• Investing
  • Stock
Round Table Thoughts
  • Economy
  • Editor’s Pick
Home Stock Should we Continue Taking Trend Signals after Whipsaws?
Stock

Should we Continue Taking Trend Signals after Whipsaws?

by February 25, 2023
by February 25, 2023 0 comment
Share
0
FacebookTwitterPinterestWhatsapp

The stock market has been a tough place for trend-following since January 2022, which is when the S&P 500 first triggered a bearish trend signal. The bearish signal in question is the humble 5/200 day SMA cross. There were whipsaws in the first quarter of 2022 and then an extended downtrend from April 11th until January 23rd. The 5-day SMA crossed above the 200-day SMA on January 24th and this cross remains bullish until proven otherwise. Despite whipsaws in 2022, this moving average cross warrants our attention because a bearish cross could foreshadow a move to new lows.

The chart below shows the S&P 500 with the 5-day SMA and 200-day SMA. The indicator window shows Percent Above MA (5, 200, 0), which is part of the TIP Indicator Edge plugin. This indicator shows the percentage difference between the 5 and 200 day SMAs. Currently, the 5-day is 1.77% above the 200-day. A cross below zero would signal a bearish moving average cross.

Prior signals resulted in whipsaws so why should we respect this cross? Whipsaws are part of the process for trend-following indicators. We can reduce the whipsaws by smoothing the close with a 5-day SMA, but we cannot totally illuminate them. Traders looking to catch big trends must learn to live with the whipsaws. It is the cost of doing business for trend-followers. We have to take the signal to catch the trends. Let’s crunch some numbers.

A simple trend following indicator can help us maintain returns and greatly reduce drawdowns. The table below shows performance metrics for buy-and-hold, the close/200-day cross and the 5/200 day cross. Over the last 20 years, buying and selling 5/200 cross signals worked 47% of the time (Win%) and the Compound Annual Return (CAR) was 6.71%. The average of the 5 largest drawdowns was 16%. Buy-and-hold had a higher Compound Annual Return (CAR), but the average drawdown was almost twice that of the 5/200 cross. Buy-and-hold went through a 55% drawdown in February 2009 and a 33% drawdown in March 2020.  

 

This is as simple as it gets for trend-following and determining the direction of the most important benchmark for the US stock market. The S&P 500 is the most widely followed index, it is the most used index for benchmarking returns and the 200-day SMA is the most widely used long-term moving average. The state of the S&P 500 is also something to consider when trading stocks and ETFs. In general, I want to be long stocks when the S&P 500 is in an uptrend and out when the S&P 500 is in a downtrend. Even though there is chance of a whipsaw, a 5/200 cross would be bearish and I would respect this signal.

TrendInvestorPro is currently working with three quantified strategies for trading ETFs. We have a Bull-Bear Strategy trading the All Weather List, a Trend-Momentum Strategy Trading stock-related ETFs and a Mean-Reversion Strategy. Each strategy has a detailed article and signal tables are updated daily. Click here to learn more.

The Trend Composite, Momentum Composite, ATR Trailing Stop and eight other indicators are part of the TrendInvestorPro Indicator Edge Plugin for StockCharts ACP. Click here to learn more and take your analysis process to the next level.

—————————————

You Might Also Like
  • DP Trading Room: This is the ONLY Sector Showing STRENGTH Right Now
  • Pay Attention to THIS! The Market is About to Skyrocket
  • Three Industrial Stocks With Room to Run!
  • The Best Five Sectors, #12
Share
0
FacebookTwitterPinterestWhatsapp

previous post
Nothing Good Happens Below the 200-Day
next post
Week Ahead: NIFTY Draws Closer To Potential Support; RRG Charts Show Defensive Setup

You may also like

Trump’s Policy Shift Reveals Potential Big Winner!

December 28, 2024

Stocks In Focus This Week: Palantir, Uber, and Coinbase

May 2, 2025

Leaders Lost & Laggards Won

April 25, 2023

Clear Split in NY FANG+ Universe Offers Pair Trading Universe

March 8, 2024

Sector Spotlight: The Story of ARGoN (Acampora’s Relative Grid of...

September 16, 2023

Fed Watch: Key Bullish Patterns in the S&P 500, Utilities,...

May 7, 2025

Macro to Micro — Seasonals, Trends and Momentum

July 28, 2023

How to Use Trend Alignment to Find the Best Entry...

July 20, 2023

What’s the BEST Market Visualization Tool?

October 21, 2024

Getting Perspective and Dealing with Volatility

April 20, 2024

    Stay updated with the latest news, exclusive offers, and special promotions. Sign up now and be the first to know! As a member, you'll receive curated content, insider tips, and invitations to exclusive events. Don't miss out on being part of something special.


    By opting in you agree to receive emails from us and our affiliates. Your information is secure and your privacy is protected.

    Recent Posts

    • Breakouts, Momentum & Moving Averages: 10 Must-See Stock Charts Right Now

      May 31, 2025
    • Leadership Rotation Could Confirm Corrective Phase

      May 30, 2025
    • Run Your Stock Portfolio Like a Pro Sports Team

      May 30, 2025
    • U.S. foreign tax bill sends jitters across Wall Street

      May 30, 2025
    • Amazon taps Xbox co-founder to lead new team developing ‘breakthrough’ consumer products

      May 30, 2025

    Popular Posts

    • 1

      Trump-era China sanctions ended by Biden may be...

      June 27, 2024 2,765 views
    • 2

      Walz’s honeymoon with China gets fresh scrutiny as...

      August 9, 2024 2,472 views
    • 3

      Biden appointee played key role in recruiting Chinese...

      June 25, 2024 2,451 views
    • 4

      Shein’s global ambitions leaves some cybersecurity experts fearful...

      July 10, 2024 2,432 views
    • 5

      Harris VP pick spent years promoting research facility...

      August 29, 2024 2,308 views

    Categories

    • Economy (7,009)
    • Editor's Pick (2,106)
    • Investing (538)
    • Stock (2,581)

    Popular Posts

    • 1

      Trump-era China sanctions ended by Biden may be revived under new House GOP bill

      June 27, 2024
    • 2

      Walz’s honeymoon with China gets fresh scrutiny as Harris camp blasts ‘lying’ critics

      August 9, 2024
    • 3

      Biden appointee played key role in recruiting Chinese businesses to Delaware: ‘Longtime friends’

      June 25, 2024
    • 4

      Shein’s global ambitions leaves some cybersecurity experts fearful of Chinese spy threats

      July 10, 2024
    • 5

      Harris VP pick spent years promoting research facility that collaborated with ‘Chinese military company’

      August 29, 2024

    Latest News

    • Breakouts, Momentum & Moving Averages: 10 Must-See Stock Charts Right...

      May 31, 2025
    • Leadership Rotation Could Confirm Corrective Phase

      May 30, 2025
    • Run Your Stock Portfolio Like a Pro Sports Team

      May 30, 2025

    Categories

    • Economy (7,009)
    • Editor's Pick (2,106)
    • Investing (538)
    • Stock (2,581)

    Disclaimer: RoundTableThoughts.com, its managers, its employees, and assigns (collectively “The Company”) do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.

    Copyright © 2024 RoundTableThoughts.com. All Rights Reserved.

    Round Table Thoughts
    • Investing
    • Stock
    Round Table Thoughts
    • Economy
    • Editor’s Pick

    Read alsox

    Stocks Retain Uptrend; Focusing on the...

    April 9, 2023

    Salesforce Falls Out of Favor: Trade...

    May 14, 2024

    Three Charts Screaming Market Top

    September 7, 2024
    Sign In

    Keep me signed in until I sign out

    Forgot your password?

    Password Recovery

    A new password will be emailed to you.

    Have received a new password? Login here