The ASX 200 is in a multi-week downtrend. However, there are a number of factors which suggest we may see better times ahead in the short term.
Given the current trend action many traders will be looking at selling any rallies in the index, however in the short term I will be looking at long positions, but I need to see more positive price action before taking a position.
Looking at the MACD (on the daily chart) shows the signal line firmly below MACD, and I want to wait until the signal line crosses back above the MACD to buy. Interestingly, we have already seen this set-up on the four hour chart.
The MACD is one of the best momentum indicators around.
History shows my idea results in a positive skew, and since the beginning of 2012 had you bought the index on the aforementioned variables you would have placed nineteen trades, with 50% of these profitable. The key here though is the money made on the winning trades was on average 2.4 times more than the money lost on the losing trades. Thus, had we started with $100,000 we would be up 16.3%.
Textbook theory would suggest traders could buy (or go long) when the MACD actually crosses above the zero line, however the quants suggest this is a less profitable strategy. Since the start of 2012 (again using the same parameters as above, but including the variable that the MACD needs to be above zero), we would have placed twelve trades, of which 33% would have been profitable. Importantly we would have only made 1%, thus it seems it pays to be aggressive with this indicator.
I also want to see the stochastic indicators printing a higher high, which would mean a move above 16. So this is another indicator incorporated in my strategy.
Traditionally the ASX 200 rallies from this week, so seasonality really could help this trade and we could see the so-called ‘Santa Claus’ rally take form.
Perhaps the biggest risk this week will be the FOMC meeting (Thursday morning at 06:00). My personal feeling is that the Fed will hold off until the New Year to cut the pace of its bond buying program (QE3), which could be positive for risk assets like equities.
So all-in-all I am looking at a long position on the Australia 200 cash, based on seasonality and the strong performance historically of this set-up. However, I need to see confirmation in certain indicators before I take action.