Dave Landry Moving Average Daylight

I like to keep my market analysis simple. In fact, other than the occasional moving average,
I don’t use any indicators whatsoever. Indicators don’t indicate. They simply help to illustrate
what’s already in the chart.

Also, since indicators are price-based, (i.e., a second derivative), there will be lag. With that
said, I have found that by combining price with a moving average some of the lag is
eliminated. Further, this can help to keep you on the right side of the market. Let’s explore
this further using the concept of moving-average “daylight.”

FIGURE 1: EXAMPLES OF DAYLIGHT PATTERNS

Source: davelandry.com

As mentioned in a previous article for Proactive Advisor Magazine, moving-average daylight

(which one client has dubbed “DaveLight”) is simply when the lows are above the moving
average for uptrends and the highs are below the moving average in downtrends. Again, like
all indicators, there can be lag, but by adding in the price component, some of the lag is
eliminated.

In Figure 2, I have added the closely watched 200-day simple moving average (SMA) along
with a daylight indicator to the S&P 500. The indicator simply counts days of daylight, not
magnitude.
For instance, a reading of +100 (green) would mean that the market has had upside daylight
(lows > 200 SMA) for 100 days. As soon as the market touches the moving average, the days
of daylight resets back to zero (no daylight) and the count starts over.

Notice that there has been upside daylight for a long time, until recently. At its peak (a), the
market went over 400 trading days without touching its 200-day moving average.

FIGURE 2: EXAMPLE OF CONSECUTIVE DAYS OF ‘DAYLIGHT’

Source: davelandry.com. Charts and indicators provided by MetaStock.

Daylight can also be very useful in longer-term analysis. It can really help you see the forest
for the trees.

In Figure 3, I have plotted the weekly S&P 500 with a 50-week simple moving average.
Notice in the great bull run of the mid to late 90s (a) there was virtually no downside daylight
(red). Fast-forward to the bear market of 2000 (b) and there wasn’t any upside daylight (i.e.,
no green) until the bull market that began in 2003. During the entire run (c), until the peak in
2007, there was virtually no downside daylight (just one week). Downside daylight began in
early 2008 and stayed completely “red” (d) until 2009. Since then, we have been mostly
“green” (e), with a few corrections in between.
FIGURE 3: ANALYSIS OF ‘DAYLIGHT’ OVER BULL AND BEAR CYCLES

Source: davelandry.com. Charts and indicators provided by MetaStock.

My takeaways

As a trend follower, I don’t try to anticipate when the trend will end. However, I have
observed that when the daylight count reaches an extreme reading (e.g., around +100 using a
weekly 50-day SMA or +300–400 on a daily chart with a 200-day moving average), a
correction often follows. When extreme readings occur, I don’t exit my long positions. I do
become prudent in my profit-taking and honoring my stops just in case. I also become very
selective on new positions.

Corrective action sometimes is just that, and sometimes it’s the start of something much
bigger. The great thing is that you can’t have a bear market without weekly downside daylight.
Of course, with anything trend following you may be a little late to the game, but for the most
part, a simple technique like this will help keep you on the right side of the market.