Friday, August 06, 2010

Whipsaw:200 day moving avg

The 200 day moving average is a popular timing indicator. The last two SPY signals have resulted in whipsaws, causing losses for those using it for timing. Roger Nusbaum is one of many that use it, and those interested can read more about it on his blog (link).

Some timers go all in, or all out on the 200 dma indicator, and their portfolio whipsaw experience is much more extreme than the modest losses that Nusbaum has seen. This is a danger with any indicator, more so with popular ones. When a lot of people are looking at one indicator, it can become a trading point for some looking to game the system and trigger orders.

Personally, I was net short SPY deltas going into the employment report, so the steep one-day decline is okay with me as long as it doesn't extend into a much bigger washout. With today's decline, I am about delta neutral on SPY, so unchanged or modestly lower on SPY until August expiration would be about my best scenario.

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