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One of the few indicators I use is a moving average crossover. One of its functions is to help me identify the possible beginning of or an end to a trend. Here I wish to discuss how this indicator, which I call “crossing enemy lines”, helps me identify the highly probable end of a trend.
To accomplish this, let’s look at the current S&P 500 DAILY and WEEKLY chart (not one from three years ago!):
S&P WEEKLY CHART:
CROSSING ENEMY LINES:
As you can see from the DIALY chart above there have been two instances in the last six months where the market has gone to the maximum length of my indicator without crossing: once at the beginning of March, after a long down trend of 18 days below the blue line, which then indicated a trend reversal and the beginning of a three month long Spring rally, and then again this past week when the red line crossed the blue line for the first time in 20 days after our Summer rally.
For anyone who has been trading for a fair amount of time you know that the market rarely provides trend trading opportunities like these but when they end the corrections can be steep and volatile. My indicators alert me to a possible trend reversal-or at least an extended consolidation- when there has been no crossing of enemy lines after 18 consecutive trading days. Combine this with a need to test a support level on the WEEKLY chart and you have a pullback level of between 945 and 880, with the strongest support around the 50 TANKS area on the WEEKLY chart at the 905 level (the CROSSHAIRS PULLBACK LINE-also known as the Battle Exit Line-ON THE DAILY).
For those who receive my members only newsletter IN THE CROSSHAIRS, you know I said the following in my weekend edition on August 2:
“The S&P futures have rallied off the 21/50 tanks over the last 3 weeks setting up what looks to be a bullish reverse head and shoulders pattern. However, we could test the breakout above the 50 tanks which could have us retrace back to the 915-920 level.”
HOW DO I USE THE CROSSING ENEMY LINES INDICATOR?
I use this indicator for various reasons but when there is no crossing of enemy lines the last 18 trading days I do the following:
1. Get out of positions I have been in on the move up or down, since I feel the end is near. No need to stay around and let the other side of the market take my money.
2. Start looking at potential reversal plays and then wait for the CROSSHAIRS to give me an entry-if at all. Patience is the key here while I wait for the next major move in the market. After a big run it usually does not happen immediately.
3. Take advantage of the correction by looking for the next areas of support on the bigger charts, especially if the same support area is showing up on multiple time frames. In the example above, the 50 TANKS support on the DAILY corresponds with the top line of the pullback area on the WEEKLY (around 945) and could be the next support area.
4. Trust my intuition that what I am seeing is a market that has run 100 yards in a 50 yard dash. Time for the market to rest and time for me to do likewise as I enjoy the results of the dash.
“IN WAR, THEN, LET YOUR GOAL BE VICTORY, NOT LENGTHY CAMPAIGNS.”
SUN TZU
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