Point of Sail Market Model

[This post features content from my discontinued blog, Specwinds. The information in article may be edited from its original form. This particular post has been completely updated to my new methods of analysis. It wil continue to be updated as the blog evolves.]

What does the POS indicator on the right mean? Well, Dr. Wish used a set of indicators to help him avoid the major market bears of 98, 2000, and 2007-2008. In my tracking of market activity, I too wanted to develop an index based on my own analysis that helped me to diagnosis the state of equity markets. Thus, if you are familiar with the Wishing Wealth GMI, then you will have an idea of what I am doing.

Background on Dr. Wish's GMI:

http://wishingwealthblog.com/2005/04/the-wishing-wealth-general-market-index/

http://wishingwealthblog.com/2005/04/lets-talk-strategy/

I developed my own system that scores or ranks current market conditions based on the signals generated from a handful of technical indicators. The higher the score (8), the more bullish or risk-on the conditions, and the greater probability for success in long positions. Inversely, the lower the score (0), the more bearish the conditions, and the greater the probability of success for shorts or cash positions in general.

The POS Index represents the sum of eight separate indicator scores. Every indicator that is bullish contributes one unit of value, with a maximum score of eight possible from eight total indicators.

The eight indicators include information from the following indexes:

NYSE New Highs-New Lows

VIX short term and medium term futures

Institutional Index ($XII)

Dow Jones Global Titans

S&P 500 Equal Weight

The POS is further enhanced by the way each indicator is scored at either a 1 or a 0. I was inspired by Chris Ciovacco's work to accomplish this component. While the model is too complex to share every detail, it bares some similarity to Chris's models "objective" scoring models https://www.youtube.com/watch?v=SJ-dYMgMn40

I use technical indicators to answer binary questions about the current state of a certain index and use the binary answers to produce a score (1 or 0) that summarizes the current technical strength of the index. The eight individual scores of 1 or 0 adds up to a total possible score of 8.

Intention: The model has an aggressive growth orientation, with a short-term focus (days to weeks), but seeks to capture expansive, risk-on periods in general. In sharing the model's output, scores into the scoring metric of the original POS system, so the same 1-8 scale will be used with 8 being the most bullish conditions. The model is concerned primarily with changes in price momentum, which is excellent for identifying trend changes.

As always, keep the disclaimer in mind: http://maintrimmercapital.blogspot.com/p/terms-and-conditions.html

Potential Trading Strategy:

BUY Rules- When the POS score rises to 4 or greater from 2 or below, use 1/2 of your trading capital to make a preliminary buy in and open a position on the general market with an index ETF (like QQQ). When the POS score continues to rise to 6 or greater complete your position on an index ETF with the second 1/2 half of your trading capital. Hold until SELL rules are active or POS drops below 3 before the 2nd buy in, in which case you should close your 1/2 position due to a failed rise.

SELL Rules- When the POS score drops below 5, sell 1/2 of your current position. When the POS score continues to drop below 3, sell the other 1/2 of your position to close out.

**SPECIAL EXCEPTIONS- The highest probabilities of success occur when the POS "cycles" below 3 before returning to a bullish state 4 or greater. Therefore, if the POS does not "cycle" to bear levels, be highly cautious in considering opening a trade as markets may be overbought. I will mark when this occurs with a ** next to the date on which it occurs.