If you are going to design a profitable stock market system, you first have to start with a concept. Before gathering data, you must have an idea as to how you want to design the system and a concept that you believe will be profitable. Before we started designing our systems, we decided that we were going to base them on the idea that through statistics we could detect overbought and oversold conditions in the market. An oversold condition would trigger a buy signal and an overbought condition would trigger a sell signal. In order to only detect the long-term extremes of overbought and oversold conditions we would have to allow for corrections in the double digits at times. This was the only way to not trigger early buy and sell signals.
So where are we today? If our system had triggered a long-term sell in April, we still would not have a buy signal. Even though this correction has been relatively harsh, it has not had the kind of extreme oversold levels that trigger long-term buy signals. This does not mean that the market has not put in its low. It means that as of today, we made the right decision in not triggering a sell in April. Occasionally corrections do trigger long-term buy signals even though there was not an overbought condition extreme enough to trigger a sell before the decline. Just as likely, our system does not detect the overbought condition before the decline and the oversold condition to trigger the new move. Therefore, as of today, our system has acted precisely how we would want it to. So far this has only been a correction and we have made the right decision by staying long.
As we have not looked at a chart of the Dow Jones Industrial Average lately, tonight this will be our only chart.
We have drawn two downtrend lines on the chart. One of the lines shows the downtrend that started in May, the other line shows the short-term downtrend that is only a couple of weeks old. The index has already broken above its May downtrend line and has started a small pullback. You can also see how the Dow is at important horizontal support and is sitting on its 200 day simple moving average and closed above its 200 day exponential moving average today. Resistance is in the short-term downtrend line and the horizontal area just below 11100. A break of this area, should push the Dow to 11300 in the short-term.
As sentiment is so extremely bearish right now and as we have just sat through a pretty large correction, we would suggest that anybody who adds during signals, should definitely add to their position here.
