When the market turns bearish there is always a temptation to review our long-term holdings in stocks and index tracking ETFs to see if we should consider selling, states Ian Murphy of MurphyTrading.com.
Over the years, I’ve searched for the perfect signal or indicator which offers the most profitable entries and exits on multi-year positions, but was unable to identify one which stands out. Every indicator has advantages and disadvantages, and our job is to match the appropriate indicator to the timeframe and instrument we have invested in.
For example, the Tidal strategy is excellent for semi-passive investing, but it only works on an index tracking ETF such as S&P 500 ETF TRUST (SPY) or Vanguard S&P 500 ETF (VOO). A crossover of 50-day and 200-day moving averages is regularly quoted as the go-to signal to enter and exit the market, but these signals must be monitored every day and they offer too many false positives in a sideways trending market.
Regardless of which signal we use, the exit is always the easy part, it’s the re-entry which presents a challenge because if we re-enter too soon, we will have lots of whipsaws, and if we re-enter too late, we will miss the first part of the move.
The best signal I have found for a long-term semi-passive approach to investing in stocks and index trackers is the -1ATR line on a weekly closing basis. It’s not perfect (no signal is) but it’s the best allrounder I know of. The signals are simple; when price closes below the -1ATR line on a weekly chart, exit the position. When price closes back above the -1ATR line, re-enter.
The exit is always the same (a close below weekly -1ATR), the re-entry is more challenging, so you can wait for a weekly close above the EMA or the 1ATR if you are more risk averse. These later re-entries are less likely to be whipsawed, but you will miss the first piece of profit.
The main US equity indices and many popular stocks have already flashed exit signals; but Tesla (TSLA), the darling of investor’s portfolios, is hanging in there (just about). We may finally be looking at an exit on this very popular and profitable stock this coming Friday.
Learn More about Ian Murphy at MurphyTrading.com.
