Above in the picture is an S&P 500 monthly chart going back to 2008. In the last 50 years this indicator has closed a monthly candle below the zero line indicated by the red “X” only 14 times. In the last 20 years it has been hit only 6 times. 5 of those times are on the chart above, the other time was the dotcom crash of 2000.
So, what does this chart tell us? It tells me at least, that this indicator like all others is never fool proof and sometimes has false signals. But, when it gets it right, you really want to be following it!
It was spot on in 2000, it was spot on in 2008, but it was short lived in 2011 and then in 2015 and 2016.
After 2015 and 2016, I put in place an additional filter called the supertrend to allow trading to resume if the trend showed significant strength, indicating that this was maybe not a superbear, like 2008, but a larger than normal correction as 2011/2015 and 2016 turned out to be. That is what I am currently following via the algorithm. Let’s look at 2016 as an example of the supertrend allowing trading to resume while the bear market filter is still in place:
This is the beginning of 2016, the pink area indicates that the bear market filter is in place. The S&P 500 has crossed the zero line and therefore no trading can resume until the supertrend indicator allows it. It’s difficult to see on this chart what line indicates the supertrend, but suffice to say that the chart switch from pink to yellow areas means that the bear filter is still in place, but, that the supertrend indicator has signaled that the market has recovered from a significant drop and may be ready to break higher following the correction.
There are no crystal balls in trading, I have no idea if this current bear market will continue much lower or if the worst is over. However, this bear market filter + supertrend filter has, historically at least, been very beneficial in limiting drawdowns and signalling that the market is going from a bearish phase back to bullish.
Dot2Dot has seen this before and will see it again. Dot2Dot is excellent at breakout trend trading and also dip buying. However, when the market is in a bearish phase, dip buying is very dangerous and costly, and that is why these indicators have allowed the system to survive and limit drawdowns in previous periods of uncertainly and fear.
This is the current picture:
As you can see, as of the first on January 2019, the chart has turned pink indicating that we are in a bear market. The supertrend indicator level that the QLD has to break above is in the green circle. Therefore, right now there can be no trades in the NQ Futures or the QLD until the market shows enough strength to say that this is not a superbear, but just an overzealous politically driven correction.
That level in the QLD currently is $71 per share. Until then, there is nothing to do but stay in cash and stay safe. The market continues to wildly swing each way on a daily basis in point levels on the S&P 500 , Dow Jones and Nasdaq never seen before in history.
The good news is that even during bear markets the supertrend allows the systems to take chunks out of the relief rallies when they come. So, even if this is or is not a full blown superbear like 2008, we will either be back taking profits or back to normal trend trading should it fully recover.
These corrections and bear markets are good for us. They are a re-set that will allow for larger trend trades when the market is calmed by trade deals and government and business stability. For now, nothing to do, stay safe and wait for my opportunity to sweep in and ride the recovery.