200 DMA As a Sign to Re-Enter Equities

A reader asked if I would begin reequitizing if we went above the 200 DMA on Monday. The short answer is yes, but there are a few more moving parts.

The way I have always worked around this is: the day it first goes above (or below) is not the day I do anything. I wait to see what happens the next day. If, late in that next day, it looks like it will hold, then I make a move. Notice I say "a move." As I said in the video and in countless other posts, I wade in slowly, not all at once. The impact on the client is less if the move turns out to be a head fake or I am otherwise wrong, which has happened before and will happen again.

If SPX were to take back the 200 DMA so quickly (even if we are talking further out than Monday too), I would be inclined to add exposure for now with an ETF (sorry, can't front run clients with a specific name) as opposed to a an individual stock.

The idea with that is that if it crossed back over so quickly, the 50 DMA would probably still be below the 200 DMA and the 200 DMA would probably still be pointed down. Both of these give me less confidence of being correct with that first move if it needed to happen so soon. The reason to stick with it is that you can look at a chart for the last year and a half to see how it has worked and I think it is a bad idea to switch in midstream. The start of the next bull market would be a better time to reassess as to whether a tweak to the idea makes sense or not. Again, just a slight tweaking of the concept.

In describing this, you hopefully noticed I am preparing to be wrong. If you manage portfolios, even just your own, you will get things wrong. We know this. The next move you make might be one of the things that goes wrong or not, but there will be things that do not work out as you hope. If you know that now, you don't need to have an emotional response to it then.

Comments

[investor88:]

Agree we should look at 200d ma, also look for golden crosses like 20d/50d and 50d/100d for sign of bullishness.

2008 Sep 22 09:28 AM

[investor88:]

Agree we should look at 200d ma, also look for golden crosses like 20d/50d and 50d/100d for sign of bullishness.

2008 Sep 22 09:28 AM

[Jay Dhruv:]

Hi Roger,

wonderful insight on entry point using 200 DMA. Do you use anything else like Williams %R or ADX or OBV for entry point ?

also what fundamentals do you prefer. I am long in LDK which has excellent fundamentals. can you please comment on the same.

regards
Jay

2008 Sep 30 11:32 AM

[Roger Nusbaum:]

I keep it simple for 2 reasons, one it generally works and two no one approach can always be the single best.

I am top down so picking big picutre first. as far as fundies, i think different things are more important with some types of stocks while other measures important for other types of stocks. meaning sizing up a utility stock and a brazilian resource stock the same way doesn't seem to be the best path.

2008 Sep 30 02:00 PM