About 6 months ago I made an observation on the dow jones industrials that has made me money every month. What I noticed is that the Dow tends to rally the 2nd week of the month. I've written about this awhile ago and since then the last 4 signals have worked.
If the trend is up (10 week average sloping higher) and it's the 2nd week of the month, you want to buy DIA on Monday's open and exit on Friday's close. Your protective stop will be some percentage of the 10 day ATR. As you can see in the above chart, this simple little system has worked since last August.
If you've been reading my blog you would know that I am bearish on the overall market based on the bond/stock relationship. I shorted financial stocks last week, took a third off on Friday for a nice profit on the 50 day average and I'm still holding two thirds of my original position.
So the question is, will I take this buy signal in the Dow even though I am bearish on stocks. The answer is yes. I'll buy the DIAs as a hedge against my short position.
Intermarket relationships can work well but you have to be careful because these relationships can and do fall apart. Even though I have a bearish outlook on the market, I still need to take my buy signals when they present themselves..
The above analysis is not a recommendation for you to do what I am doing. No one knows what will happen in the future. I'm just sharing with you my thoughts on the market and how I am trading the current market environment,
My ideal scenario would be for the Dow to move higher this week while financial stocks such as banks and some airlines continue to show weakness. If that happens, I'll be very happy!
Sunday, June 10, 2007
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