Yesterday, I talked about the flattening of the trend line and its potential effect on a buy signal. Today, let’s look at a historical chart of the domestic Trend Tracking Index (TTI) to determine if a rising trend line should you keep you in the market, even though our trading rules signal a ‘Sell.’
Take a look a the graph below, which shows the price action along with our ‘Buy’ and ‘Sell’ signals over the past 6 years: There were 4 sell signals identified by the large red arrows. You can look at each one of them and note that the trend line was still rising when the ‘Sell’ occurred. The first 3 ended up to be whip-saws as the markets subsequently resumed their long-term upward trend. Here’s where percentages can get you into trouble. If you were to conclude that 75% of the time a rising trend line renders a sell signal invalid, then you would be right—until you’re wrong. This is where the magnitude factor kicks in. Had you made the decision to stay in the market and ignore the ‘Sell’ on 6/23/08 as well, your portfolio would be in the same shape as that of the buy-and-hold crowd. Three times you would have been right over 6 years by avoiding a whip-saw, but the fourth time you would have gotten clobbered. My experience from following these trends for over 20 years simply tells me that you can never be sure. I have learned that it is better to live with an occasional whip-saw than to arbitrarily use rising or falling trend lines to fine tune my decisions. The simplicity of following all buy and sell signals regardless of outcome is what will keep you consistently on the right side of the long-term trend; even though at the time it may not always seem that way. If you adopt the long-term view, as I tried to by using these occurrences over a 6-year period, you may find these whip-saws to be nothing more than a necessary evil on your way to safely avoiding bear market disasters. 
[Click chart to enlarge]
Comments 9
Ulli,
I have noticed over the years that there have been many simple “Holy Grail” type trading ideas brought to my attention such as the flattening of the 150 day m.a. to find bottoms in the market or some other such simple idea, but this one like all the rest has some big drawbacks, which you point out that make them out to be nothing more than a big crap shoot. If they were really that good then everyone in the world be using them, which would cause everyone to buy and sell at the same time and that would be a serious problem for the market.
Ulli,
I do not understand your reasoning. By waiting until the trend line is flat or negative would have generated sell signal around 1 July 2008 during which time the S&P; dropped only an additional 5%. This is probably less that the losses occurred during the first 3 whip saw signals and is a far better result than the buy & hold crowd.
I really do like following your blog and agree most of the time, but this one has me stumped.
Bob
Bob,
Hmm, you must have missed something about these 2 blog posts. I am not advocating the use of a flattening trend line. I merely examined this idea to see if it had any merit; and it did not. I think most readers understood it that way.
Ulli…
Ulli,
Yes I understood your point perfectly. Maybe that other guy Bob wasn’t paying much attention to what you had to say.
Thanks
Ulli,
That Bob fellow in a previous message must not have read what you wrote very throughly about the 150 day flattening because I understood perfectly what you had to say.
I am sure people out there wonder about whether they can use your TTI sell signals to go into bear funds. My back-test says that it doesn’t normally work well at all. The most recent sell signal up until the current date was an exception where it did work well.
I like the TTI method although I don’t think is is the best method in the world, but has a long history of making money and is very transparent, which I like.
The cost of a ‘whipsaw’ is comparable to the cost of an insurance policy for your house or car. Your house may never burn down, but it is worth paying for insurance just in case.
The recent bear market is something like the house burning down.
Anon,
I agree with you in that the short side does not work as well, especially when you use sell stops. If you have nerves of steel and only use the crossing of the trend line as your exit points, you can do better, but you will experience sharp draw-downs of your capital.
Yes, the TTI has been around since the 80s when I developed it; but it is certainly not perfect.
However, I have not found a better system that is as simple and can easily be followed.
Ulli…
Taxxcpa,
Well said. I like that terminology.
Ulli…
Ulli,
Following is quote from your first blog on Flattening Trend Line.
"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?"
To me this means if your current sell signal occurs while TTI is still rising, ignore until TTI flattens OR reverses (starts declining). Likwise if your buy signal occurs while TTI is declining, ignore until TTI flattens OR starts increasing.
Using above rules, it appears to me this may enhance your current entry/exit point rules and would NOT put a follower in the position of the buy & hold crowd. I agree just using flattening TTI line makes no sense to me.
It appears to me the rules you used are not what I assumed.
Bob