When to Invest

I think my comment was something like “the time to buy is when both the weekly and daily stochastics are oversold (20%)". That was kind of a glib comment, and Mannwich correctly questioned me on it. In fact, we can show that that’s the time to invest, and to refine the time we can use regression analysis (or SMA evaluation) to get a more exact entry point. So here’s the analysis I promised. First, the weekly SPY chart for the time period I wish to explore: April 2008-present. On it you can see the times we hit oversold.: June 2008, Dec 2008, March 2009, May 2010, June 2011, Aug. 2011, and Oct 2011. All the charts below are courtesy of TDAmeritrade StrategyDesk.



As you can see, there are only a few times where the SPY weekly hits the 20% (or oversold) point, and crosses over in the upward direction (I’m writing this from the long viewpoint because everybody hates people who short). (And I’m tired of being hated.) We’ll take a look at these.

The first one hits in June, 2008. Here’s the weekly section of the above chart for this time frame:



At the June point, the price has not gone above the 12-period SMA (blue line). Price starts to break the SMA in Dec/E but returns and doesn’t break the SMA trend line until March, 2009 (it hasn’t broken it’s down channel until that point) so the beginning of the trend reversal happens in March, 2009. Here is the daily chart for that timeframe:



You can see that during the Dec/E, we haven’t returned to oversold. So we have to wait until the daily returns to oversold before entry. The stochastics return to oversold around Jan 14, and break the SMA around Jan 28th, so that’s our entry point. However 2 days later, we have to exit because we’ve broken below the SMA, and it’s turned flat, then negative slope. We don’t get a turn-up of the SMA until March 10. That’s when I would enter again. Notice we get a pullback on the 19th, but because we didn’t drop below the 20% point on the Stochastics, I’d add at those points because of the W formations with the right side higher. See this chart for my exit point:



Your risk appetite should tell you when to exit, but I’d start taking money off the table preparing to exit when the SMA starts turning south, on May 20th. However when we break back above the SMA, I’d add again, looking at those W’s. I wouldn’t exit until June 12 or so, when we get a significant drop below the SMA, and wait for the next setup.


The next time we revisit the 20% point on the weekly is around May, 2010. We don’t start leaving that until July 2010. Here’s the weekly chart for that timeframe:




You can see we cross the SMA around the beginning of July/mid, 2010. But at that point, the SMA is not positive. So any investment entry consideration at that point should be carefully done. Here’s the daily chart:




You can see that we’re not at the oversold point at the beginning of August, so I would have to wait for the daily to return to oversold. This happens around Aug 15, and starts breaking the daily SMA around Sept. 1, 2010. That would mark my entry point. At that point, the weekly stochastics are still on the rise.


The next time we hit the 20% point on the weekly is (arguably) June 2011. Here’s the weekly chart:



We don’t break out over the SMA until October, 2011. Here’s the daily chart:




As you can see around Oct 7 the stochs are on their way up, and we break out over the SMA, so that’s our entry point. I won’t tell you how to manage your risk, but we cross back round Nov 16, so that was my exit point.

This concludes my approach for buying when both the weekly and daily S&P hit oversold. I hope this answers Mannwich’s question adequately.

Remember, I’m not so much a risk taker. I remember my losses vividly. Some people buy as the market goes down. Not me. I am a trend-follower. The last thing I’d like to mention is that you can invert the above analysis if you wish to short.