MLR - Special Report on Market Direction Model (MDM) and Crossbow (xbow)
Part of the Market Direction Model's (MDM's) strategy is to minimize risk. Thus when volatility jumps, MDM may elect to go to cash until it sees an open window to either go to an outright buy or sell signal. Note, that even if MDM is in cash and the market is falling as it did recently, you are gaining "single" points vs the market. In other words, if the market falls 5% and you're in cash, you scored 5% vs the market. Now if MDM is on a sell and the market is falling, you are gaining "double" points vs the market. Thus, if the market falls 5% and you're on a sell using a 1x ETF such as QQQ, you scored 10% vs the market.
At times, elevated volatility is mostly noise, in which case, MDM is best off remaining in cash. At other times such as after QE2 ended in mid-2011, the elevated volatility becomes coherent such that MDM may switch between buy and sell signals frequently as it did from Jul - Oct 2011.
After long term real-time studies conducted with actual capital, my intraday indicator Crossbow (xbow) tends to work well as purely an intraday timing device though this is not practicable for most people due to its frequency of switches. But xbow can also be used during periods of elevated volatility to enhance MDM's entry points. As you can see, the last couple of signals have been nicely profitable in a short time.
Periods of elevated volatility occur when the market corrects. And since the market takes the stairs up and the elevator/trapdoor down, the market tends to offer both buy and sell signal entry points as the market corrects. Xbow makes MDM switch signals more frequently when volatility jumps with the intention for quick profits in such environments. This is simply because xbow is an intraday indicator which fine tunes entry points using volatility instruments such as XIV, VXX, and VIX. Of course, outside of such periods, MDM may stay for weeks on a buy signal.
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