I am truly surprised at the amount of misinformation put forth lately in regards to whether a Golden Cross with a downtrending 200 day simple moving average (dsma) is a valid signal.
Despite the work of backtesting heavyweight MarketSci (not to mention my own work) which showed that it does not matter whether the 200dsma is falling or not, there are still many people out there who insist that this variety of Golden Cross is invalid. Across a variety of blogs and websites this myth remains very persistent.
Not being one who is fond of promulgating more technical analysis myths (there are enough out there already), I have decided to put this myth to bed, once and for all.
The Method
Both Michael Stokes and myself have proven that a Golden Cross on the S&P500 is valid regardless of the direction of the 200dsma. Despite our efforts, there has been some doubt about this research since data for the S&P only goes back to 1960. Some have asserted that this test should be performed on the Dow Jones, since there is more data available.
The other important consideration is how “downtrending” or “falling” is quantified, in regards to the 200dsma.
I will test all of the Dow Jones data provided by Tradestation, going back to January 1, 1920. Secondly, I will quantify “downtrending” and “falling” so that my results can be replicated.
My tests will not include commissions or slippage or any other fees. It will also not give a return on the cash held when the system is in between trades. Starting equity is 100K and gains are compounded.
In return for my hard work, you dear reader will agree to provide the link to this post to whomever puts forth this myth, from this day forward.
Quantifying Downtrending and Falling
The 200dsma will be defined as downtrending or falling by using 6 different look-back periods: 1, 10, 25, 50, 100, and 200 days. Specifically, six separate tests will be run. Each test will use a different look-back. The first test will consider the 200dsma to be falling if it is lower than it was 1 day ago. The second test will consider the 200dsma to be falling if it is lower than it was 10 days ago, and so on and so forth.
If the 200dsma is lower than it was on the look-back day AND the 50dsma has crossed above the 200dsma, a trade will be entered at the close. The exit takes place on the close of the day the 50dsma crosses beneath the 200dsma.
The Results:
Analysis of Results:
After completing a few of these tests and seeing the trend, I had a true “rolling on the floor laughing my a$$ off” moment.
The “technical analysts” were exactly wrong about buying a Golden Cross with a falling 200dsma. In fact, performance improves as the look-back period increases. In other words, the longer the 200dsma has been downtrending, the better!
The two graphs above show that it is better to buy a Golden Cross when the 200dsma is falling, flat, or just beginning to rise. The longer it rises, the greater the decrease in the average trade and the percentage of winners (percentage of winners not graphed).
The equity curve is generated from the 50 look-back period test. I have posted it here primarily because I think it is important to examine equity curves as they show details that the statistics do not illustrate nearly as well.
Summary:
I’m willing to entertain any well-reasoned and insightful challenges as to why I have not busted this well-publicized technical myth. No matter how it is sliced, the Golden Cross is bullish, but like everything else market related, there are no guarantees this cross will be successful and lead to a multi-month rally.
It is important to note that a Golden Cross took place today (July 2) on the Dow Jones. The 200dsma has been falling for more than 200 days. As such, the cross that occurred today has the highest probability of success, as shown in the results posted above.
***Update*** While I had hoped to entertain comments here, it looks like the discussion has moved over to Denninger’s forums. Put on your boots before you visit, as it gets a little deep over there.
“This is a disappointment to see someone who we have all looked up to in the blogosphere for his transparency not be willing to simply admit he made a mistake. And really, it was a small mistake, borne out of frustration about DK.”
This is the reason for banning all the intelligent folks from the forum over the years… It is much easier to feed the masses bs, when you take out the dissenting voices.
Denninger responds:
http://www.tickerforum.org/cgi-ticker/akcs-www?post=100977&page=3
Of course you’ll have to register and wait an unspecified amount of time before being allowed to comment.
Indeud.
Emini, the whole thing seems so simple to me. Based on his own words, he is 100% incorrect.
To his credit, he has not banned me, yet. I have never followed his forums so I do not know if he bans all the dissenters.
That is exactly his M.O. As I said he is the only poster on that garbage forum. He is very predictable and downright weird.
It is very simple. I have been apart of TF since its inception. He will do and say everything in his power to prove he is correct. This is exactly why the forum has become a forum for wanna be neo-cons and sheep. If you have the inability to think outside the box, and love jerking off to bearish news, TF is the place for you. We used to have a balanced bear/bull forum until he and others decided to alienate every dissenting voice. You as well as everyone who else can see this for yourselves. Notice how there are only a handful of active members?
He is not the only person on Earth who understands what we are up against. Save your brain power.
You’re cracking me up Emini.
Thanks for the support. For a second I thought maybe it was just me.
Oh good grief.
Couple of things (haven’t had my morning coffee yet) that I’ll toss out as being weird as a response from the smug, wrinkled suit wonder over there:
Wood, let’s start with inflating the S&P 500 with devaluation of the dollar, since a dollar of stock that buys 10 cents now .vs. 1930 won’t do you much good at 10x the price, right? Same purchasing power.
The value of the dollar has nothing to do with this argument.
Score one for the straw man.
That is exactly correct. It is in fact WORSE than a coin toss (which is right 70% of the time on “the market will rise”, ergo, the signal must be BETTER than 70% predictive of a rise to be better than a coin.)
Coin Toss right 70% of the time?
(scratching head)
Well, that would be true only if the coin were fixed AND the sample size was over 20.
At a 21 sample size, a 70% win rate (15) would give a 2-tailed P of 0.0495, which is barely statistically significant.
Random chance says that 70% of the time the market rises.
OK – that statement isn’t even mathematically true. (see previous paragraph)
I watched the DK clip and there were more than the one that KD got all bent out about.
(note, am I the only one that noticed that their initials are mirror images DK vs KD)
FWIW, in retrospect I think it was sort of a brilliant play by DK to call out the bearishness on the blogosphere. There’s a word for that kind of activity: showmanship.
Frankly, I don’t think that self aggrandizing celebs (and their wannabe counterparts) really get the whole purposes of even pseudo anonymity. it goes against the grain of their ego (I’m smiling at the thought of Marla’s recent missive back to GS over at ZH) and when egos are attacked, out comes the vitrol.
Finally, am I the only one for whom DK himself is reminiscent of Fogell in a good suit?
Whass Up Gangstaass
Off to have some coffee.
Exactly. Its weird why would anyone even let this guy speak, let alone follow his forum.
I meant I watched the DK clip and there were more than the one that KD got all bent out about. to be
I watched the DK clip and there was more than the one indicator that KD got all bent out about.
Here you can find stats and performance on golden cross for SP500 since 1945 for both rising and declining 200 day-trend http://bit.ly/qWQHm
Past performance is no guarantee of future results.
And why are you trying to fight it, just let it go.
You or someone may have touched on this issue so excuse my oversight: Was there a golden cross in the past that occurred during a “severe” recession similar to what are experiencing now and the market was still bullish? My point here, and in order to strengthen or weaken your position, the market environment today when the golden cross occurred should relate as near as possible with a former recession when the golden cross occurred also.
Wood – why bother – he’s arguing from both technical and fundamental points-of-view – as such, he’ll never see your point of view. And on top of that, his definitions are just soft, so therefore untestable.
Denninger has just packed up his toys and went home. Here is the email message I just received.
When I try to enter the thread or forum, I am told that I do not have the necessary privileges. Do you all know how to get those privileges? Well I can tell you one way is to give him a donation…lol…
This is a man, preaching honesty, transparency, and intellectual discourse. When proven wrong, he has for all intents and purposes deletes the entire thread, and disallows me, a registered user, access.
So I ask, is Mr. Denninger always right? It appears that he is because when he is proven wrong, he simply deletes the offending information and starts over.
This email is to notify you that a post you participated in on Tickerforum
has been moved by an administrator or moderator to a new forum from where
it was previously posted.
Please do not reply to this message.
You may view the post in its “new home” at:
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I think if you go to the main login screen you still will be able to log in.
I had the same problem going to a link for a thread that had moved to the “bar”.
Cuervo, he has banned me from the entire thread. There is no “The Bar” when I log in.
Very convenient for him. He does not want to go head to head with me.
Nergo, the macro-economic environment has nothing to do with this. This is a pure technical signal.
In order for you to be able to get any traction with that thinking, you’d have to somehow be able to quantify the current macro-economic conditions, and then compare then to a previous (and quantified) macro-economic period.
It could probably be done, but that’s not my forte.
Wood, I think that’s why recessions are called after the fact, and why TA is so useful for both trading and investing. If anyone could “figure out” all the macro-stuff the world would have successful command economies, rather than market based economies. The Soviets would still be in business, measuring output in tons and having empty store shelves, and rotten potatoes.
I’m not saying that the macro-economics should not be considered. They should.
However, this is a debate about whether a particular technical signal is “false.”
As such, any other variables do not belong in the debate.
But you’re right, the technicals can simply the big picture.
Exactly. My comment wasn’t clear. I guess I use four or five things to trade: Macro, Fundamentals, TA, market psychology, and gut instinct. Each has a different weighting depending on where we are in the market cycle. In the best trades I ever made I think 3 or four were lined up with one or two of them telling me not to take the trade.
Damian, of course their untestable. How else do you go around making blanket statements all the time, without them ever being proven incorrect?
Wood, Score one for the good guys! There is so much crap spouted about (both technical and fundamental) that is taken as gospel truth, it truly refreshing to see on of these BS purveyors called on the carpet.
What really pisses me off about this state of affairs, is that there are millions of regular Joe’s and Jane’s losing their investment Dollars because of bad information and bad advice, and for the most part the financial press is either ignorant and does not call these clowns out, or they are completely lazy. I guess Haines and the guy’s on Bloomberg Surveillance are the rare exception. I guess I need to include you and the IBC’ers, don’t I?
Thanks.
Yeah, and most of the people framing the debates do not even trade!
I mentioned a recent report from ML’s technical research dept which shows the same thing by looking at golden crosses from the 1920’s onwards. There is a definite difference between those that occur when the slope is negative vs. positive. You can download the report and take a look at the historical data yourself.
oops, doesn’t look l the link worked. Here’s the report on golden crosses.
Babak, thanks. That’s a good article.
Note that the author quotes 2 different researchers who both come to a different conclusion about the Golden Cross with a falling 200dsma.
Hi Woody,
have you tried your power dip system on ibd100 or ibd200.
I have done some research and it looks pretty good.
thanks
I do notice that even on your best case scenario, your win percentage is 59%. Funny how the farther you go back (and test the idea in time), the worse the win percentage gets. This also doesn’t mean that the golden cross works for everything….just so far it seems to work ok for indexes. Personally I’d rather wait for some sort of confirmation before jumping in with a golden cross, and both trending up is a decent confirmation. Much better risk/reward ratio.
Viper, welcome, from Denninger’s palace of fascism. I hope you find your stay here to be one filled with honesty, transparency, and threads filled with discord, that will not be deleted.
I’m confused by this statement: “Funny how the farther you go back (and test the idea in time), the worse the win percentage gets.” Please elaborate, or be more clear. The best I can figure you are talking about the lookback period, and actually, the farther back you go, the better the win percentage gets.
Yes, it works for the indexes.
As for your statement, “Personally I’d rather wait for some sort of confirmation before jumping in with a golden cross, and both trending up is a decent confirmation. Much better risk/reward ratio.”
Can you provide me some data which shows that to be true? My research shows that a downtrending 200dsma on the SPX has a 85% win ratio for the Golden Cross. It is less so for the Dow Jones. Perhaps your research will be illuminating.
“I’m confused by this statement: “Funny how the farther you go back (and test the idea in time), the worse the win percentage gets.” Please elaborate, or be more clear. The best I can figure you are talking about the lookback period, and actually, the farther back you go, the better the win percentage gets.”
Sure. I wasn’t referring to the lookback period, I was referring to the amount of history (or datapoints) provided in the analysis. Your SPX analysis only went back to 1965 and with the small set, you got 85%. The dow you did went back to 1920 and with a larger set, got 59%.
Farther you go back in time and run the analysis the worse it seems to get. And this actually makes sense due to the fact that since the GD, we have had one of the longest bull markets in history.
As far as the risk/reward category, I provide (same link you have in your other article), http://marketsci.wordpress.com/2009/06/20/testing-the-rare-downtrending-golden-cross/
In that article, Variation #2 waits for both 50 and 200 to be trending up (confirmation of the cross). Put a stop that follows the 200 MA and you have yourself a fairly comfortable position that you dont need to check every day because the 200 MA is rising and so your stop rises with it to provide a good risk/reward.
The only downside of that article is that it also only goes back to 1960.
Viper, S&P data goes to 1960. As it takes 200 days of data to make a 200 day average, the first possible trade can only be 200 days after the start of the data set.
At this point, I do not see that there can be a direct comparison made between the Dow Jones and S&P data. While it is intuitive that the data sets would be very similar, it was also intuitive that one would be better off buying a Golden Cross with an uptrending 200dsma. Therefore, until I see good S&P data going back farther than 1960, I don’t see any use in speculating what the data might show, if it did go back as far as the Dow Jones data.
I still don’t see any proof that the farther we go back, the worst the Golden Cross performs. I guess I could divide the Dow Data into sections, say 1920-1939, 1940-1959, etc.. and then analyze each section, but I’m not sure what that would accomplish. Technical signals commonly go through periods of out-performance and under-performance. That phenomena is nothing new.
As for you statement “since the GD, we have had one of the longest bull markets in history.” I’m not sure what the point is. That IS our history. There is not a lot of data to work with from before the depression, unless one wants to pay a lot more money for the data set than I have. The fact is that bull and bear markets typically last for a couple of decades, on average. This cycle has remained true since before the GD, and is still holding true. Despite this, the Golden Cross has remained a profitable technical signal. If your point is that this bear market has longer to go, then I would not argue that, as I believe it to be true. However, I can’t see the future, and so I trade with the odds. The odds are in the favor of being long here, for a LONG TERM trade.
As for you last statement about variation #2, why do you insist upon ignoring the data? I am going to say it very clearly, again. A downtrending 200dsma has a better edge than an uptrending 200dsma, unless you happen to catch a Golden Cross where the 200dsma has been uptrending for only a few days to a couple of weeks.
Again, you can dream up all the complicated stop procedures you want, but the fact of the matter is that a rising 200dsma is WORSE for the Golden Cross than a downtrending one.
You have higher odds for a large winning trade buying the Golden Cross Monday than AT ANY TIME WITH A RISING 200dsma.
I guess we have to agree to disagree. S&P and Dow are indexes. If it works well on one but not so good on another, then what use is the signal?
“As for you last statement about variation #2, why do you insist upon ignoring the data? I am going to say it very clearly, again. A downtrending 200dsma has a better edge than an uptrending 200dsma” ????? I didnt ignore the data. I followed the same data you did. Variation #2 bought the cross only after it turned and did almost as well as buying every cross, and had a known risk and an easy stop.
Your data says you have a 59% chance of winning with buying the recent cross. Thats slightly better than 50/50, and not what I consider “odds favoring” but whatever to each his own.
Viper, agreeing to disagree is fine, but lets be clear: We do not know and cannot make an exact comparison on the Dow vs. SPX because we do not have a data set for the SPX that goes back as far as the Dow. You seem to want to make an assumption that all things will be the same, but we do not have the data. I prefer to let the data speak for itself, rather than making assumptions.
As for variation 2, in my previous comment I was referring to my Dow data, not Stokes’s S&P data. Sorry for any confusion that has caused. Still, you seem to want to bend the data to fit your thesis. The data from Stokes’s testing shows that it hurts performance (slightly) to wait for confirmation. So again, with S&P data and Stokes’s test maybe we don’t say that one variation is materially better than the other, but remember, the entire argument was that the downtrending 200dsma makes a “false” signal. Clearly, it is not.
Viper, are you a trader? If so, then you understand that a winning system may only be right 30% of the time, if the winning trades are larger than the losers. For this system, the odds are better than 50/50, and the winning trades are 2.5x larger than the losing trades. To repeat, you have a better chance of winning than losing, and if you do lose, the likelihood is that it will be a small loser. If you have a winning trade, odds are that will be a big winner. What is not favorable about those odds?
Again, your thesis (as I assume you’re still arguing for Denninger) is that a downtrending 200dsma is a false signal.
That thesis is incorrect.
Hope you’ll weigh in on this one too Wood — http://www.cxoadvisory.com/blog/internal/blog6-11-09/ Cheers, Jeff
JP, excellent, thanks for bringing it my attention.
Wooder, you are such a dick. Your charts are useless. What the fuck is a golden cross when facing this magnitude of a consumer retreat you fool.
Lambo, my suggestion, do a google search for “technical analysis.” Then do one for “fundamental analysis.”
It will be illuminating.
Say hi to Karl for me. By the way, how much have you had to “donate” to participate in his forums?
“fundamental analysis.”’
===================
Recession worries boost dollar, yen
by Andrew Wilkinson (Interactive Brokers LLC) | Mon, Jul 6 2009, 15:45 GMT
It appears that last week’s gloomier U.S. jobs picture has provided a wake-up call for those dreaming about a global recovery and a return to business as usual. The Japanese yen and American dollar are both dusting themselves down as investors appear to be building up demand for their services as safe havens during economic crisis. The dollar reached $1.3900 against the euro earlier while the yen is stronger against all major currencies and has risen to ¥94.80 against the dollar. Despite calls
Lambo, I really shouldn’t be so snide. I apologize.
My point is this. Quantify for me what happened the last time Yen and the Dollar were “dusting themselves down.”
What will become obvious is 1. you’ll have to use some technical analysis if you want to understand the Dollar/Yen relationship in greater detail and 2. Often it is very very difficult to quantify the fundamentals, for many reasons, not to mention that there will be so many degrees of freedom that any model will likely not be able to be applied to future timeframes.
interestingly when (if?) we get the Death Cross next week the 200 dsma will be heading up (using a short look back value) and then the debate will rage on whether it is more bearish to have the death cross when the 200 dsma is heading higher or when it is heading lower.
Born2, I don’t know if I’ll have it in me to go through all this again!
Since Oct 1, 1928, the DOW has had a green close 52% of the trading days, red close 48% of the days and flat close <1% of the days. So market is not up 70% of the time or saying that tomorrow will be an up day won’t be correct 70% of the time, at least not on DOW in above timeframe. It really is a coin toss, except the up days have been larger in aggregate than down days.
SPX is 53% up days, 46% down days and 1% flat since Jan 3, 1950. Still don’t see where the 70% number comes from.
PCP, Karl Denninger was debating me as to whether a Golden Cross with a falling 200dsma was a “false” signal.
Denninger insisted that any strategy that did not win more than 70% of the time is “no better than a coin toss” as Denninger believes the market goes up 70% of the time. Actually, he stated this at least 4 times.
Then, Denninger deleted the thread. Had he not deleted it, you could post your data there to straighten him out. Actually, the last comment I left was that I wanted to test his 70% myth. I asked him for clarification so I could test it. Bam, he deleted it.
Technically, he didnt delete it….he moved it to the bar. If you read the email that was automatically sent out it would have told you that.
http://tickerforum.org/cgi-ticker/akcs-www?post=100977
Viper, here is the email I received:
Message MOVED [Topic: FAME AND FORTUNE OF KARL DENNIGER…. GOLDEN CROSS]
Friday, July 3, 2009 10:04 AM
From:
“World Wide Web Owner”
Add sender to Contacts
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Now Viper, you tell me, from that emai, where I’m supposed to go? When I click on the thread, I’m asked for a username and password. When I provide my login, here is the message I get:
Unauthorized Request
You are receiving this message because you attempted to follow a link to a message that resides in an area of the forum only open to users with a specific user classification or privilege, and you either provided no user credentials or the credentials you provided lack the privileges required.
Your request has been denied.
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Sooo…..Mr. Viper….when I go to the forums and log in, or not, the thread is gone. This means that for anyone else, not just me, the thread is gone, nowhere to be found. Thus, it is deleted.
And if it is not deleted, then is it existing in some sort of basement lair that sits directly beneath Denninger’s Palace of Fascism? Perhaps our budding Dictator has placed this thread in a pay-only section of the site? My God Viper, do you have paid access to this lair? Run Viper Run, while you still can, BEFORE THE ZOMBIES EAT YOUR BRAINS!
hey viper,
Since you have access to that thread at its new location, maybe you can ask him how he arrived at the markets are up 70% of the time statement. I just did a quick analysis and posted the results here that show something completely different and closer to coin flip.