Sometimes we get so caught up in the day to day news and volatility of the markets that it is nice to take a step back and look at the bigger picture. In the chart below, we take a look at the monthly chart for the S&P 500 Index along with a technical indicator called the Parabolic SAR (stop and reverse). Basically this indicator is a system that tracks price from afar. Upon entering a position, it then calculates an acceleration factor and starts to tighten up close to price as price starts rising more rapidly.
A lot of traders/investors like to use this SAR system as a stop-loss mechanism. As illustrated in the chart below, one can see that the current S&P 500 Index price is still above the SAR (yellow dots) and has been since February 2012. Thus, until S&P 500 Index price touches the current SAR point at 1,737 the system says to remain long. Only a breach of this level would cause a stop out and reversal from a long trade to a short one.
Additionally, one can observe from the chart that past signals for the SAR, on both the long side (dots below price) and short side (dots above price) have worked out quite well. The lower indicator for reference is showing the money line or profit/loss on the long trades only, which one can see saw a steady increase in profits. This worked much better than buy and hold during the periods shown.
Note: the Parabolic SAR is a technical overlay option in FusionIQ Trader and Investor – on the chart it is found in the drop down menu that says price overlay. Click it and you will see it is the last option in the drop down.