Market timing can be made complex or simple, says Greg Capra of Pristine Capital Holdings, Inc., and he has studied many methods and definitely found the simple approach the way to go.
Those studies were a quest for finding that method and what works for timing and what doesn't? What you'll find surprising is that the typical tools used by the majority do not work. I know you're interested in what does and I'll show you.
Before we review what to use, let's review some of the methods often talked about to determine market turns. Almost all of them will give a signal after a turn of some form has already happened. For example, the break of an uptrend trend line will signal a violation of the uptrend since prices have already moved lower. However, haven't you see uptrend lines broken that were followed by an almost immediate reversal back up in the direction of the trend? I have many times and found them inaccurate.
Let's think about the use of a trend line. An uptrend line is drawn by "connecting the dots" and is supposed to show you a support line that is projected into the future. If that line is violated, it signals the end of that uptrend. Why should that be the case though? Can you really locate significant reference points of support by drawing lines on a chart? How do you know you are connecting the right dots? And since there are different points that the line can be connected to, should you draw from all of them? And, what if those lines intersect, does that make for a more significant support point? And then, what if you change the time frame from a daily one to a weekly one? Doing that has now changed the "dots" to connect to. Are the lines in the weekly time frame more significant than those in the daily time frame? Getting complicated and confusing isn't it?
What about moving averages as a market timing guide? Okay, which one should be used? Is a break of the 50-day moving average a trend violation? How about the 100-day? Surely the break of the 200-day moving average would be bearish. However, by the time prices made it below the 200-day moving average, the trend would have been violated long ago.
There are also moving average crossovers. Again, which moving averages should be used? The 5-MA crossing the 20-MA is a popular combination. Then there is the "Golden Cross" of the 50-MA crossing the 200-MA. Golden cross sounds impressive. Then of course, there is the question of what type of moving average to use. Simple, exponential, weighted, and there are others, even optimized. The combinations are endless.
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