Using the Signals

This article is a work in progress. It's about which signals to use, and when, and also how to choose the best signals to actually trade. The trading is best around the inflection points in the overall market, and at times like this there are a ton of signals all in tandem. The trick is to narrow it down.

For starters I should state the over-arching goal of technical analysis - as far as we're concerned - which is to determine the overall market trend. Getting the trend right is probably the most important factor behind your success or failure handling individual stocks, much more so than a given buy or sell signal on a stock.

Fortunately, this isn't too hard. Our specialized breadth indicators will show you the way, illuminating the market cross-section visually on the chart. These indicators show us the daily "numbers of things" happening across the entire database of stock data, such as the daily numbers of stocks making new highs or lows, or up on big volume, or generating one of our proprietary signals such as the Climax Low. You can clearly see the waves of buying and selling taking place as the market oscillates between overbought and oversold. You can usually spot the turning points to the exact day, especially when combined with signals such as Climax High and Climax Low applied to charts of the stock indexes and ETFs.

For example, here's a chart of the Dow back in February of 2010. In retrospect, we can see that the Climax Low signal marked the exact bottom. The daily number of Climax Lows is plotted above, in blue, in the second indicator window. Note the corresponding spike in the number of signals across the database:

One point you might take from this is how well the Climax Low signals work. Another more subtle point is that there's only one day when the market bottoms, and right around this time is when you should start buying stocks. These times don't come along every day. It's really important to get in sync with the overbought / oversold swings around the trendline, and time any stock purchases accordingly.

Here's a chart of the Dow from back in March of 2009, when the market hit rock-bottom. Note the blue Climax Low signal, once again occurring at the exact low.

By the way, sometimes people will notice those little red signals at the tops. Roughly-speaking, these are the inverse of the Climax Low signals. As you might imagine, for lack of a better term, we call them Climax Highs. They're designed to pinpoint market tops.

To be continued...