From the September 2004 issue of Investment Advisor • Subscribe!

The Ten Models

These are the 10 mechanical models used at Abraham Bedick Capital to determine whether to be in the market or to go to cash. Only when nine of the 10 models agree on the upward trend of the market is a buy decision made.

Model 1

This is a weekly system, based on the research of Dick Fabian, and is run after the market close at the end of the business week.

A BUY signal is indicated when the S&P 500 closes higher than its 39-week moving average and the Dow Jones industrials index is higher than its 39-week moving average, and the Dow Jones transports index closes higher than its 39-week moving average.

A SELL signal is indicated by the inverse, when each index closes below its 39-week moving average.

Model 2

This is based on the McClellan Oscillator, which is included in most trading systems.

A BUY signal is issued whenever the Oscillator crosses from below to above zero. The Oscillator number is the difference between the 39- and 19-period moving averages of the number of New York Stock Exchange advancing issues minus the number of NYSE declining issues. We smooth the resulting number with a two-day moving average.

A SELL signal is issued whenever the McClellan Oscillator crosses from above to below zero.

Model 3

A BUY signal is issued whenever the S&P 500 closes higher than the 20-period and the 40-period moving average of the S&P 500.

A SELL signal is issued by the inverse, whenever the S&P 500 falls below both moving averages.

Model 4

A BUY signal is generated whenever the Dow Jones industrials, utilities, and transports increase 4% over their weekly lows while the Dow industrials also closes above its 20-week moving average.

A SELL signal is issued by the inverse, i.e., whenever the three Dow averages fall more than 4% below their weekly lows and below their 20-week moving averages.

Model 5

This is a system combining both breadth and price.

A BUY signal is issued whenever the S&P 500 rises above a 20-week moving average, when there is a one-day increase of more than 3% in the S&P, and when the number of advancing issues is greater than 75% of all the issues traded that week. This model allows investors to become involved in the market after a down period, and when there seems to be a possibility of a new move up.

A SELL signal is issued with a trailing stop of 10%.

Model 6

A BUY signal is issued using an oscillator of the difference between a 40-week moving average of the S&P 500 and the S&P 500 itself, smoothed with a two-day moving average. When the resulting number crosses from below to above zero, a buy is issued.

A SELL signal is issued whenever the inverse occurs and the number crosses from above to below zero.

Model 7

This model uses a 10-day moving average of the New York Stock Exchange advancing volume and the 10-day moving average of the NYSE declining volume, compared to total trading volume of the NYSE. A BUY signal is issued whenever the down volume is less than 30% of the total volume.

A SELL signal is issued whenever the up volume is less than 30% of the total volume.

Model 8

This system looks at the difference between the 15-day moving average of NYSE advancing issues and declining issues.

A BUY signal is issued whenever the difference between these numbers is greater than the difference five days prior multiplied 1.5 times by the 15-day moving average of advancing issues.

A SELL signal is issued whenever the difference is less than the five days' prior number.

Model 9

A BUY signal is issued whenever the S&P 500 increases more than 4% on a weekly basis.

A SELL signal is issued whenever the S&P falls more than 4%.

Model 10

This system uses a five-day moving average of NYSE new highs and new lows, divided by a five-day moving average of the sum of the new highs and new lows.

A BUY signal is issued whenever the five-day moving average of new highs and new lows divided by the five-day moving average of new highs and new lows is greater than 0.5.

A SELL signal is issued when that number is greater than 0.75.

What Do They Tell Us?

Here is a listing of the number of indicators that indicated a buy since the beginning of 2003 to the present. Note that the system caught most of the upswing in the 2003 market--remaining at a 9 from May 2003 through May 2004.

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