Gating a weekly average crossover with stored support and resistance

A one-parameter weekly signal

A one-parameter weekly close-versus-simple-moving-average rule is presented as objective and backtestable, with the lookback period as its only fitted input. A moving-average-crossover is a weekly close crossing a simple moving average as the first, unambiguous trend signal.

The weekly close is the Friday net asset value used as the only price trigger, with execution at the following Monday close. A weekly Friday close is used as the trigger so daily noise is filtered, with the next Monday closing net asset value as the execution price.

Intermediate swings and the lookback period

Intermediate stock-market swings are described as typical 10-30% peak-to-trough or trough-to-peak moves lasting about two to six months. The suggested lookback period for those intermediate swings is about half the swing duration, placing the working window in the four- to 13-week range.

Lengthening the average from 10 to 20 weeks removed four of six illustrated whipsaws but delayed 1995 entries and exits relative to the shorter average. A whipsaw is a short, costly sequence of opposing average-crossover signals inside a range.

How support and resistance are stored

Support-resistance is the nearest prior swing high or low used to confirm or withhold that average-based signal. SMARS is a two-parameter weekly mutual-fund procedure pairing a simple moving average with stored support and resistance.

The combined rules store resistance as the maximum weekly high since the last support event when a buy is still in force and price is below the average at the cross, and store support as the minimum weekly low since the last resistance event when a sell is still in force and price is above the average at the cross.

When the combined rules commit

The confirmation factor is the minimum ratio between the average and the stored support or resistance that allows an immediate crossover trade. A buy fires if weekly close exceeds stored resistance, or at the average cross if close is above the average and resistance divided by the average is at least the confirmation factor. A sell is the symmetric case using support.

A breakout-system is the combined procedure that only commits after a confirmed close through the average or through the stored support or resistance level.

A historical comparison

On 1993-1997 weekly data for one emerging-markets fund, with no transaction fees and a 5% money-market parking yield, the plain average (confirmation factor of 1) was relatively insensitive to lookback and beat a 7.7% buy-and-hold return, averaging about five trades a year near a 10- or 11-week lookback.

Over the same test, adding support-resistance confirmation cut trades per year by about half in the 10- to 14-week lookback band and matched or slightly exceeded the plain-average return except at very short lookbacks and confirmation factors above 1.08.

The same comparison found the unaided average needed a 19-week lookback to cut trades by half, while a two-average crossover with a two-week short average only reduced trades from five to four per year.