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FAQs Frequently Asked Questions

Dr K Market Direction Model
Will the MDM ever change to a buy signal without a follow through day? What about sell signals from a confluence of distribution days?

Q: Will the MDM ever change to a "Buy" signal without a follow through day? The reason I ask is because it seems possible that the market could continue to grind higher for weeks without an official follow through day. I know you have a fail safe for your sell signal, but what about your buy signal?

A: The market environment has been one of the most unusual with central bank intervention by way of quantitative easing (QE). While this has enabled markets to continue to drift higher into the end of 2010, there has never been a sustained strong rally without a valid follow through day (FTD) [as of this writing, Jan 2011]. IBD once violated this rule and switched to a buy signal, but that buy signal proved false and thus was closed out at a loss.

That said, MDM may switch to a buy signal without a valid FTD as there are other variables that are weighed into the model.

Note, FTDs do not guarantee a buy signal. There are other variables at work, especially in this age of quantitative easing (QE).

Likewise, distribution days (DDs) can occur in a variety of price/volume situations which we outline in our book and in the FAQs. If 5 DDs occur within a rolling 20 day period, it is likely to push the model into a sell signal standby. That said, this is a rule that applies more to periods outside of QE. In this age of QE, a sell signal can still come earlier or later depending on other factors. For example, if QE/POMO is being injected over a period as can be tracked here http://www.newyorkfed.org/markets/tot_operation_schedule.html, the model may withhold going to a sell signal since the market can drift higher over a period of several days or even weeks on QE injections.

Incidentally, I learned while working for Bill O'Neil that cash is often king, especially during unusual market environments. He spent time on the sidelines then would hit the markets hard when the window was clearly open. In other words, the market will always be there, there will always be new bull markets, and so in unusual environments such as the one we're in, it is sometimes best to stay neutral.

In the meantime, we continue to recommend stocks in our Pocket Pivot Review and Buyable Gap Ups sections so even if the market were to listlessly drift higher, odds are that the strongest stocks would continue to outperform.

First published: 4 Jan 2011
Last updated: 26 Aug 2012