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Value Line Index Bullish10/11/11 08:46:29 AM
by Mike Carr, CMT
Martin Zweig wrote about the importance of the Value Line Index in the 1980s. It remains a useful indicator.
|Analyst Martin Zweig's 1986 book, "Winning On Wall Street," detailed the 4% trading system. The rules were simply to buy when the Value Line Index is 4% above a low and sell when it declines 4% from a high. This was most likely adapted from the filtered waves that technician Arthur Merrill described about 10 years earlier in "Filtered Waves, Basic Theory: A Tool For Stock Market Analysis."|
|In an update to his book, Zweig showed that from 1966 through 1993, the 4% long/short strategy delivered a 12.6% annualized gain, compared to a 2.7% gain for the index. After the reversal of the past week, the Value Line Index is on a buy signal (Figure 1).|
|FIGURE 1: THE VALUE LINE, WEEKLY. The Value Line Index offers reliable stock market signals.|
|Graphic provided by: Trade Navigator.|
|This index measures the average daily changes in the stocks included in the Value Line investment universe. It is a geometric mean of the price activity, which has the advantage of eliminating many factors like market cap that are usually driving index changes in part.|
|According to the Value Line Index, there is no doubt that stocks suffered a bear market, falling 30% from their peaks earlier this year. Figure 1 also shows Williams' PercentR, a useful overbought/oversold tool. It just crossed above 20 after reaching oversold levels, signaling a buy.|
|Value Line is one of the broadest measures of the stock market. It is now on a buy, at a seasonally favorable time of year.|
Mike Carr, CMT
Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."
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