News Analysis date published New: 
Wednesday, September 26, 2012 - 07:00
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Wednesday, September 26, 2012 - 07:00
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Wednesday, September 26, 2012 - 07:00

Market Outlook: This 'Sure Thing' Indicator is Saying 'Buy, Buy, Buy'

Wednesday, September 26, 2012 - 7:00am

Stock prices were down slightly last week. SPDR S&P 500 (NYSE: SPY) lost 0.93%, while PowerShares QQQ (Nasdaq: QQQ), an ETF that tracks the 100 largest Nasdaq stocks, lost 0.04%.

QQQ closed last week with a relatively rare buy signal based on an indicator called KST. This is an indicator developed by Martin Pring, who said it offered a reliable market forecast based on the interaction of the stock market with the business cycle. He called it "Know Sure Thing" because he felt that it was the closest thing to a sure thing he knew of.

Three time frames for this indicator are shown in the chart below, using the parameters Pring offered in his 1985 book, Technical Analysis Explained. The medium and long-term indicators both crossed above their moving averages last week, while the short-term version has been bullish since July.

QQQ Chart

In the past, being long when all three KST indicators were above their moving average would have provided profitable signals for trading QQQ. Over the entire history of QQQ, 4 of 6 (66.7%) buy signals were accurate, delivering an annualized gain of 10.26% and having less than one-third the risk of a buy-and-hold strategy.

The Nasdaq 100 index dates back only to 1985, after the time when Pring identified the parameters for this indicator, and there are only eight signals since then, although the system is still very profitable, beating buy and hold while the worst loss was limited to 4.9%. This test uses data that would not have been available when the indicator was being developed, and that fact should give us added confidence that the system is reliable.

Given the small number of trades, I also tested this strategy on the Dow Jones Industrial Average using data back to 1900. With 33 trades (at least 24-30 is the minimum we'd like to see to ensure the results are statistically valid), KST was profitable on 72.7% of the trades, and the worst intraday drawdown with this strategy was only 8%, about one-tenth the risk of a buy-and-hold strategy.

KST is giving us a long-term, low-risk buy signal right now, and the record shows this could be an extraordinary signal.

Gold is Also on a Long-Term Buy Signal

SPDR Gold Trust (NYSE: GLD) was almost unchanged last week, closing only 0.09% higher on the week. GLD is now trading above its 10-month moving average, a long-term bullish indicator. Holding GLD only when it is above this moving average dramatically lowers risk with the largest loss in the past being limited to 8.2%. There are a limited number of trades due to the short trading history of GLD (four trades with three winners), but testing with gold futures confirms the profitability of the strategy with data back to 1976.

GLD Chart

With a bull market in gold likely continuing, I still believe that Global X Silver Miners (NYSE: SIL) will be the biggest winner in this market.

Action to Take --> Maintain stop-loss on QQQ at $68.60. Set price target at $76.

Raise stop-loss on GLD to $166.80. Maintain price target at $178.92. Buy SIL at the market price. Raise stop-loss to $22.84. Maintain price target at $32.68.

This article originally appeared on
Market Outlook: This 'Sure Thing' Indicator is Saying 'Buy, Buy, Buy'

Michael J. Carr does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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