SMA Slope

Introduction

The Simple Moving Average (SMA) Slope identifies whether the intermediate trend of the market is up or down. It uses the 6 month SMA (180 day) of the chosen market index. It compares the current moving average to its value 1 week ago. If the 6 month SMA now is higher than it was 1 week ago, the indicator is bullish; if it is lower, bearish.

Why it is a Bearcatcher: Using this simple timing signal by itself improves returns over buying and holding the S&P by about 25%, and decreases risk by about 60%.

Example

SMASlope

Current chart

The above example shows a Bullish environment. The blue line (the current SMA) is above the red line (the SMA one week ago).

The green lines around the blue line show a .1% tolerance band ("hysteresis"). The author of this page uses that band to avoid whipsaws. In a neutral market environment, this signal can be noisy, switching between bullish and bearish; a tolerance band as shown reduces the number of signals to keep them meaningful.

This is an intermediate-term trend, defensive signal. It keeps the user in the market during short term drawdowns, is a slow-moving signal, and only changes when the market conditions have changed in a meaningful way for a meaningful amount of time. As such it will also not catch "exact" market bottoms.

The optimized SMA "lookback" was tested to be about 180 trading days.

Background

Original formulation (tpoto)
Detailed backtest & optimization (Zeelotes)

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License