Author Archives: Frank Roellinger

     

 

 

[Ed. note: we are republishing the original Frank Roellinger article on the Modified Ned Davis Method with an up-to-date performance chart]

Introduction and Disclaimer

An earlier version of this article was submitted to Seeking Alpha but was rejected because it contained no “in-depth, fundamental analysis”. A brief search of the SA website disclosed references to fundamentally based articles on the Acting Man website. So I sent Pater a note claiming knowledge of a fairly accurate, purely mechanical method to identify significant long-term turning points in the market. I offered to tell him a few days in advance the target point of the next signal. He graciously offered to publish my article here. If it can be arranged, I will post its buy and sell signals as they occur in the future. This information is for educational and entertainment purposes only, it will never be a recommendation to buy or sell anything. But I believe that it will prove interesting to consider and watch over time.

 

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Market Breadth Divergences

[ed note: readers not familiar with Frank’s trading system can look at an introductory article here: The Modified Davis Method

Over the years I have developed a lot of respect for the condition of bearish breadth divergence, when an index such as the S&P 500 is rising and the NYSE daily cumulative advance-decline line is not.

 

1-NYSE-a-d-lineNYSE advance decline line vs. NYSE index – currently breadth is strong, as many of the market’s previously weakest sectors (particularly commodity stocks, transportation stocks and industrials) have begun to rally strongly. However, tech stocks and other momentum favorites have begun to lag – click to enlarge.

 

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The Modified Davies Method Suggests the Time is Close

[Comment by PT: Readers not familiar with Frank’s MDM trading system should check out these previous articles on the topic: Modified Davies Method and Reader Question on the MDM. Technical analysis generally has the problem that the data of the past as such cannot really tell us anything about the future. However, data like market internals do tell us something about the degree of investors’ risk appetite, resp. risk aversion and how they are changing over time. Such information is often useful as an early warning indicator of impending trend changes. A side note: the MDM is solely focused on the Russell 2000 Index.]

Probably the most difficult thing to do in stock market investing is to identify a good time to sell. Many technical indicators have been devised to identify lows around the time they occur or soon thereafter, with a moderate degree of success, but to my knowledge that has not really happened for tops.

 

$RUTThe Russell 2000 Index (RUT) and the S&P small cap advance/decline line over the past year – click to enlarge.

 

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Stock Market Volatility in the 1950s vs. Today

Market volatility has been of concern for many market participants for several years. There are ways to exploit volatility for profit, but it generally is the bane of long-term trend followers. Implicit in concerns about volatility is the notion that it has been unusually high recently, and that in past years was not a major concern.

Some may be tempted to imagine that things were nearly ideal in the sleepy, tortoise-paced years of the 1950s, including the stock market, when scary volatility must have been virtually nonexistent.

I decided to illustrate a few facts about volatility via the accompanying chart. It plots the S&P 500 over two periods, both a little over two years in length. These are plots of the weekly close, and this is my first point: If one can ignore all market activity except the weekly closing prices, most scary volatility all but vanishes.

 

Slot-Machine-Winner

Image credit: Mircea Maties

 

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