Thursday, August 26, 2010

Bear Acceleration Confirms New Trade Signal

Guest Article

August will be the third month of losses for the stock market out of the last four when the books close next Tuesday and we move into September. The major US indices have lost more than 5% across the board with the Dow down just 4.25% and the Russell 2K down 10%. The bearish price action looks like it will continue for the majority of September.

As of Wednesday’s close a new, confirmed bear signal has emerged on the markets and it’s historically dependable. In addition to the slew warning signs from Monday’s Equity Put/Call, the VIX crossing above its 200 day moving average and poor home sales we are seeing a short signal based on Acceleration Bands. Let me explain what this means…

Perhaps one of the most difficult momentum indicators to trigger a buy or sell for the SP500 is Acceleration Bands – the bands target the top/bottom 5% of bull and bear trends helping traders focus on only strongest moves. Check out our free Indicator How to Video on Acceleration Bands. The signals are easy – a traditional Acceleration Band Buy Signal occurs after 2 consecutive closes outside the upper band while a Sell Signal occurs after 2 consecutive closes below the lower bands…

Why is this Important NOW?

Wednesday’s close marks the second consecutive close below the lower Acceleration Band meaning a Bearish Acceleration is expected in the market. The previous signals based on acceleration were profitable more often than not.

In the chart below you can see all SPY acceleration signals since 2008. I’ve noted the entry/exit dates and entry/exit prices of each signal—the performance is based on the total signal result and max gain/loss is the max gain in the signal. What’s interesting is that about 75% of signals were profitable at one point during the signal. This means we’ve got a very good opportunity to short the market now.

To give you a better idea of what these signals look like on a chart we plotted the system on the chart below. This shows you the systematic entry/exits. Overall, you can see that these areas are the strongest trends over the past two years—Acceleration Bands seek to highlight the top 5% of moves in a stock or ETF. Of course, the S&P500 (SPY) is an average so there are several sector ETFs experiencing the same signal. Other sector ETFs that are currently in bear accelerations are SPDR Energy (XLE) and SPDR Financials (XLF).

What’s Bottom line for TRADRs? Seasonality suggests that we could see strong selling pressure in September while the mid-term election cycle suggests a one year rally starting after the elections… It would seem likely that a sharp seasonal sell-off could take place in September following by a strong fourth quarter rally.

SP500 Index – Daily – Acceleration Band Signals Since 2008

Trade well,

Andrew Hart – ETFTRADR

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