Which Trend Line Should You Use?

Reader Ben brought up an excellent question regarding the use of trend lines to determine the direction of the overall market or certain areas of it. Here’s what he said:

I’ve followed your StatSheet, and recently the blog, for a couple of years. I think yours is some of the soundest market advice around.

I’m thinking of a few well-regarded international funds that did well in 2007, but suffered losses like most in Q1 of 2008. Now, they’re well up over their lows and above their 39-week MA, although the index still has a way to go before it catches up. Are the individual funds a “buy” already, or does your disciplined approach caution delay until the index gives a general buy signal?

Using the international Trend Tracking Index (TTI) as a buy signal generator has worked well for me over the past 20 years, but I admit that it is a very conservative approach. Since I use the piercing of the trend lines as a signal with sector and country funds/ETFs, you could do the same with those well-regarded international funds you were referring to.

If you are more aggressive, and you decide to go that route, I suggest that you work with my recommended exit strategy to be sure that you limit your losses should it turn out that you were wrong or simply too early with your decision.

However, I also recommend that you decide on a strategy and then stick to it. I don’t favor using one approach and flopping back and forth to another, because in your mind circumstances have changed. Again, there is nothing wrong with trying to get onboard a little early, as long as you protect yourself from too much downside risk.