Last week I wrote about a five year back-test I ran on a 10 stock portfolio in which I purchased stocks on Primary Wave Up signals and sold them on 'S' Rec's. This portfolio was long 100% of the time. Although it produced a profit, it revealed a number of problems that had to be solved.

First of all, I saw the portfolio go up time and time again in up markets and go down time and time again in down markets. Well, I already knew that was going to happen, so the solution to this problem was simple: Buy long upon C/Up signals and go into cash on C/Dn signals.

The second problem I saw was that selling on an 'S' Rec allows stocks to go up very nicely, but it also allows them to go down quite a bit before getting an 'S' rating. Somehow, I had to find an exit strategy that captured more of the gains. The third problem was that the portfolio typically peaked at the top of each up trend; then fell sharply just before the C/Dn signal appeared. So I had to find a way of reducing my exposure, i.e., raise cash, as the market trended higher.

I knew it was going to take a lot of work to find the answers to these problems, so I enlisted the aid of two Simulator Wizards: Steve Chappell and Angel Clark. As it turned out, Angel had been working on these problems for some time and had made considerable progress in solving them. So when it came time to find the best exit strategy, she knew exactly what to do. She found that using a G/L% of 50% gain and 30% loss gave the best results. This finding is consistent with work I and others had done.

Angel also knew how to reduce risk as the market went higher. She bought 10 stocks at the beginning of a campaign, but did not replace any of them as they were sold. In this fashion, she typically was underinvested at the end of each up trend. She also bought and sold positions at the Next Day's Open. In this fashion, she could place her orders at night and didn't have to be concerned with the market during the day.

So Angel took several techniques we have demonstrated for several years and combined them into a new, powerful, easy to use strategy. With this strategy, you buy the top 10 VST-Vector stocks at a C/Up signal; sell them upon hitting a 50% gain or 30% loss at the Next Day's Open; then go into cash at a C/Dn signal. What could be easier than that? It's called Easy Does It - C/Up.

Last week I said to "think of the Color Guard as you would a traffic light. Green means go, it's OK to buy stocks. Yellow means caution, it may or may not be OK to buy stocks. Red means stop, don't buy any stocks."

I also said there's more here than meets the eye and went on to introduce our trend indicators, the Primary Wave and Market Timing Indicator. To make things simple, I also said that it's always OK to buy stocks when the Primary Wave is Up. Having said all that, I thought I would take the Color Guard out for a test drive.

I wanted to see what would happen if I bought stocks when the Primary Wave was Up and deferred purchases when it was Dn. So I created a 10-stock portfolio as of five years ago, 09/19/03, and managed it week-to-week, selling on an "S" Rec. I stayed long 100% of the time and replaced empty positions only when the Primary Wave was Up. The exercise was very instructional.

At the end of the first year, I had a gain of 22.91%, and a gain of 71.17% after two years. Not bad, I thought, but then my portfolio peaked on May 12, 2006, up 123.51%, and got mauled during the summer of '06. It fell to a gain of 61.67% by September 22, 2006, the three year mark. It fought back to a gain of 99.67% on December 08, 2006; then it went down again. Nevertheless, it recovered once again to a gain of 76.47% by September 21, 2007, the fourth year. It peaked at 99.35% on October 26, 2007 and went downhill after that. As of yesterday, September 18, 2008, it had a gain of 22.55%.

You might say that performance is not very good and I certainly would agree with you. It's not very good at all. But you should remember that I didn't take full advantage of all the information the Color Guard provides and the portfolio still survived 10 months of a terrible bear market. So what other information in the Color Guard could I have used?

Perhaps the most important signals it gives: The Confirmed Up and Confirmed Dn signals. These signals are presented in the Trends column as C/Up and C/Dn. These signals should not be ignored. While there's a lot of flexibility as to when you may buy stocks, you're playing with fire if you buy them when the market is falling. Again, you cannot ignore a C/Dn signal. Had I heeded the C/Dn of November 1, 2007 and gone into cash on November 2, 2007, I would be sitting here with a gain of over 99%. Had I gone into cash on November 2, 2007 and gone long during the following C/Up to C/Dn period of April 3, 2008 to June 11, 2008, I'd have a gain of 135.53%. Now that's not bad, but we can still do a lot better.

Simply buying on Primary Wave Up signals and not buying on Dn signals is a good beginning and using the C/Up and C/Dn signals is a must, but there's much more than that, which I will present in the next few weeks, to fully explain Implementing the Color Guard.

I have received some feedback recently that the Color Guard is confusing and hard to understand, so this essay is dedicated to explaining, as well as I can, how it works.

Think of the Color Guard as you would a traffic light. Green means go, it's OK to buy stocks. Yellow means caution, it may or may not be OK to buy stocks. Red means stop, don't buy any stocks.

Can it really be that simple? In a perfect world, the answer would be yes, but there's more here than meets the eye. For example, I'm not going to go through a green traffic light if I see a truck in my path, running a red light. Even though I have the green, I always look both ways to make sure it's safe to proceed. This is why our trend indicators, the Primary Wave and the Market Timing Indicator, are important parts of the Color Guard.

We use colors to report the up and down movements of the Price of the VectorVest Composite, the Relative Timing of the V V C and the Buy to Sell Ratio, and we use Up and Dn signals to report the direction of our Trend Indicators. Put it all together and we have a set of three lights and two indicators. Here's a summary of the most likely combinations of light colors and trends, what they mean and the suggested action to take:

LIGHTS......	TRENDS ..............	MEANING................	ACTION
3 Green.....	UpUp	The Color Guard is Bullish.........	Buy...
2 Green.....	UpUp	The Color Guard is Somewhat Bullish	Buy...
1 Green.....	UpUp	The Color Guard is Mildly Bullish..	Buy...
1 Green.....	UpDn	The Color Guard is Mildly Bullish..	Buy w Caution.
3 Yellow....	UpUp	The Color Guard is Neutral.........	Buy w Caution.
3 Yellow....	UpDn	The Color Guard is Neutral.........	Buy w Caution.
3 Yellow....	DnUp	The Color Guard is Neutral.........	Do Not Buy.
3 Yellow....	DnDn	The Color Guard is Neutral.........	Do Not Buy.
1 Red.......	DnUp	The Color Guard is Mildly Bearish..	Do Not Buy.
1 Red.......	DnDn	The Color Guard is Mildly Bearish..	Do Not Buy.
2 Red.......	DnDn	The Color Guard is Somewhat Bearish	Do Not Buy.
3 Red.......	DnDn	The Color Guard is Bearish.........	Do Not Buy.

Given this array of light combinations, trends, meanings and actions, I can see why some people may be confused by the Color Guard. But here's how to make it real simple: IT'S ALWAYS OK TO BUY STOCKS WHEN THE PRIMARY WAVE IS UP.

The Primary Wave, shown on the left side of the Trends column, is discussed at some length in my essay of July 9, 2004. The Underlying Trend, shown on the right side of the Trend column, is discussed in my essay of July 23, 2004. A comprehensive review of our Market Timing System was presented in a series of seven essays from July 9, 2004 to August 20, 2004.

While it may confuse some people, one of the best times to buy stocks can be when we have 3 Yellow lights and an UpDn situation. But you have to look both ways before you act. You have to see whether prices are rallying in a falling market or whether they are taking off from a bottom. Of course we prefer to buy stocks at the lowest prices, so we use the Market Timing Graph to see what is going on. We give you the results of our analysis in our Strategy commentaries.

As I write this essay, 3:00PM ET, VectorVest RealTime is showing 3 Yellow lights, a DnDn situation and the Price of the V V C is at $25.57 per share. If the Price of the V V C goes up more than one cent, it will be higher than last Friday's close of $25.58 per share and the Primary Wave will be Up. Therefore, the table shown above would say it's OK to buy stocks, but caution is advised. So what would we do?

The first thing we would do is close out of the ETF Contra Fund positions in the Model Portfolio. We'd then be in cash. The next thing we'd do is get a shopping list ready to go long on Monday if the rally continues. We always want to go with the flow. So the Price of the V V C would not only have to be going up next Monday, but it would have to go above last Monday's close of $25.86 per share for the Primary Wave to remain in an Up mode. It's important to realize that just because the Primary Wave may be Up on any given day, it doesn't mean the market will go up the next day. We think it would, but we always have to look out for that truck running a red light.

We believe that market direction is the single most important thing you need to know to consistently make money in the stock market. So consulting the Color Guard is the place to start before you do anything with your portfolio. That's why we feature it prominently on our homepage and present it vividly for instant interpretation. Hopefully, it will serve you better now that we have The Color Guard: Clarified.

Never Be a Day Late Again

Traders can now enjoy even more timely and actionable insight into the markets with the release of VectorVest RealTime.

The highly regarded computerized stock-selecting system that provides daily end-of-day recommendations and market information, indicators and evaluations for over 8,300 U.S. stocks, now offers all its trademark VectorVest features in real-time for even more informative, timely and strategic trade decision-making.

VectorVest's unique fundamental and technical analysis system, including 28 indicators updated in real-time, enables clients to enjoy profits and preserve capital in volatile markets by identifying Buy/Sell candidates and overall market trends each trading day. VectorVest RealTime now analyzes, sorts, ranks and graphs every stock across Value, Safety and Timing, and provides Buy, Sell and Hold recommendations as they develop throughout the trading day.

"With VectorVest RealTime, our clients now have even greater insight into overall market, stock and sector trends," said VectorVest creator Dr. Bart DiLiddo. "They can identify major market moves or trend changes intra-day to capture the advantage of buying or selling at optimally profitable times."

Day traders, swing traders, even long-term investors can now spot actionable trends as they are occurring to enjoy greater returns on their trades or ensure they are on the right side of the market when it turns.

"VectorVest has all the strategies, and it defines them based on your objective -- and it's simple to use," said David Price, an architect from Columbus, Ohio, $100,000 2nd Prize Winner of CNBC's Million Dollar Portfolio Challenge. "VectorVest has saved me a lot of money by selling at the right time. With the CNBC contest, I looked at VectorVest and saw that Dr. DiLiddo said the market was at a double bottom. I followed his recommendation to go into stocks that had been beaten down pretty badly. A week before the contest ended, I was in 31st place, and then in the last 3 days I made just shy of a million dollars using a VectorVest strategy," said Mr. Price. "I would never have had the information I needed available if it hadn't been for VectorVest."

About VectorVest
VectorVest is a highly regarded, intuitive system that analyzes, sorts, ranks and graphs over 15,500 stocks worldwide each day for Value, Safety and Timing and gives a Buy, Sell or Hold recommendation on each stock, every day. With nearly 30 years of research and 13 years of historical data on which to base its recommendations, VectorVest is world-renowned for its reliable and comprehensive market analysis and is used by investors of every type.

Combining features of both technical and fundamental analysis, VectorVest alerts its self-directed trading clients to market timing signals for them to enjoy profits and preserve capital by filtering out market noise. Easily read charts, portfolio-building capabilities, and incisive market commentary are among the benefits VectorVest customers enjoy in managing their assets during market rallies and sell-offs. VectorVest RealTime now makes these same features and capabilities available intra-day. For more information or to register for a risk-free trial, visit http://www.vectorvest.com/products/vvrt.htm .