In “Reader Question: More On Sell Stops,” reader Jon responded by saying the following:

If you buy only when the index cuts above the trend line and sell when it cuts below it you will, by definition, realize profits equal to the increase in the trend line between these two moments in time!

While that is correct if in fact the trend lines are sloping up, they sometimes continue to head south before heading higher, especially after a large correction. Reader Richard shared these thoughts:

Regarding today’s blog on Sell Stops, there is another reason to not base a Sell Signal on a major trend line. In my experience, when a price curve pierces a major trend line from below, thereby generating a Buy Signal, the trend line almost always still will be sloping downward, and, because the trend line is a relatively long-term moving average, the trend line will continue to slope downward for some time before turning upward.

If an equity’s price would turn downward during the meantime, and if the equity’s price would cross the trend line from above, thereby generating a Sell Signal, the trend line probably will be lower than it was when the Buy signal was generated, thereby resulting in a loss for that trade cycle. Therefore, relying on a major trend line as a Sell Signal would work only when Buy/Sell cycles would be of relatively long durations (which of course cannot be determined in advance).

The market meltdown of 2008, and the subsequent recovery in 2009, is a good example to demonstrate what Richard is talking about. The chart below shows a snapshot in time of the Domestic Trend Tracking Index (TTI) and its buy signal effective 6/3/09:



The trend line (red) was still in correction mode when the price line (green) crossed above it and generated a new Buy. It took about another 4 months before the trend line reversed direction and recovered enough to follow the price line higher.

My experience shows that you need to have at least a 6 months period from a buy to a potential Sell if you are relying on the upward sloping trend line to bail you out.

I have found it much easier and effective to use the upside crossing of the trend line as a Buy point only, while downside protection should be accomplished via your trailing sell stop points.

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

Not much volatility, but the S&P; 500 managed to eke out a small gain.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved above its trend line (red) by +5.26% (last week +5.12%) and remains in bullish mode.



The international index has broken above its long-term trend line by +6.46% (last week +7.02%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.



[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No Load Fund/ETF Tracker StatSheet, please see the above link.

Yesterday, the markets did a repeat of the last few days in that an early rally ran into resistance causing the trend to reverse, and we ended up with slight losses.

Interestingly, there was no place to hide and red numbers dominated the computer screens. Stocks were down along with bonds, gold, oil and most country funds while the dollar headed higher.

Right now we seem to be witnessing a battle between the bulls and the bears, as recent market activity has shown lack of sustainable upward momentum. In other words, we have run into overhead resistance again, which translates to 11,500 on the Dow and 1,250 on the S&P; 500.

The pattern of the recent days, with morning rallies fading into the afternoon, is not exactly confidence inspiring. On the other hand, improved economic data might provide the support needed to break out of this pattern.

Today, we’ll be looking at initial jobless claims, housing starts and building permits. Supporting the early morning sprint were a better-than-expected CPI report and strong manufacturing activity. Providing the headwind and helping the afternoon fade was Moody’s announcement that it was putting Spain on review for a possible debt downgrade.

That caused the dollar to rally, and took the starch out of the upward momentum. The major indexes changed direction and slowly but surely slipped into negative territory.

As always, when the markets run into resistance, you never know which way the next breakout will occur; will it be to the upside or the downside?

Since no one can give me the answer with any degree of certainty, I let my trailing sell stops make the decision as to whether I should remain invested or not. I suggest you do the same.

If you look at yesterday’s chart, and compare it to the one shown above, you will see a virtual mirror image of market activity, reflecting almost the same highs and lows in the S&P; 500.

The markets crept higher in the early going, supported by better than expected November retail sales, but sold off after the Fed announcement. There were no earth-shattering news other than that the Fed will continue with its program to boost the economy via Treasury purchases. The official reason is that the pace of the recovery remains so slow that additional stimulus is warranted.

Subsequently, the dollar rose, energy and metals slumped, and the markets headed south, however, the day was saved by a last minute comeback and a close above the unchanged line.

While the Fed conceded that there has been a little improvement in the economy, growth has not been sufficient to bring down unemployment. Nevertheless, business and household spending along with manufacturing and a reviving auto industry are showing small but positive developments.

The Fed reiterated its firm stance that it will employ all tools available to further the recovery and prevent deflation from spreading. Whether that will actually play out this way remains to be seen.

The stock market has already discounted a recovery in the upcoming months, which is reflected in current prices. There is still confusion as to whether the Fed intended for interest rates to rise, or if it’s a sign of failure that the Quantitative Easing program has not been working.

On the other hand, some believe that because of economic improvement, no matter how small, rates have spiked reflecting growing strength.

As usual, there are more questions than answers; so follow the trends, track your stop loss points and try not to figure out all of the fundamentals; it’s impossible to do.

While no trend will last forever, emerging markets have been on a tear for most of this year as the 1-year chart above shows. There was a brief interruption in upward momentum when the S&P; 500 dropped over 13% during the May/June period.

More recently, since the Fed announced its Quantitative Easing (QE-2) program in early November, emerging market ETFs seem to have hit a brick wall and have retreated from their lofty levels. The 3-month chart clearly demonstrates this pullback:



At the same time, the S&P; 500 (represented by SPY in chart), has been moving upward and has made a two-year high in the process.

Bond prices have followed emerging markets down, as interest rates have risen since QE-2, which was probably one of those unintended consequences. With emerging markets and bonds heading south, I have to wonder if they are a leading indicator to a path that stocks eventually will follow.

On the other hand, this could be just a temporary blip in an ongoing bull market. Since no one can be sure about the outcome, simply use your trailing sell stops as a guide to decide when to exit any positions you hold in this arena.

My view is that we will continue to wander through a period of great uncertainty, which makes it absolutely crucial to have a workable plan in place to deal with the unexpected. It is important that you prepare for these eventualities now, so you don’t have to stress out when the market heat is on.

Disclosure: Positions in above ETFs

Al Thomas, author of the well known book “If It Doesn’t Go Up, Don’t Buy It,” wrote an interesting column a couple weeks ago on the subject of retirement, which offers some food for thought:

PLANNING TO RETIRE

While the financial aspect of retiring is a whole discussion by itself, I want to share some of my observations of “what to do.” As people approach retirement, some seem to only have a very vague idea as to how to keep life interesting by using the extra time while others struggle to find meaning.

The usual answer I get upon asking the “what to do” question is ‘cleaning out the garage,’ or ‘playing golf’ every day. OK. Now fast forward a few months.

You have cleaned out the garage, sorted your tools by purchase date and arranged all nails not only by length but also by weight and degree of rust. You edge your lawn twice a day and check your pool chemicals at least 3 times. You participate in the regular visiting of your grand children and by now could write an essay on how to avoid getting puked on.

Unless, you are fascinated by and deeply interested in a hobby or other subject, life takes on a boring tone. Not helping is your wife, who probably by now has told several times that she married you for better or worse, but not for lunch.

If you’ve been there, you know that I am not making this up. A few years ago, one of the newspapers here in Southern California put together a small fair intended to provide some job opportunities for seniors. The place was flooded by thousands of retirees looking for an opportunity to spend time with work related activity.

Many follow up stories revealed that while some indeed needed the money the majority did not. The overriding theme was that most were looking for meaning in life and/or wanting to contribute.

In the end, work is not all bad, as long as it’s something you enjoy. One of my readers, a 75 year old urologist, called me a couple of weeks ago and said that he was quite distraught about the possibility that he may have to stop working next year.

I have an 87 year old friend, who plays tennis four times a week. Upon my inquiry, he mentioned that he is so busy with his work projects that he is adding space to enlarge his home office. Wow, does he not see the end in sight?

The ultimate reward for being a passionate worker has to go to Richard Russell, who writes the Dow Theory letter. He is in his 90s and has written the newsletter since 1955. Talking about making a contribution…

My point is that being involved in a passionate endeavor, whatever that may represent to you, can provide your life with meaning and give you satisfaction by being able to contribute. Without it, it can be a hard, long and lonely road.

Maybe we should all take a lesson from woman retirees. For the most part, they don’t seem to have the issues most guys do and appear to slide into their new role with much less effort.

I like to hear about your experiences. Click on the comment button below and share your thoughts.