Schulz on Market Cycles Slow TAO Trades

SMT4 SLOW MECHANICAL TAO 4 Trading Model:

The SMT4:    12/ 31/ 2009:   Current Position:   Long SPY @ 97.38 (From 07/28/09)

Results: From 11/ 04/ 1998 through 12/ 31/ 2009:      STMM   + 299.08%
             Trades: 21                     Gainers: 17         Losers: 4
     80.90%                   19.10%
                                    Average Gain: 17.64%   Average Loss: -0.21%

     The SMT4 is the result of more than two decades of both TAO 4 and technical stock market analysis.   Mechanical models have advantages (objectivity), and disadvantages (relatively inflexible).   My goal, here, is to define one mechanical model (the SMT4), and how it generates profits. More importantly is to define how the mechanical model can have those profits increased significantly by using the Slow TAO 4.

      The Slow TAO 4 changes bias infrequently, 12 times in the last 10 years. Therefore, the trading model that compliments the SMT3 (outlined below) used a standard arithmetic 192 day moving average as its basis. This 192 dama was supplemented with two filters: an MACD and one shorter moving average.

As of 01/ 01/ 2010, and the beginning of the subscription pages, the SMT3 model shown below has been simplified and transformed into the SMT4 model, updated on the Astro ETF Trading page only.

Methodology:    Slow TAO 3 Mechanical Model #1 (ST3MM1):

1) Three daily arithmetic moving averages (dama) are used: 12, 16 and 192.
           MA 1 = the 192 dama
           MA 2 = the average of the 12 dama and the 16 dama.
        (An aside: 12 and 16 are recurrent numbers in my systems, as are squares).

2) Three daily MACD's (moving average convergence/divergence) are used:
         MACD 1:   16/48/9
         MACD 2:   25/64/9
         MACD 3:   64/144/9

3)     The Slow TAO 3 Bias is used for leveraging of the technical signals.

     The general methodology for the ST3MM1 is being given below. It applies to the global index ETF's in Sector 1 (and, to some extent, the more specific ETF's in Sector 2), and to TIP/TLT/IEF using a reverse TAO bias.   I have kept it as simple as possible while maintaining the system's logical integrity and functionality.

RULES: (12/10/09 To be simplified asap).

    1). The 192 dama is Primary. Trading position: if rising, long or flat only; if falling, short or flat only.

         1a. The TAO 3 bias is used for leverage. If the 192 is rising and TAO 3 bias is long, leverage long. If the 192 is falling, and the TAO 3 bias is short, leverage short.    When leveraged, if the TAO 3 bias changes to go contrary to the 192, then deleverage.   If not leveraged, if the TAO 3 changes to favor leverage, then leverage.

        1b. When leveraged long, the signal remains valid as long as the average of the MACD 3 and its 9 dama is greater than zero. When short, the signal remains valid as the average of MACD 3 and its 9 dama is less than zero.

        1c.   If the MACD 3 goes contrary to the prevailing 192 dama, then de-leverage, if any. Re-enter leverage using MACD 1, and validated by the 12/16 average (12/16 moving higher for buys, lower for sells).

    2).   When the 192 dama is changing bias (for simplicity, when the current 12 day average of the 192 is intersecting the 12 day average of the 192, 192 trading days earlier), then MACD 2 becomes primary.

       2a.   MACD 2 greater than zero validates a buy, and MACD 2 less than zero validates a sell.

       2b.   If rule 2a is valid, then, for three weeks, MA 2 (12/16) becomes primary, and must validate MACD 2.
                 For buys, MA 2 must be rising during those three weeks; for sells, MA 2 must be falling during
                 those three weeks.   If MA 2 validates MACD 2, then MACD 2 becomes primary, and eventually,
                 MACD 3 becomes primary once it confirms MACD 2, and the system returns to rule #1.

         2c.   If MA 2 fails to confirm, and reverses direction before the 3 weeks expire, it remains primary, and its                 direction gives the signal. (Depending on the significant digits that are chosen for the calculations,
                if there is any doubt about the 12/16 direction, use a 12/16/20 average for confirmation)(fewer
                trades rather than more).

     3).   For now, use a 5% stop loss from any entry price (wasn't used during the last 10 year period).

      There are other, more effective ways of capturing more long term profit. And, also, with this ST3MM1 system, there are additional techniques to both lock in profits and improve the timeliness of reversals. However, they all increase the complexity of the system greatly.   It has been demonstrated, with some statistical certainty, that a technical trading system (ST3MM1) can be profitable with the SP 500, and that the profits can be enhanced with the use of the TAO 3 bias.

TRADES:     Slow TAO 3 Mechanical Model #1:
                    07/ 28/ 09: Current Position: Buy SSO (leveraged long SP 500)

(B=Buy, S=Sell, Lg=Long, Sh=Short, Cts=Contracts, EA=Effective Average, Pts=Points, Cumm=Cummulative)
07/28/09: A change: As with the Home page:   B SPY=Long SP 500, B2 SPY=Leveraged long SP 500 =SSO)
                                                                        B   SH=Short SP 500,   B2 SH=Leveraged short SP 500 =SDS)
This enables all IRA's to participate (buying the ETFs only), both on the long and short sides of the market.

Slow TAO Bias      Level       Trade      B/S     Net      Price      EA    # Cts    +/--         +/--       Cumm     Cumm
Date                                     Date                   Cts.                  Price                Pts            %        #Cts       +/- %

09/01/98 Buy    -- 300.0   11/04/98     B2      Lg 2     1118     1118
05/21/99 Sell    + 187.4    05/21/99    S1       Lg 1     1330     1118      1     + 212     +18.96        1     + 18.96
09/11/99 Buy    +     0.5
                                          10/28/99     B1      Lg 2     1342     1230
                                          09/26/00     S3      Sh 1     1427     1427      2     + 394     +32.03        3     + 50.99
02/09/01 Sell    + 417.0    02/09/01     S1      Sh 2     1315     1371
11/13/01 Buy   --1079.4   11/13/01     B1      Sh 1     1139     1371      1     + 232     +16.92        4      + 67.91
                                          12/31/01     B3      Lg 2     1148     1148      1     + 223     +16.27        5      + 84.18
                                          01/11/02     S3      Sh 1     1146     1146      2    --     4      -- 0.35        7      + 83.83
03/26/02 Sell    + 937.7    03/26/02     S1      Sh 2     1138     1142
10/22/02 Buy   --1439.1   10/22/02     B1      Sh 1       885     1142      1     + 257     +22.50        8     + 106.33
01/14/03 Sell   --1278.9
                                          01/21/03     S1      Sh 2       888     1015
                                          04/21/03     B3      Lg 1       892       892      2     + 246     +24.24       10    + 130.57
05/23/03 Buy   --1499.9   05/23/03     B1      Lg 2       932       912
10/12/04 Sell    +   97.8   10/12/04      S1      Lg 1     1122      912       1     + 210     +23.03       11    + 153.60
                                         10/07/05      S3      Sh 2     1195    1195       1     + 283     +31.03       12    + 184.63
                                         10/28/05      B3      Lg 1     1198     1198      2     --     6   -- 0.50       14    + 183.56
11/22/05 Buy -- 646.4   11/22/05      B1      Lg 2      1262    1230
                                         07/19/06      S1      Lg 1      1262    1237      1      +    7    +   0.57      15    + 184.70
                                         08/07/06      B1      Lg 2      1276    1253
02/23/07 Sell    + 781.3   02/23/07      S1      Lg 1      1451    1253      1     + 198     +15.80       16    + 200.50
                                         01/02/08      S3      Sh 2      1447    1447      1     + 194     +15.48       18    + 215.98
06/22/09 Buy   --   43.0   06/22/09      B1      Sh 1        893    1447      1     + 554     +38.28       19    + 254.26
07/28/09                           07/28/09      B1      Exit       976                  1     + 471     +32.55       20    + 286.81
07/28/09                           07/28/09      B2      SPY      97.38
10/22/09 Sell    + 1400    10/22/09      S1      Lg 1      97.38 109.33    1    +11.95    +12.27       21    + 299.08

STATISTICAL SUMMARY:    (10+ years, 11/04/98 through 10/22/09)   SP 500: + 299.08%
                                                         (This does not include the unrealized profit/loss within the current trade)

SP 500:    Total # contracts traded: 21

# Gainers: 17        % Gainers:   80.9%               Total Gainers: + 299.93%             Average Gain: + 17.64%

# Losers:     4        % Losers:    19.1%               Total Losers:   --    0.85%             Average Loss:   --   0.21%

COMPARISONS: (below, not updated yet, 07/28/09)

SP 500 Buy and Hold:   Buy 11/04/98 @ 1118 through 07/28/09 @ 979:   -- 139 pts. =     -- 12.4%

SP 500 Mechanical Model (no TAO 3), single contract, long signals only:                                + 51.6%

SP 500 Mechanical Model (no TAO 3), single contract, long and short (SH) signals:                + 123.7%

SP 500 Slow TAO 3 Mechanical Model 1 (ST3MM1):                                                              + 254.3%

Adding the bias of the Slow TAO 3, the profit of the mechanical model, utilizing both the long and short trades, is improved + 130.6%.

Since the global markets have evolved into new animals since 2000, I am suspect of back-testing models before then. At first glance, 1994 looks like it could have been a losing year. For me, a truer test was the year 2000--a trend change combined with large short-term volatility.