Sp500 - My system retains Bullish Environment posture.

Much has been written regarding the 50/200 moving average crossover on the SP500 in recent weeks. The 50/200 sma crossover produced a bearish signal in early July. Since that signal the SP500 has rallied strongly, there is nothing that unusual in this, the 50/200 crossover is a lagging indicator and it is not uncommon for adverse moves to occur after a signal. - The chart below shows the recent crossover; it is noteworthy that the SP500s rise has been constrained twice by the 200 day sma since breaking through it to the downside in May. Although my outlook for the SP500 is currently bullish, this bullishness will be tempered if the price fails to clearly break above the 200 day sma soon.

In relation to the 50/200 moving average crossover, I have looked back at its track record since 1970 (A generous 40 years worth of data). In that time it has produced 40 signals, 22 winners and 18 losers, in other words just over half the signals have been successful, not a particularly impressive performance. In terms of returns, its annualised return has been around 6.82%, which is better than a 'Buy and Hold' strategy during that time, though only just (I have calculated simple annualised return on Buy and Hold at 6.24%). The return also exceeds the return had an investor placed his money at the US 3 year Treasuries rate on a rolling annual basis (6.68% according to my calculations), though again only marginally better, and not great considering the amount of drawdown and uncertainty suffered during that time, relative to such a safe investment.

Further to this, for the past couple of years I have been monitoring my own system which I use to gauge whether we are in a Bullish or Bearish environment for the SP500.  The model is similar to the 50/200 in that it is a lagging indicator, however it differs in a number of ways. For a start it is a momentum indicator of the 50 day simple moving average. I then have a number of entry and exit rules for bullish or bearish signals, in addition a neutral signal can also be created. I do not use this system as a trading system, since like the 50/200, it is a lagging not forward looking indicator, and is therefore liable to significant adverse swings, which could seriously damage the wealth of a leveraged trader such as myself. However, I do use it to gauge the overall trend environment of the market, and will always be aware of the trending environment as indicated by my system. -  For the record, had I used it since 1970 as an investment tool, its performance would have been significantly superior to the 50/200 crossover method. It has generated 32 signals in that time 15 winning signals and 5 losing signals, a 75% success rate winners to losers (The remainder have been neutral signals, although they have been for shorter periods, just over 2 months on average.).  The annual average return would have been 8.48% (Though this does not include interest on balances during neutral periods, which would have slightly increased the return).

The last signal generated by my system was early July 2009 when it turned bullish. Throughout the past three months of negative price action it has remained in bullish mode, though being a lagging indicator it would anyway take its time to turn neutral or bearish. Despite being in bullish mode, it currently is in an oversold position, and moving lower, which highlights a risk of turning bearish, however the market would need to start turning seriously lower over the next week or two to generate a bear signal. Unless that occurs soon it will likely continue to signal a bullish environment.

The first set of charts below shows the SP500 over the past decade or so, with my indicator below. The coloured areas on the chart shows the nature of the environment (bullish/bearish/neutral) as indicated by the system.

The next chart shows the SP500 on a log-scale since 1970, with the coloured areas on the chart reflecting the nature of the environment (bullish/bearish/neutral) as indicated by the system.

Finally below is  a table showing some performance statistics for the system, compared to the 50/200 crossover method, 'Buy and Hold', and an investment at the 3 Year Treasury rate.

SP500 Inverse Head & Shoulders Pattern - ????

There has been a lot of talk over the past 2/3 trading days regarding the Inverse Head & Shoulder pattern on S&P futures. Head & Shoulders patterns are one of the most familiar patterns to traders, I also know from personal experience, that they can be one of the most frustrating. Many a time I've found myself jumping on a neckline break, only to be frustrated (I've also found myself committing the cardinal sin of trying to anticipate the break). Breakout failures however can often be more instructive than successful breakouts, not only do they have a tendency to rapidly wipe out the gains(losses) of that pattern, they often move well beyond the extremes of the pattern.

I've posted 3 charts below. - The top chart is the current SPM0 intraday, showing the current Inverse Head & Shoulders pattern. Below that is two examples from the SP500 of prior Head & Shoulders patterns. The first of these two shows the recent top on the S&P500, this was a successful Head & Shoulders. The lower chart shows the S&P500 from last May/June, this appeared at first to be a classic Head & Shoulders top, however the breakdown failed wiping out any losses during the formation of the pattern and the breakout, before making further substantive gains. I believe there is a strong possibility that this recent inverse Head & Shoulders pattern may fall into the category of a failed break, which could lead to significant further losses for the SP500 and US Stocks.Further to the above it is worth noting that the recent episode of Risk aversion across a wide range of markets, which began in late April/Early May, could be about to reassert itself following the pause/correction of the past week. A number of markets have returned to test key levels. Both the Dow Industrials and the S&P500 broke through the 200 day sma the week before last, since then they have both corrected back towards the 200 day ma. The AUDUSD (See below) appears to have completed a large 'Double-Top' pattern, breaking though the neckline of the double-top, however last week's price action saw a return to the breakout of this level. Also Sep10 Eurodollar Futures (See Below) broke down from a rising support line on the 20th May, dropping sharply to 98.865. Since then the future has rebounded to test the breakout of the rising trendline at 99.25, however the future now stands at 99.125.
There have been a number other markets returning to key break levels, including the CAC and the AUDJPY cross. Certain other risky assets have barely made a correction - EURUSD and IBEX to name but two, which really does not bode well for these two. EURUSD is back to the twin lows of mid 1.21s, and may well be breaking out of an Inverted 'Cup & Handle' pattern, I fear a sustained break through 1.2100 here could see rapid losses to 1.15/1.16 area.
I think an interesting week lies in store.