Bean There, Done That

In this piece I wrote about a strong seasonal tendency in corn based on the planting cycle.  Turns out soybeans are in the same boat.  This can be a good thing for traders who are, a) willing to speculate, b) not dumb enough to the bet the ranch.

 

The Trend

 

Figure 1 displays the annual seasonal trend for soybeans (from www.sentimentrader.com).  Just as with corn, the months of February through April tend to see positive results.  Please note the use of the word “tend” and the lack of the words “sure” or “thing”.

 

 

bean seasonality

 

Figure 1- Soybean Annual Seasonal Trend (Courtesy Sentimentrader.com)

 

The History

 

Figure 2 displays a monthly chart for soybeans going back 4 decades.

 

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Figure 2 – Monthly chart for Soybeans (Courtesy ProfitSource by HUBB)

 

Here are the two things to note (using some pretty technical terms):

 

*Soybeans (like most commodities)  spend a lot of time “churning”, “grinding”, “consolidating” and generally going “nowhere”

 

*HOWEVER, “when beans go they really go!” (hopefully that wasn’t “too technical”)

 

*The primary thing to remember is that when soybeans get going to the upside, typically the best thing to do is to banish the word from “overbought” from your trading lexicon.  See Figure 3.

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Figure 3 – Big moves in Beans (Courtesy ProfitSource by HUBB)

 

Now let’s focus on the months of February, March and April.  Figure 4 displays the hypothetical $ growth (no slippage or commissions) from holding long a 1-lot of soybean futures during February, March and April every year starting in 1976.

 

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Figure 4 – Long 1 soybean futures contract during Feb-Mar-Apr every year since 1976

 

The Results

 

Some things to note regarding Feb-Apr in soybeans:

 

*# of times UP = 33

*# of times DOWN = 10

*Average $ gain = +$3,808

*Average $ loss = (-$1,788)

*Largest gain = +$15,025

*Largest loss = (-$3,775)

 

In sum, a winners to losers ratio of 3.3 (or 76% winners), an average win to average loss ratio of 2.13-to-1

 

Bottom line: these are great numbers for traders BUT they entail the assumption of significant risk (2017 saw a loss of over -$3,400)

 

An Alternative Way to Play

 

Ticker SOYB is the Teucrium ETF designed to track the price of soybeans.  SOYB allows traders to buy soybeans just as they would buy shares of stock.  Just remember that you don’t get the same leverage buying SOYB as you would buying a futures contract.

 

Figure 5 displays a monthly chart for SOYB and Figure 6 displays a daily chart.  Note the significant resistance level at around $16.96 a share.  If SOYB takes out that level sooner than later it might be a bullish sign.

 

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Figure 5 – SOYB Monthly (Courtesy TradingExpert)

 

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Figure 6 – SOYB Daily (Courtesy TradingExpert)

 

Summary

 

Soybeans have been beaten down a bit over the last several years.  If (and “yes”, that is a big “If”) beans are going to make a move higher, history suggests that the Feb through April period is a likely time for that to happen.

 

Am I “recommending” or even “merely suggesting” that you should buy soybean futures or ticker SOYB?  Not at all.  I adhere to that old media adage of “We (I) report, you decide.”

 

Which is better I think than the current motto of major media which appears to be “We decide, then we report our decision.”

Jay Kaeppel

 

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

All Eyes on Key Bellwether Support Levels

First the reality.  Nobody knows what the market is going to do.  Yes, I am aware that there are roughly a bazillion people out there “prognosticating” (myself included) about the stock market.  And yes, if one makes enough “predictions”, the law of averages dictates that one will be correct a certain percentage of the time.

 

Still, the market does offer clues.  Sometimes those clues turn out to be false leads.  But sometimes they do offer important information.  For example, Figure 1 displays four major market indexes.  As you can see, in the Aug-Sep-Oct time frame all four of these averages “broke out” to new all-time highs (i.e., The Good News) and then broke back down below the previous resistance line drawn on each chart (i.e., The Bad News).

 

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Figure 1 – Four major indexes breakout then fail (Courtesy  TradingExpert)

 

False breakouts happen all the time.  And the reality here is that sometimes they mean something and sometimes they don’t.  But when all four major average do the same thing, a warning sign has been issued to those who are interested in seeing it.  That’s why it can be useful to seek “confirmation”.  For my purposes I look to what I refer to as my 4 “bellwethers”, which are:

 

SMH – Semiconductors

TRAN – Dow Transportation Average

ZIV – Velocity Shares Inverse VIX Index

BID – Sotheby Holdings

 

These tickers appear in Figure 2 (click to enlarge).

 

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Figure 2 – Jay’s Market Bellwethers (Courtesy TradingExpert)

 

While the major indexes were testing new highs in Aug/Sep and then breaking down in October:

 

SMH – Never really came close to breaking out above its March high

TRAN – Followed the major indexes by hitting new highs in Aug/SP and then breaking down in October

ZIV – Never came anywhere close to its Jan-2018 high

BID – Broke to a new high in Jun/Jul, then failed badly.

 

In a nutshell, the failed major index breakouts were accompanied by absolutely no positive signs from the 4 bellwethers. So, the warning signs were there if one wished to see them.

 

So where are the bellwethers now?  Another close look at Figure 2 reveals that:

 

SMH – the key support level at 80.92

TRAN – the key level for the Dow Transports is 8744.36

ZIV – the key support level is 60.60

BID – a potential support level is 32.95 (the Apr 2013 low)

 

Summary

 

*Given the washed-out/oversold level that many indicators and sentiment surveys have reached…

 

*…Combined with the fact that we are in the seasonally favorable pre-election year (no down pre-election years since the 1930’s)

 

*There is a chance that 2019 could be surprisingly bullish, and shell-shocked investors should not stick their heads in the sand to the possibility.

 

At the same time:

 

*Based solely on trend-following indicators ALL of the major market indexes are technically in confirmed bear markets.  As a result, there is absolutely nothing wrong with having some portion of one’s capital in defensive positions at the moment (30% cash or short-term bonds?).

 

*Keep a close eye on January performance.  A bullish January would be a positive sign just as a negative January could – in this case – signal a continued market decline.

 

*Keep a close eye on the 4 Bellwethers relative to their respective support levels.

 

In a nutshell:

 

*Up January + Bellwethers holding above support = GOOD

 

*Down January + Bellwether breaking down below support = BAD

 

Those are all the “clues” I can offer at the moment.

 

Jay Kaeppel

 

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

When to Buy Energy Stocks

Crude oil and pretty much the entire energy sector has been crushed in recent months. This type of action sometimes causes investors to wonder if a buying opportunity may be forming.

The answer may well be, “Yes, but not just yet.”

Seasonality and Energy

Historically the energy sector shows strength during the February into May period.  This is especially true if the November through January period is negative.  Let’s take a closer look.

The Test

If Fidelity Select Energy (ticker FSENX) shows a loss during November through January then we will buy and hold FSENX from the end of January through the end of May.  The cumulative growth of $1,000 appears in Figure 1 and the yearly results in Figure 2.

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Figure 1 – Growth of $1,000 invested in FSENX ONLY during Feb-May ONLY IF Nov-Jan shows a loss

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Figure 2 – % + (-) from holding FSENX during Feb-May ONLY IF Nov-Jan shows a loss

Figure 3 displays ticker XLE (an energy ETF that tracks loosely with FSENX).  As you can see, at the moment the Nov-Jan return is down roughly -15%.

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Figure 3 – Ticker XLE (Courtesy TradingExpert)

All of this suggests remaining patient and not trying to pick a bottom in the fickle energy sector. If, however, the energy sector shows a 3-month loss at the end of January, history suggests a buying opportunity may then be at end.

Summary

Paraphrasing here – “Patience, ah, people, patience”.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

An Obscure but Potentially Useful Oversold Indicator

Trend-following is essentially a “tried and true’ approach to investing.  But overbought/oversold (i.e., attempting to buy low/sell high) – that’s where the “excitement” is.  Of course, when it comes to trading and investing, “excitement” can be highly overrated.  Nevertheless, in this piece I want to talk about a relatively obscure indicator that may be useful in identifying vastly oversold situations.

 

EDITORS NOTE: The WinWay EDS file for Jay Kaeppel’s indicator is available to download here

 

 

The VixRSI14 Indicator

 

Part of the reason this indicator is obscure is because I think I “invented” it – but only by mashing together an indicator from Larry Williams and an indicator from Welles Wilder.  The first part is the standard Welles Wilder 14-day Relative Strength Index, more commonly referred to as “RSI”.

 

The 2nd part of VixRSI14 is an indicator created by famed trader Larry Williams which he dubbed “VixFix”.  This indicator is an effort to create a “Vix Index-like” indicator for any security.

 

WinWay TradingExpert code for these indicators appears at the end of the article.

 

A Few Notes

 

*For the record, VixRSI14 is calculated by taking a 3-day exponential average of VixFix and dividing that by a 3-day exponential average of RSI14 (are we having fun yet?).  Please see code at the end of the article.

 

*I prefer to use VixRSI14 using weekly data rather than daily data

 

*(Unfortunately) There are no “magic numbers” that indicate that a completely risk-free, you can’t lose, just buy now and watch the money roll in” buying opportunity is at hand (Disclaimer: If there was, I would probably just keep it to myself and not bother writing the article – sorry, it’s just my nature).  That being said, a decent “rule of thumb” is to look for a reading above 3.5 followed by a downside reversal.

 

(Click any chart below to enlarge)

 

With those thoughts in mind, Figure 1 displays a weekly chart of Wynn Resorts (WYNN) with the two indicators plotted separately below the bar chart.

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Figure 1 – WYNN with William’s VixFix and Wilder’s RSI 14-day (Courtesy WinWay TradingExpert)

 

Note that as price declines, VixFix tends to rise and RSI14 tends to fall.  VIXRSI14 essentially identifies “extremes” in the difference between these two.  Figure 2 displays WYNN with VixRSI14 plotted below the bar chart.

 

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Figure 2 – WYNN with VixRSI14 (Courtesy WinWay TradingExpert)

 

More “examples” appear in Figures 3 through 8 below.

 

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Figure 3 – AMD (Courtesy WinWay TradingExpert)

 

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Figure 4 – BAC (Courtesy WinWay TradingExpert)

 

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Figure 5 – DISH (Courtesy WinWay TradingExpert)

 

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Figure 6 – GRMN (Courtesy WinWay TradingExpert)

 

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Figure 7 – NTAP (Courtesy WinWay TradingExpert)

 

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Figure 8 – YHOO (Courtesy WinWay TradingExpert)

 

Summary

 

As always, I merely present “ideas” here at JOTM.  So, do not assume from the charts above that you have found the “keys to the kingdom”.  But if used in conjunction with other confirming indicators – and remembering to employ some sort of risk control for those instances when a stock price decline fails to arrest itself even after VixRSI4 peaks above 3.5 – VixRSI14 may hold some value.

 

Indicator Code

 

EDITORS NOTE: The WinWay EDS file for Jay Kaeppel’s indicator is available to download here

 

Below is the code for VixFix, RSI14 and VixRSI14 from AIQ Expert Design Studio.

!#######################################

!VixFix indicator code

hivalclose is hival([close],22).

vixfix is (((hivalclose-[low])/hivalclose)*100)+50.

!#######################################

!#######################################

!RSI14 code

Define days14 27.

U14 is [close]-val([close],1).

D14 is val([close],1)-[close].

AvgU14 is ExpAvg(iff(U14>0,U14,0),days14).

AvgD14 is ExpAvg(iff(D14>=0,D14,0),days14).

RSI14 is 100-(100/(1+(AvgU14/AvgD14))).

!#######################################

!#######################################

!VixRSI14 code

VixRSI14 is expavg(vixfix,3)/expavg(RSI14,3).

!#######################################

 

Jay Kaeppel

 

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

AI Market Timing system – saw the fall coming, so now what

What is the AI in AIQ?

The AI in TradingExpert Pro is programmed with the knowledge and insight of many stock market professionals, and is capable of making market recommendations based on this knowledge and insight; recommendations are made on a scientific basis free of bias, emotion, or hidden motives. 

The AI or expert systems are programmed with rules that combine sound principles of technical analysis with the knowledge and experience of market professionals.  Technical analysis, as used by AIQ, is based on the logic that price is the result of supply and demand.  An AIQ timing signal, therefore, reflects all available knowledge and opinions such as news of the day, earnings, product reports, and company forecasts.

Technical analysis recognizes price and volume movement as the voice of the market itself and hence the only data necessary to determine what the market is likely to do next.

 

The AIQ Expert System


As an expert system, TradingExpert Pro is comprised of two knowledge bases – one for market timing and a second for stock selection – and an inference engine. Knowledge, in the form of rules, is stored in the knowledge bases. The inference engine is the thinking component of an expert system.

Each of the two knowledge bases within TradingExpert Pro has its own unique rules. The rules operate on facts which are values of the technical indicators. The indicators are computed from daily price, volume, and breadth data.

The rules employed in ATQ TradingExpert Pro are derived from the knowledge of many experts of market action and market timing. The reliability of these rules is maximized by combining them into a higher level of Expert Rules. Market analysts have found that no single rule or indicator works all the time. In AIQ, the Expert Rules and technical indicators work together to generate upside and downside signals.

 

Different knowledge bases for different market cycles


Continuing research at AIQ has shown that a single knowledge base can be improved if it is split into several knowledge bases, one for each phase of the market cycle. This advancement has been incorporated in the market timing knowledge base. The crest, trough, up slope, and down slope are each addressed by a specific set of rules specialized and weighted for that specific phase of the market cycle.

Each market day, then, the system determines the strength and  direction of the phase, or trend.  If there is no trend, it is first determined if the cycle is at a crest prior to a downtrend, or in a trough before the next uptrend.  A more specialized knowledge base is used for each of these conditions, increasing the overall market timing effectiveness.

 

 

The inference engine

The knowledge base fuels the second part of the AIQ expert system, the inference engine.  The inference engine is the thinking component of an expert system, and mimics the way humans think.

To understand how the AIQ inference engine works, picture a decision tree. The procedure starts from the tree’s trunk, where the major rules are located. Each rule is represented as a node, or fork, where the tree splits into three branches-representing a yes, a no, or a maybe.  If the expert system determines that the premise of a rule is true, then the rule is considered to have fired, giving one of those three answers.

As each rule is evaluated, the process moves on to the next node and subsequent branches and continues to move on through the tree. Each rule node has an assigned value.  That value is added to a node total that is accumulated as the inference engine passes through the tree. When all the rules have been evaluated, the resulting node total is normalized and becomes an AIQ Expert Rating.  


Finally


The Expert Ratings are based on a scale of 0 to l00. The higher the Expert Rating, the stronger the signal.  An Expert Rating of 95 or higher is considered a strong signal, meaning that there is a strong possibility that the price trend is about to change direction.


Confirmation of Expert Ratings


Research has shown that a change in direction of the Phase indicator (changing up for up ER, changing down for down ER) at or close to the high Expert Rating date provides a higher degree of confidence in the rating. Phase is not part of the Expert System.


So let us examine the last 7 weeks market action.



2-98 down signal 9/18/2018, 9/18/18 and 9/20/18 all with these primary riles firing confirmed by phase


Intraday high prices of the market have increased to a 21 day high.  Never the less, the advance/decline oscillator is negative. This unusual event is read as a very strong bearish signal that is often  followed by an downward price movement. 


Closing prices on the market have increased to a 21 day high but market breadth as measured by advances and declines is declining. This non-confirmation in a trading market is a weak bearish signal indicating a possible downward price movement.  

DJIA with the 3 successive down signals

 

Confirmed down signal 4-96 on 10/05/18 these primary rules fires

 

Trend Status has changed to a strong down trend.  This indicates that a downward trend has started that may continue in this direction. This is a  moderate bearish signal. 

The 21 day stochastic has declined below the 80% line and the price phase indicator is decreasing. In this strongly downtrending market this is an indication that the downtrend will continue.  

Confirmed down signal 5-95 on 10/18/2018 these primary rules fires

The market closing average has dropped below the 21 day exponentially smoothed average price.  At the  same time, accumulation is decreasing. In this down trending market, this is taken as a very bearish signal that could be followed by further decreases in price.  

 

The price phase indicator is positive but volume distribution has started to advance. This is a nonconformation that, regardless of the type of market, is a bearish signal which usually results in an downward movement of the market. 

DJIA with 2 more down signals confirmed by phase

Unconfirmed up signal on 10/16/18 – phase did not change direction


Volume accumulation percentage is increasing and the 21 day stochastic has moved above the 20% line. In this downtrending market, this is taken as a   strong bullish signal that could be followed by an upward price movement. 


The price phase indicator is negative but volume accumulation has started to advance.  This is a  non-conformation that, regardless of the type of market, is a bullish signal which usually results in an upward movement of the market. 

The new high/new low indicator has reversed to the upside. This is a reliable bullish signal that is often followed by an upward movement in prices. In this weak downtrending market an uptrend could  start shortly. 



DJIA on 10/16/18 97-3 up no phase confirmation


Confirmed up signal 10/31/18 98-2


The 21 day stochastic has advanced and crossed the 20% line and the price phase indicator is also in- creasing.  In this weakly downtrending market this is taken as a strong bullish signal suggesting an increase in prices. 


Volume accumulation percentage is increasing and the 21 day stochastic has moved above the 20% line. In this downtrending market, this is taken as a strong bullish signal that could be followed by an upward price movement. 


The new high/new low indicator has reversed to the upside. This is a reliable bullish signal that is often followed by an upward movement in prices. In this weak downtrending market an uptrend could  start shortly. 

DJIA on 10/31/18 with confirmed up signal 98-2

 

While never perfect, the Expert rating provides a formidable advantage to the trader looking for signs of direction changes in the market. As of 11/7/18 close the DJIA was at 26180

 

DJIA as of 11/7/18