LunaticTrader

Investing with the Moon

Monthly key reversal levels

Posted by Danny on December 2, 2013

The start of a new month is always a good opportunity to take a look at longer term charts and indicators. While monthly charts do not give new signals very often, they can be very significant because monthly trends often continue for years.

The key reversal levels I have been sharing on a weekly basis also work on the monthly level. These key reversal levels are not moving averages, they are calculated quite differently. These key levels are also not forecasts, they just summarize where the market is right now and in what direction the momentum is going. They are to be used for market orientation. It is well known that trades in the direction of the main trend have better odds of being profitable.

It is important to know that on average these key reversal levels get crossed every 20 bars (on a closing basis). So, 20 days, 20 weeks, 20 months,.. depending on which timeframe is being considered. Some moves will be only 1 or 2 bars long, which means a quick turnaround and being stopped out at a loss. But you will also see a lot of cases where a market remains above (or below) its key reversal level for 50 or more bars. Twenty bars is the average and that’s useful to know, because when a move stretches beyond 20 bars then we know it is an aging rally/decline, or an aging bull/bear market (for monthly bars).
In comparison, if a 30 bar moving average is tested, then on a closing basis it gets crossed every 11 bars on average. This means that the key reversal levels can keep us in a trending move more effectively, and for a bigger portion of profits.

That’s enough background info for now, more will be coming when I have completed the materials to explain the use of key reversal levels in more detail.

Here are the monthly key reversal levels going into December 2013:

Monthly Current Mode Key (M) MoM (M) Months % Ch.
Nasdaq 4,059.88 3,247.76 8.69 48 87.76
S&P 500 1,805.81 1,511.06 8.23 22 37.59
Nikkei 15,661.87 11,983.40 8.35 11 47.69
FTSE 100 6,650.60 6,119.14 4.69 12 13.36
DAX 9,405.29 7,572.45 7.08 21 37.67
Bonds (TLT) 104.45 114.32 -3.81 5 -3.81
Gold (spot) 1,252.50 1,508.11 -5.32 7 -15.16
$EURUSD 1.3591 1.2960 2.05 2 0.49
Oil (CL) 92.72 101.77 2.02 0 0.00

(Legend: Mode: green = bullish, pale green = weak bullish – may have peaked, red = bearish, pink = mildly bearish – may have bottomed | Key: key reversal level | MoM indicator: green = rising, red = falling | Months: months since start of current bullish or bearish mode | % Ch: percent change since start of current mode | yellow box: changed direction)
(for more details about these key levels, see: https://lunatictrader.wordpress.com/key-reversal-levels/ )
(for information about the MoM indicator, see: https://lunatictrader.wordpress.com/2013/09/14/mom-indicator/ )

A few notes:

* The Nasdaq has been above its monthly key reversal level for 48 months and counting, so that’s an aging bull market. Of course, that’s not news for most of us.

* For the Nikkei and FTSE 100 we see a pale green box because their momentum (MoM) is going down. The continuation of their bull markets is currently in question.

* Crude oil has closed below its monthly key reversal level in November, so it gets marked as month zero of a new bear market. We don’t know whether it will stay bearish for 1 month or for 50, but we do know that the average is 20 months. It will take a monthly close above the key level ( $101.77) to turn oil bullish again.

And here are the monthly key reversal levels for other major markets:

Monthly Current Mode Key (M) MoM (M) Months % Ch
Australia (AORD) 5,314.30 4,738.41 6.16 13 17.17
Brazil (BOVESPA) 52,482.00 57,210.12 -2.73 18 -3.68
Canada (TSX) 13,395.40 12,314.97 2.61 10 5.13
China (SSEC) 2,220.50 2,317.07 -1.34 42 -13.86
Dow Jones Industrials 16,086.41 13,932.41 6.74 25 34.60
France (CAC40) 4,295.21 3,687.97 6.36 11 16.00
Gold stocks (XAU) 86.46 151.16 -6.30 23 -52.23
Hong Kong (HSI) 23,881.29 21,190.47 1.82 2 3.84
India (SENSEX) 20,791.93 18,114.95 2.82 14 10.69
Indonesia (JCI) 4,256.44 4,081.06 0.74 53 110.00
Italy (MIB) 19,021.48 16,050.78 3.29 2 8.81
Malaysia (KLCI) 1,812.72 1,619.23 5.68 52 54.29
Mexico (IPC) 42,499.13 39,195.16 -0.70 52 56.97
Russell 2000 1,142.89 923.15 8.46 22 43.40
Singapore (STI) 3,176.35 3,037.30 0.96 16 4.61
South Africa (JOHA) 44,975.67 37,626.23 8.13 49 70.62
South Korea (KOSPI) 2,044.87 1,883.17 0.59 2 2.37
Spain (IBEX35) 9,837.60 8,083.23 3.80 2 7.19
Switzerland (SMI) 8,264.20 7,137.30 8.01 16 29.14

(Legend: Mode : green = bullish, pale green = weak bullish – may have peaked, red = bearish, pink = mildly bearish – may have bottomed | Key: key reversal level | MoM indicator: green = rising, red = falling | Months: months since start of current bullish or bearish mode | % Ch: percent change since start of current mode | yellow box: changed direction)
(for more details about these key levels, see: https://lunatictrader.wordpress.com/key-reversal-levels/ )
(for information about the MoM indicator, see: https://lunatictrader.wordpress.com/2013/09/14/mom-indicator/ )

* A lot of countries have aging bull markets. Of course, that doesn’t mean they have to end soon.

* China has been in a bear market for 42 months, but MoM is turning up and a monthly close above 2317.07 would turn it bullish. Keeping an eye on this one.

* Gold stocks are down 52% in the 23 months since they fell below their monthly key reversal level. So, this is one to watch as well. The monthly MoM for gold stocks index is at -6.3, which is the lowest it has been in over 20 years.  If its MoM turns up then we are likely to get a nice rally.

* Notice that all covered markets show a positive (green) %change in the direction of their market mode. So, all monthly signals are profitable at this point. That’s not always the case, but it shows the merits of going with the long term trend. It takes an extremely patient and courageous investor to stick to positions for such long times, but the rewards can be great. Day in day out we are being fed with news and information that scares us out of stocks. How many stocks in your portfolio have been owned for more than 3 years? If the answer is none, then it may be a good idea to switch off the news media and take a good look at monthly charts more often.

Good luck,

Danny

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2 Responses to “Monthly key reversal levels”

  1. bob collett said

    Hi Danny
    The South Africa All Share monthly key reversal……. you are a star.
    It makes for interesting thought
    The reversal point is 7349 points away
    Trading 1 small contract @ $10 per point (LONG ), I would lose $73000 before I decided i was wrong in my long position and went short.
    I cant afford that loss.
    kind regards
    bob

    • Danny said

      Hi Bob,

      Good observation.
      So, this tells us that right now is not a great entry point for a long term investor who is looking to go long on the basis of monthly key reversal levels.
      When the market is 20% above its monthly key reversal level there is a significant risk for a serious correction.
      The stop loss would be too far below the entry point if you were to buy now.

      The idea is to go long when the market closes above the key reversal level after being below it for a while. So that happened 49 months ago for the South African index. That was October 2009, when the index was around 26000.
      Alternatively you can go long when MoM turns up from very oversold bottom. That’s a speculative buy, but gets you in earlier. In this case that was May 2009, when the index was about 22000.
      A third way is to enter long when the market pulls back to just above the monthly key reversal level, but doesn’t break below it. In the South African market that happened in September 2011, when the market bottomed just 4 or 5% above its monthly key reversal and then resumed upwards.

      Somebody who trades futures contracts would not work only with monthly charts and key levels, anyway.
      For example, the weekly key reversal level for South African index is currently at 43024, which is much closer to the market already.
      Has been bullish for 76 weeks, so that is also a very aging bull run already.
      When both the monthly and weekly have been in bullish mode for over 20 months/weeks it is not a good time to buy for long term. Then you have to wait for a good entry point. Wait until the market comes close to the key reversal, or wait for the market to drop below it and then can buy when it rises back above.
      It is a game of patience.

      Danny

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