Approach

Uilizing the Elliott Wave Oscillator, the Golden Cross, and volume, this asset allocation approach may be used to dynamically allocate in and out of stocks when:

  • Wave & Volume properties indicate a primary wave trend down (or up) in stocks is occurring.

Elliott Wave Oscillator

Elliott Wave Oscillator (EWO) is simply the difference between a five-period and thirty five-period simple moving average.

The EWO indicator is used to determine where an Elliott wave ends and another begins. When the oscillator begins to put in a series of lower highs while price puts in higher highs a trend change is occurring.

The basis of the Elliott principle, which quantifies market crowd behavior, works best in equities that (1) have lots of volume (liquidity) and (2) move according to key forces of fear and greed on the part of many participants.

The Golden Cross

The Golden Cross is a longer-term trend measure that utilizes the 200 day moving average. It sometimes is coupled with a shorter 50 day moving average. In the Meb Faber’s paper, A Quantitative Approach to Tactical Asset Allocation, a 1% move of the one day change in price above or below the 200 day moving average.

Faber in his paper cites Jeremy Siegel with the 1% specification:

“The most often cited long-term measure of trend in the technical analysis community is the 200-day simple moving average. In his 2008 book Stocks for the Long Run 5/E: The
Definitive Guide to Financial Market Returns & Long-Term Investment Strategies,

Jeremy Siegel investigates the use of the 200-day SMA in timing the Dow Jones Industrial Average (DJIA) from 1886 to 2006. His test bought the DJIA when it closed at least 1 percent above the 200-day moving average, and sold the DJIA and invested in Treasury bills when it closed at least 1 percent below the 200-day moving average.

He concludes that market timing improves the absolute and risk-adjusted returns over buying and holding the DJIA. Likewise, when all transaction costs are included (taxes, bid-ask spreads, commissions), the risk-adjusted returns are still higher when employing market timing, though timing falls short on an absolute return measure.”

Price & Volume Wave

With a strong correlation between volume and wave trend drawdown, an increase in volume with a 1% deviation between the EWO and 200 day moving average, signals a more defensive allocation out of stocks.

Volume confirms the overall trend or if it can warn of a coming reversal.

Ordinarily volume should increase in the trend direction.

Similarly high volume on falling prices and near bottoms in a falling trend will confirm the overall negative trend and indicate it will continue to fall.

Quantitative Active Asset Allocation Insights & Strategy