP.

50MA is the blue line, also available in the upper left. 108.17.

Price is 108.18, testing both 50MA and very near the YP. 

Slope of the MA is still somewhat positive. 

This is on alert, but in this long term system the weekly close is what matters. Check back next week. Note - AGG did generate an exit early 2017, and then a buy back in April. Should the decline continue this will be the second exit in as many years, and i think especially worth acting upon.

If you want to do this yourself:

1. www.stockcharts.com
2. enter symbol and default chart will pull up
3. select weekly, then update
4. go to overlays
5. select pivot points, then update (chart must be weekly first to work, otherwise pivots will not be yearly)

Perform analysis as above.