Monday, October 8, 2012

One Sector Signaling Screaming 'Buys' in This Ambiguous Market

Traders looking at the stock market right now are finding it difficult to determine the direction of the major trend. We have seen several days where the market closed weak after showing a large gain at the open -- a sign of weakness. In addition, there are bearish momentum divergences building in stocks.

Charts of the major stock market averages can be interpreted as either bullish or bearish, but there is at least one market giving an unambiguous buy signal, and traders can focus on that while stocks work on developing a trend.

One indicator that I like to use is the little-known Momentum of Comparative Strength (MoCS). This indicator converts relative strength (RS) to a MACD-style indicator. Just like MACD, MoCS can be drawn as a histogram or as two lines with one line being the raw indicator and the second one being a moving average of the indicator. The two-line method offers more trading signals, but the histogram offers highly reliable signals. MoCS makes RS signals more precise and easier to spot. This indicator often allows traders to get in as a trend is just getting under way.

To picture RS, you can think of a golf ball being hit off the tee. At first, the ball is rising very quickly. If we measured its RS (the change in the speed of the ball), we would find that RS is accelerating as the ball rises. Soon, the ball levels off and so does the RS as the ball heads toward the hole. As the ball turns downward, RS will begin falling quickly. If we were trading a golf ball, we would want to buy shortly after the ball began moving off the tee and sell when the ball starts falling toward the ground. MoCS is an indicator that creates that kind of picture of RS on a chart.

Using just MoCS buy signals, you would buy when the momentum of the price change is accelerating and sell when the RS turns down. This simple indicator would have delivered 71% accuracy on the daily charts of SPDR Gold Shares (NYSE: GLD) and 100% winners on the weekly chart of that ETF. Right now, we have already seen the daily signal and are setting up a weekly buy signal.
GLD Chart
We have only seen four previous weekly buy signals in GLD and all were profitable with an average gain of 13.8% and lasted an average of 29 weeks. There have been 31 daily signals and 71% of those trades were profitable. The average gain was 13.2% in about six weeks.  (more)

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