I'm going to give you jump on a ChartSchool article in the making on the DecisionPoint Thrust/Trend Model. Although Carl and I retired it from the DecisionPoint Market/Sector Summary, it is still available in the DecisionPoint Market Indicator ChartPack (free download!).
The Thrust/Trend Model is made up of two primary components, thrust and trend. Each component produces its own BUY/SELL signals, with the Trend Model sometimes triggering Neutral signals. The T/TM actually combines three different timing signals. Thrust is about momentum and internal strength; while, the Trend Model is about trend following timing signals.
In Part I, we will review the Trend Model. This will be a good refresher for DecisionPoint timing followers and a primer to those new to the Trend Model timing tool.
In Part III, you will learn how to use both thrust and trend to produce T/TM signals. You'll also be able to weigh the benefits of using the model to refine your timing techniques.
The DecisionPoint Trend Model is reviewed in great detail in ChartSchool. Today, I will go over how signals are generated in the intermediate and long terms. The T/TM uses only intermediate- and long-term Trend Model signals so it is important to understand how they are generated.
Long-Term Trend: The long-term trend can be determined using daily, weekly or monthly charts. As far as the Trend Model and Thrust/Trend Model, the long-term trend is determined by the location of the 50-EMA in relation to the 200-EMA. Simply put, the Long-Term Trend Model is on a BUY signal when the 50-EMA is above the 200-EMA and a SELL signal when the 50-EMA is below the 200-EMA. It is a simplistic model, but it is very useful for classifying bull and bear markets. In DecisionPoint analysis, a LTTM BUY signal indicates the index, stock, ETF, etc. is in a bull market (green) with the SELL signal indicating a bear market (yellow).
Intermediate Term Trend Model: The ITTM also triggers signals based on EMA crossovers. It gets a little more tricky because now we add Neutral signals to the mix. The signals on the ITTM are determined by 20/50-EMA crossovers. If the 20-EMA crosses above the 50-EMA, it is ALWAYS generates an ITTM BUY signal. However, if the 20-EMA crosses below the 50-EMA, a SELL or Neutral signal will be generated. How do you determine if it is a SELL or Neutral signal? In Alexander Elder's book "Trading for a Living" (available in the StockCharts Bookstore), he tells us that every timing model should have a long-term "screen". The ITTM uses this screen to differentiate between a SELL and a Neutral signal. The screen is the Long-Term Trend Model that I explained above. If the LTTM is on a BUY signal (50-EMA is above the 200-EMA), a negative 20/50-EMA crossover triggers a Neutral signal (cash or fully hedged). DecisionPoint reasoning is that we shouldn't expect a deep decline because the LTTM defines the current trend as bullish. If the LTTM is on a SELL signal (50-EMA below the 200-EMA) then the signal is a SELL because technically it is a bear market.
Now that you are familiar with the Long-Term and Intermediate-Term Trend Models, you now know how the "Trend Component" is determined as part of the Thrust/Trend Model.
NEXT WEEK in Part II: Thrust Component = PMO + PBI, measurement of momentum and internal strength.
Come check out the DecisionPoint Report with Erin Heim on Wednesdays and Fridays at 7:00p EST, a fast-paced 30-minute review of the current markets mid-week and week-end. The archives and registration links are on the Homepage under “What’s New”.
Technical Analysis is a windsock, not a crystal ball.