Time For Vigilance

Our last buy signal on the Seven Sentinels was on September 4th. We've had a great run since that buy signal was issued. However, the past two trading days are showing some deterioration in market internals. That may mean more weakness is on its way or it could simply mean the market is taking a breather. We'll know soon enough next week.

There are no indications that this rally is over, but we may be seeing another tradeable sell signal beginning to develop. Since the March low, none of the Seven Sentinel sell signals have translated into significant selling pressure, but a couple of them have been good for a few extra percentage points in gains. I can only hope that if a sell signal develops, we don't get another buy signal before October 1st. Chances are we won't, but we did see a very quick reversal a few months ago where a sell signal was followed by a buy signal 3 days later. That’s a very unusual occurrence for the Seven Sentinels. We need to recognize that in our current market environment sentiment can change rapidly with an equally rapid shift in market positioning. This is causing the volatility we are seeing in the Seven Sentinels. But for the most part we’ve been able to play this volatility.

But I can’t worry about when these signals will occur. I can only play them as they happen and hope they occur within our IFT window. Right now there are only 8 trading days until October 1st, so we aren’t too far away from two new IFTs.

So let’s take a look at the big picture.

Even though we had a very modest rally Friday, these four indicators deteriorated a little more. They are now all flashing sell signals.

TRIN is also flashing a sell, but TRINQ and BPCOMPQ are still on a buy. This could change quickly without more support soon. This is why I have to watch these signals very carefully at this point.

Not much change among our top 25%, but a little bit of cash was raised and bonds rose a little bit too. These percentages are still within a fairly tight range from the past few weeks and really show no signs of caution from our top performers.

Same info, different look.

So I'm still long, but watching intently. While we may get a Seven Sentinels sell signal soon, I do not expect a deep pullback. Our top 25% shows no inclination to reduce risk and the uptrend is still intact.

 

[CountryBoy]

Thanks CH,

I appreciate ya taking the time for these updates.

CB

 

[Birchtree]

If the Sentinels go negative perhaps some of the traffic ahead of me will seek shelter - that would provide me an opportunity to make progress. Looking at your current ranking you have clear passage all the way up if you can hold the line. If we continue to rally in hard mode many of the lily padders will move back in and create traffic. But right now fear reigns and that is welcome.

 

[airlift]

Hello CH,

We now have 5 of the SS indicators in negative territory, but the uptrend is still up. I realize that the theory behind following a system is to set emotions aside.

Please correct me if I am wrong. Discipline requires that one should wait for the 7 SS signals to follow the system properly -- up/or down. Although, I ask, if one uses a hybrid mode and uses the trading system as a guide but decides to go to safety two or three days prior to next months 2 IFTs, would this not increase the gains and reduce or losses? Best regards to you and thanks in advance.

 

[coolhand]

Thanks CH,

I appreciate ya taking the time for these updates.

CB

YW CB. I hope you're making some progress with your account.

 

[coolhand]

If the Sentinels go negative perhaps some of the traffic ahead of me will seek shelter - that would provide me an opportunity to make progress. Looking at your current ranking you have clear passage all the way up if you can hold the line. If we continue to rally in hard mode many of the lily padders will move back in and create traffic. But right now fear reigns and that is welcome.

I see no reason for the traffic ahead of you to reduce speed unless they collectively see something wrong in the longer term. I think they are good indicator moving forward.

If we get a sell, I'm out until we get another buy. Had I been following this system closer the past 3 months I would probably be up another 12% or so. That's my fault of course.

I also see no reason for fear to abate in the near to intermediate term. Maybe even the longer term. Emotion is still running high and perspectives are all over the place, but mostly cautious to negative.

 

[coolhand]

Hello CH,

We now have 5 of the SS indicators in negative territory, but the uptrend is still up. I realize that the theory behind following a system is to set emotions aside.

Please correct me if I am wrong. Discipline requires that one should wait for the 7 SS signals to follow the system properly -- up/or down. Although, I ask, if one uses a hybrid mode and uses the trading system as a guide but decides to go to safety two or three days prior to next months 2 IFTs, would this not increase the gains and reduce or losses? Best regards to you and thanks in advance.

Discipline is vitally important. I learned that in July.

I'm not sure I understand your question AL. What would be your reason for going to safety? A SS sell signal? Playing it safe? How would you use a hybrid mode?

 

[airlift]

CH,

I see your point -- July was a teacher. BTW, How was this system backtested. I am aware that no backtesting could have foreseen the big downturn we have had. These are quite extraordinary circumstances. Thanks.

 

[coolhand]

CH,

I see your point -- July was a teacher. BTW, How was this system backtested. I am aware that no backtesting could have foreseen the big downturn we have had. These are quite extraordinary circumstances. Thanks.

I did not backtest it. But we've all seen the chart going back about three years from now, and it was impressive. XLentlady did some backtesting and thought it was very reliable. It is also highly regarded on Trader's Talk. Nothing's perfect, but I've seen enough of its results to latch on to it.

You mention the big downturn not being foreseen. The SS did see it and stayed out of the market last year from mid-May until mid-November. No buy signals at all. That was good for sidestepping a whole lot of carnage.

 

[brownjw]

CH,

I too appreciate your in-depth analysis and market perspective. Since last falls market drop - I watch the market & my TSP account much closer.

I would like to get some background information on the Seven Sentinals indicators that you post - can you explain or share a LINK to a previous post for understanding how you read the signals and interpret market directional trends?

Thanks

 

[coolhand]

CH,

I too appreciate your in-depth analysis and market perspective. Since last falls market drop - I watch the market & my TSP account much closer.

I would like to get some background information on the Seven Sentinals indicators that you post - can you explain or share a LINK to a previous post for understanding how you read the signals and interpret market directional trends?

Thanks

Hello brownjw,

Here's the rules for following the Seven Sentinels:

The concurrent alignment of all seven signals under specific conditions constitutes a signal and defines the context or prevailing trend of the market. Here are the individual buy/sell triggers:

TRINQ and TRIN: Daily reading below the 13 Day Exponential Moving Average (EMA) is buy mode, a reading above the 13 Day EMA is sell mode.

For NAMO, NYMO, NAHL, NYHL, a daily reading above the 6 Day EMA is buy mode, and reading below the 6 Day EMA is sell mode.

For BPCOMPQ, A positive crossing though the lower or upper bollinger band constitutes buy mode. A negative crossing through the lower or upper Bolinger Band constitutes sell mode. It stays in buy mode or in sell mode until it re-crosses in the opposite direction.

All seven must be in a sell or buy condition simultaneously to complete the signal.