Markets reached multi year highs and many investors are now starting to ask the question are we falling into a correction. To answer it I am going to use one old and forgotten trading method – The Darvas Box. Nicolas Darvas was professional dancer in the late 1950’s who traded in his spare time and successfully turned $36,000 into a $2 million following his own Box trading system. It is thoroughly described in his 1960 book “How I Made $2 Million in the Stock market”.
To prove accuracy of that method I have been using it for timing and target setting of the Nasdaq index as it appears to be accurate since it is simple and intuitive method combining technical and fundamental elements.
Here in the posts NASDAQ target reached! Now what?, Next NASDAQ target you can check the Box system application.
I intend to apply this approach to current market conditions with some modest justification. Instead using box breakouts as buy signals I am using the 200 moving average breakouts. The question to be answered is how long does the market stays above the 200 MA before it starts correction?
For the current bull market, started back in Oct 2011, the breakout of 200 day simple moving average forms the first box with length 96 days. During that time the market(S&P500) gained 159 points (12.58%) before correcting sharply.
The second box lasted relatively the same duration and performance (14.24% for 100 days). The last box, which apparently the market currently is moving within, began with the last 200 ma breakout on 21st of November 2012. If the pattern is to be repeated again than we’ve got only 20 days left and some 3% potential gain (The S&P500 target level set by the previous boxes average height is 1553) before market reverse.
|Applying Darvas Box Trading System To S&P500|
Interestingly the timing suggested by the Box method exactly coincides with the next budget deficit decision deadline (1st of March). An important event expected to shake the markets again after being once postponed. Whether there will be sharp correction or mild correction nobody knows. One is for sure there will be such soon or later and the good timing could save a lot of investors’ headaches and money.