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Cash Is Always King

01/02/13 10:59:36 AM
by Koos van der Merwe

The lady who introduced me to the JM internal band strategy said, and I will never forget her words: "This strategy has been very kind to me."

Security:   OFIX
Position:   Buy

The JM internal band strategy is a 15-period simple moving average offset by 2% positive and 2% negative. We buy when the price rises above the upper band, and we sell when the price drops below the lower band. That is simple, but can it be improved on?

FIGURE 1: ORTHOFIX. Showing the JM internal band buy and sell signals with the RSI buy and sell signals.
Graphic provided by: AdvancedGET.
Looking at the daily share price in Figure 1, we can see how profitable the buy and sell signals have been. We can use the relative strength index (RSI) to confirm a buy signal, but as shown, the RSI buy signal on October 26, 2012, was way too early. We could also use the RSI as a sell signal, and the green vertical lines show that this would be a very effective strategy. So, keeping in mind that it is far safer to be in cash, buy with the JM internal band indicator, and sell with the RSI sell signal.

FIGURE 2: ORTHOFIX. This chart shows the JM internal band buy signals but the 10-period pivot point sell signals.
Graphic provided by: AdvancedGET.
Figure 2 is a chart of Orthofix showing the JM internal band buy signals, but with a 10-period pivot point sell signal. The red line on the chart is a 10-period moving average of the pivot point 10 days previously. When the closing price of the share breaks below the 10-period pivot point, then a sell signal is triggered. This is another instance where the sell signal is ahead of the JM internal band sell signal.

The JM internal band is an indicator for the cautious investor, who prefers buying a share as the price is on the rise. Selling the share and taking good profits is always a good solid strategy. Cash is always king.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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