LunaticTrader

Some long term charts and info about a few new indicators from my experiments box. I have started showing those indicators in my charts on Twitter and here on the blog from time to time, so this will be the go to article for people with questions about it.

To me, the main aim of an investor or trader should always be to stay on the right side of the market. Price targets, overbought or oversold, wave counts, etc… are all secondary if not tertiary considerations.
If we can manage to be (and stay) on the right side of the market most of the time, then the rest will take care of itself.

On a most simple level I want to see a market/stock make higher highs and higher lows if I am bullish, or conversely lower highs and lower lows if I am bearish. If that’s not (or no longer) the case, then I better consider that conditions may have changed and I am now on the wrong side of the market. In practice it’s a bit more complex of course, but some people are still doing very well with that basic approach.

Watershed lines (examples up next) are just another attempt at determining that rewarding “right side of the market”. I use them together with “BMO” and “BUD” indicators, which some of the more frequent readers here probably know already. A picture says more than a thousand words, so here it goes with monthly gold. (Note: those indicators work on all timeframes from daily up to very long term quarterly. I will be focusing on some long term charts in this article)

Watershed line turns blue (up) during bull markets and red (down) during bear markets and corrective phases. BMO and BUD can be used for more optimal entry and exit. Both have an “optimized lag”, which means they can be early as well as late. That means we don’t have to anticipate possible turns, we just wait until they DO turn. Both are green and going above the zero line during bullish phases, and turn yellow in bearish or corrective phases. The idea is to buy on a BMO low after BUD has turned bullish (green arrow). One can also buy subsequent BMO lows as long as BUD stays green with the Watershed line going up (blue). Some profit taking is best done on BMO peaks when we see BUD starts sputtering, and we sell all when BUD turns bearish (orange down arrow) or on the first BMO peak after BUD turns bearish.

Here we see how BUD turned bullish for gold in early 2018. BMO made a nice bottom in late 2018, which was a great entry point. Now the Watershed line is tentatively turning up, which bodes well for possible long term gains.

Here is monthly EURUSD:

This setup is very similar to gold in year 2000. BUD turned bullish in 2017, so we are ready to buy on a BMO low. BMO turned up 6 months ago, but Euro has continued to drift lower just above the Watershed. This is still a good chance to buy while using the Watershed at 1.10 as a stop level.

Monthly S&P 500:

Buying BMO bottoms during BUD yellow phases would have taken some of the best opportunities of the recent decades. There is no BUD sell signal yet, but it is sputtering and it is an aging move. So some caution is warranted, but it’s not wise to bet against the market as long as it trades well above the Watershed (currently at 2677).

Quarterly Dow Industrials:

This is the most long term scenario we can crank out. Interestingly, BUD has alternated 30 year bullish periods with 10 year bearish (yellow) phases. In the bullish phases the market tends to multiply 10x. If that rhythm continues then we are headed for Dow 100k by the late 2030s. Is that crazy? No, it isn’t.

8% nominal change compounded for 30 years gives 10 times the starting price. People who think the economy must crash because debt is too high don’t understand the effects of long term compounding. If you are old enough to remember what prices were 30-40 years ago then you will see that almost everything has done something like x10. The price of a beer, a house or a car is 10 times higher, the national debt is 10 times higher, the budget deficit is 10 times higher, GDP is 10 times higher, money supply is 10 times higher, and the stock market is 10 times higher… Just 1.08^30.
If you find something that hasn’t gone up 10x over the last 30-40 years then chances are it is a good buy because it will eventually catch up.