VectorVest has three main timing systems that vary in their degree of aggressiveness. These systems include the Confirmed Market Call, the DEW Timing System, and the Primary Wave.
Primary Wave: (Highly Agressive)
Our studies show that day-to-day movements in the Price of the VectorVest Composite are not statistically significant. Week-to-week movements, however, are very much worth noting. When the Price of the V V C is higher than it was one week ago, the Primary Wave is Up. When the Price of the V V C is lower than it was one week ago, the Primary Wave is Dn. The Primary Wave provides a relatively fast, fairly reliable indicator of market direction.
When the Primary Wave changes direction, say from Up to Dn, Prudent Investors should use it as a warning signal that the market trend is showing signs of changing from up to down. They should become defensive, i.e., defer the purchase of stocks, tighten stops, sell Covered Calls, buy Puts and so on. Aggressive Investors and Traders should use this signal to switch from favoring upside strategies to favoring downside strategies. (Aggressive Investors and traders should always key their bias to that day's trading activity). For those of you who are "Riding the Wave," a change in Primary Wave from Up to Dn should be a signal to stop replacing long positions and to accumulate cash. A particularly strong change in the Primary Wave may be used as a signal to go from long to short positions. This information is presented in the Daily Color Guard Report.
Confirmed Market Calls: (Least Aggressive)
Our studies show that a slower, but more reliable signal of market direction than the primary wave is obtained by analyzing the two-week movements of the Price of the V V C. When the Price of the VVC goes up two weeks without an intermediate down week, it gives a preliminary signal of a sustainable Up trend. When the Price of the VVC goes down two weeks without an intermediate up week, it gives a preliminary signal of a sustainable Dn trend. You are invited to look at our Market Timing Graph in the weekly mode to see how well the Two-Week Rule works. Over the last 13 years, the two-week signal has been reversed by a two-week counter move only about once a year.
When a signal from the Two-Week Rule changes direction, say from Up to Dn, Prudent Investors should recognize that the market has gone from an uptrend to downtrend. They should implement the defensive actions cited above and also consider selling their weaker stocks. Aggressive Investors and Traders should use this signal to implement downside strategies such as selling stocks short and buying Puts. Again, these investors should key their actions in accordance with that day's market activity. For those of you who are "Riding the Wave," a change in the Two-Week signal from Up to Dn should be a signal to go into cash and to go short if that day's market activity is downward. This information is also presented in the Daily Color Guard Report.
The VectorVest Buy, Sell Ratio, (BSR), is an extremely powerful indicator of market conditions. The market is robust when the BSR is greater than 1.00 and weak when the BSR is less than 1.00. Therefore, we use the BSR to give confirmed up and confirmed down signals. A Confirmed Up signal is given when the Two-Week Rule has signaled a sustainable uptrend and the BSR has gone from below 1.00 to above 1.00. A Confirmed Dn signal is given when the Two-Week Rule has given a signal of a sustainable downtrend and the BSR has gone from above 1.00 to below 1.00.
Our experience has shown that the use of confirmed signals to buy long on Up signals and sell short on Dn signals is far superior to employing simple buy and hold strategies. Confirmed Calls work best in markets having sustained uptrends and long downtrends. The Confirmed Dn signal we gave on March 17, 2000 was the most crucial we have ever given. The Confirmed Up trend from March 21, 2003 to March 15, 2004 was the longest we have ever seen. So Confirmed signals should not be ignored. It is important to recognize, however, that confirmed signals are often slow in developing.
The DEW Timing System: (Moderately Aggressive)
The ideal market timing system should be fast, reliable and objective. The signals generated by the VectorVest ProTrader version of our Market Timing Graph are faster than the Confirmed Calls obtained from the Standard Market Timing Graph. They also are more reliable than the Primary Wave. Moreover, the ProTrader signals are totally objective and easy to identify.
VectorVest ProTrader is an adjunct software program that becomes an integral part of VectorVest end-of-day program when installed. It uses technical analysis to identify entry and exit points for trading stocks. Therefore, it is ideally suited to supplement our market timing system which is, in fact, based upon technical analysis. You must have VectorVest ProTrader on your computer to see these signals.
The default ProTrader Market Timing Graph is already set up to display all the necessary indicators. These include the Detrended Price Oscillator, Envelopes, and a 30-day Weighted Moving Average.
Up signals are given when Price is above the 30-day Weighted Moving Average, and the DPO is positive. Down signals are given when Price is below the 30-day Weighted Moving Average and the DPO is negative. It's that simple.