Our market AI down signal 4/18/19

WinWay Charts AI issued a market down signal of 99 on April 18, 2019. Price Phase, our custom indicator that we use to confirm ratings turned down 4 days after the rating. Usually we like to see this indicator turn down closer to the rating, but the AI Expert system is often a little early.

 

The two significant rules rules that fired on this 99 down are below

“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. “

“Intraday high prices of the market have increased to a 21 day high. But the up/down volume oscillator if negative. In this uptrending market, this is taken as a very strong bearish signal that is often followed by downward price movements. “

The prior AI rating on the market was a 100 up on March 11, 2019 the market moved up over 850 points to the April down signal. Here are the AI rules that fired for this rating

“The market closing average has exceeded the 21 day exponentially smoothed average price. At the same time, accumulation is increasing in a strong down market. This is taken as a bullish signal that could be followed by a reverse in trend direction. “
“The Money Flow Indicator has reversed and is now advancing. In this downtrending market, this is taken as a weak bullish signal that could indicate an upward movement in the market averages. “
“Analysis of the rate of change of the exponentially smoothed average price suggests that in this strongly downtrending market an uptrend is starting to form. This is taken as a strong bullish signal that is usually followed by an upward movement in prices. “
“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 strong downtrending market a reverse in trend could start shortly. “

Ultimately any AI down signal is a note of caution in this market.

Trend-Following in One Minute a Month (A Quick Update)

This article is intended to be a quick update to this article.  The original idea is based on the theory propounded by Ken Fischer that suggests that one should not worry about a “top” in the stock market until after the market goes at least 3 months without making a new high.

Three things to note:

*Like all trend-following methods the one detailed in the linked article will experience an occasional whipsaw, i.e., a sell signal at one price followed some time later by a new buy signal with the market at a higher price.

*Like any good trend-following method the real purpose is to help you avoid some significant portion of any major longer-term bear market, i.e., 1973-74, 2000-2002, 2007-2009).

*The secondary purpose is to relieve an investor of that constant “Is this the top, wait, what about this this, this looks like the top, OK never mind, but this, this time it definitely has to be the top” syndrome.

The Rules

For a full explanation of the rules please read the linked article.  In general, though:

*A “Sell alert” occurs when the market makes a 6-month high, then goes 3 full calendar months without piercing that high

*The “trigger” price is the lowest low for the 3 months following the previous high

*A “Sell signal” occurs at the end of the month IF the “trigger” price is pierced to the downside during the current month

*The “trigger” is no longer valid if the S&P 500 makes a high above the high for the previous 6 months prior to an actual “Sell signal”

*If a “Sell signal” occurs then a new “Buy signal” occurs when the S&P 500 makes a high above the high for the previous 6 months

Sounds complicated, but its’s not.  Figure 1 displays the signals and alerts and trigger prices since 2005.

Green Arrows = Buy Signal

Red Arrows = Sell Signal

Red horizontal lines = Sell trigger price

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Figure 1 – One Minute a Month Trend-Following Alerts, Trigger prices and Signals (Courtesy WinWayCharts TradingExpert)

Note that actual sell signals occurred in 2008, 2011 and 2015.  The signal in 2008 was a life-saver, while the signals in 2011 and 2015 resulted in small whipsaws.  Sorry folks, that’s just the nature of the beast.

Interestingly, there have been two “Sell alerts” in the last year.  The first occurred at the end of April 2018, however, that alert was invalidated at the end of August 2018 when the S&P 500 pierced the previous 6-month high.  Another alert occurred at the end of December 2018.  The “Trigger price” is the December 2018 low of 2346.58.  That trigger is still active but could be invalidated if the month of May 2019 makes a high above whatever the high for April 2019 turns out to be.

The key point here is that despite the volatility and painful sell-offs in October and December of 2018, the “system” has remained on a buy signal.

Where to from here?  We’ll just have to wait and see.

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.

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

Watch This Indicator

So, the big question on every investor’s mind is “What Comes Next?”  Since this is not an advisory service (and given the fact that I am not too good at predicting the future anyway) I have avoided commenting on “the state of the markets” lately.  That being said, I do have a few “thoughts”:

 

*The major averages (as of this exact moment) are still mostly above their longer-term moving averages (200-day, 10-month, 40-week, and so on and so forth).  So, on a trend-following basis the trend is still “up”.

 

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Figure 1 – The Major Index (Courtesy WinWayCharts TradingExpert)

 

*We are in the most favorable 15 months of the 48-month election cycle (though off to a pretty awful start obviously) which beings Oct.1 of the mid-term year and ends Dec. 31st of the pre-election year.

 

*Investors should be prepared for some volatility as bottoms following sharp drops usually take at least a little while to form and typically are choppy affairs.  One day the market is up big and everyone breathes a sigh of relief and then the next day the market tanks.  And so on and so forth.

 

An Indicator to Watch

 

At the outset let me state that there are no “magical” indicators.  Still, there are some that typically are pretty useful.  One that I follow I refer to as Nasdaq HiLoMA.  It works as follows:

 

A = Nasdaq daily new highs

B = Nasdaq daily new lows

C = (A / (A+B)) * 100

D = 10-day moving average of C

C can range from 0% to 100%.  D is simply a 10-day average of C.

 

Nasdaq HiLoMA = D

 

Interpretation: When Nasdaq HiLoMA drops below 20 the market is “oversold”.

 

Note that the sentence above says “the market is oversold” and NOT “BUY NOW AGGRESSIVELY WITH EVERY PENNY YOU HAVE.”  This is an important distinction because – like most indicators – while this one may often give useful signals, it will occasionally give a completely false signal (i.e., the market will continue to decline significantly).

 

A couple of “finer points”:

 

*Look for the indicator to bottom out before considering it to be “bullish”.

 

*A rise back above 20 is often a sign that the decline is over (but, importantly, not always).  Sometimes there may be another retest of recent lows and sometimes a bear market just re-exerts itself)

 

*If the 200-day moving average for the Dow or S&P 500 is currently trending lower be careful about using these signals.  Signals are typically more useful if the 200-day moving average for these indexes is rising or at least drifting sideways rather than clearly trending lower (ala 2008).

 

Figures 2 through 8 displays the S&P 500 Index with the Nasdaq HiLoMA indicator.  Click to enlarge any chart.

 

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Figure 2 – SPX with Jay’s Nasdaq HiLoMA ending 2006 (Courtesy WinWayCharts TradingExpert)

 

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Figure 3 – SPX with Jay’s Nasdaq HiLoMA ending 2008 (Courtesy WinWayCharts TradingExpert)

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Figure 4 – SPX with Jay’s Nasdaq HiLoMA ending 2010 (Courtesy WinWayCharts TradingExpert)

 

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Figure 5 – SPX with Jay’s Nasdaq HiLoMA ending 2012 (Courtesy WinWayCharts TradingExpert)

 

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Figure 6 – SPX with Jay’s Nasdaq HiLoMA ending 2014 (Courtesy WinWayCharts TradingExpert)

 

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Figure 7 – SPX with Jay’s Nasdaq HiLoMA ending 2016 (Courtesy WinWayCharts TradingExpert)

 

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Figure 8 – SPX with Jay’s Nasdaq HiLoMA ending 2018 (Courtesy WinWayCharts TradingExpert)

 

Summary

 

The stock market is in a favorable seasonal period and is oversold.  As long as the former remains true, react accordingly (with proper risk controls in place of course).

 

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.

NASDAQ dive

Working on some slides for a seminar last week, it was apparent that breadth indicators on the NASDAQ signaled a divergence from the price action of the market.
Looking specifically at AD Ind and HI/LO, although other breadth measures told the same tale.

The AD indicator explained

 

The Advance/Decline Indicator is an exponentially weighted average of the net advancing versus declining issues. With this indicator, the direction of the trend is of importance and not the actual value of the indicator. When the indicator is increasing, advances are outweighing declines, and when it is decreasing, there are more declining is­sues than advancing.
The  Advance/Decline Indicator is a breadth indicator very similar to the Advance/Decline Line.  However, this indicator tends to be more sensitive and at times will signal a move earlier than the Advance/Decline Line.
The breadth was telling us something was amiss from last week. Take a look at this chart of the NASDAQ clearly a divergence was in place before the downturn.
Today’s (10-10-18) 316 point drop in the NASDAQ a 4% drop and nearly 9% drop from the high is close to the 10% corrective point and some buyers may come in over the next few days and keep the decline in check or not.
The markets are down between 6 and 10% in 5 days. Keeping good stops is a must in your portfolio to protect you from the worst of this. Using trailing stops between 7 and 10 % on stocks that are moving and protective stops 5 to 7 % below initial investment for example can easily reduce your losses in these volatile markets.