Sep 17, 2018 | educational newsletters, ETFs, gold, indicators, jay kaeppel, MACD
Most people are familiar with ADHD, manic-depressive disorder, depression and schizophrenia. But one common affliction within our trading community that gets almost no attention is WESS. That stands for “Wild-Eyed Speculation Syndrome”. And it’s more common than you think (“Hi, my name is Jay”).
The exact symptoms vary, but generally speaking they go something like this:
*A person gets up in the morning with a hankering to make a trade
*Said person then finds “some reason” to make some trade in something
*If the person happens to make money on that trade then the affliction is reinforced by virtue of IGTS (“I’ve Got the Touch Syndrome”, which is one of the occasional side effects of WESS)
*If the person loses money on the trade the side effects can vary but may include: angry outbursts, kicking oneself in the head (typically figuratively), vows to either stop the behavior or at least do it better, and so on.
*The most common side effect of WESS is a declining trading account balance (which not coincidentally is how this disorder is most commonly diagnosed).
For those suffering from WESS – with the caveat/disclosure that I am not a medical professional (although I have found that ibuprofen really clears up a lot of stuff, but I digress) – I am here to help.
If you find yourself suffering from Symptom #1 above:
The most effective step is to go back to bed until the urge passes. If this doesn’t work or is not possible (for instance, if you have one of those pesky “jobs” – you know, that 8-hour a day activity that gets in the way of your trading), repeat these two mantras as many times as necessary:
Mantra 1: “I must employ some reasonably objective, repeatable criteria to find a trade with some actual potential”
Mantra 2: “I will risk no more than 2% of my trading capital” on any WESS induced trade (and just as importantly, you must fend off the voice on the other shoulder shouting “But this is the BIG ONE!!”)
Repeat these mantras as many times as necessary to avoid betting the ranch on some random idea that you “read about on the internet, so it must be true.”
Regarding Mantra 1
There are a million and one ways to find a trade. There is no one best way. But just to give you the idea I will mention one way and highlight a current setup. IMPORTANT: That being said, and as always, I DO NOT make recommendations on this blog. The particular setup I will highlight may work out beautifully, or it may be a complete bust. So DO NOT rush out and make a trade based on this just because you read it – you know – on the internet.
The Divergence
Lots of trades get made based on “divergence”. In this case we are talking about the divergence between price and a given indicator – or even better, series of indicators. There is nothing magic about divergence, and like a lot of things, sometimes it works and sometimes it doesn’t. But the reason it is a viable consideration is that when an indicator flashes a bullish divergence versus price it alerts us to a potential – nothing more, nothing less – shift in momentum.
Let’s look at ticker GDX – an ETF that tracks an index of gold mining stocks. In Figure1 1 through 4 below we see:
*GDX price making a lower low
*A given indicator NOT confirming that new low (i.e., a positive divergence)
Figure 1 – GDX and MACD (Courtesy WinWayCharts TradingExpert)
Figure 2 – GDX and 3-day RSI (Courtesy WinWayCharts TradingExpert)
Figure 3 – GDX and TRIX (Courtesy WinWayCharts TradingExpert)
Figure 4 – GDX and William’s Ultimate Oscillator (Courtesy WinWayCharts TradingExpert)
So, do the divergences that appear in Figures 1 through 4 justify a trade? Well, here is where the aforementioned affliction comes into play.
Average Trader: “Maybe, maybe not. In either case I am not entirely sure that trying to pick a bottom in gold stocks based solely on indicator divergences is a good idea”
WESS Sufferer: “Absofreakinglutely!! Let’s do this!!”
You see the problem.
So, let’s assume that a WESS Sufferer likes what he or she sees in Figures 1 through 4. The good news is that we have met the minimum criteria for Mantra #1 above – we have employed some reasonably objective, repeatable criteria (i.e., a bullish divergence between price and a number of variable indicators) to spot a potential opportunity.
Now we must follow Mantra #2 of risking no more than 2% of my trading capital. Let’s assume our WESS Sufferer has a $25,000 trading account. So he or she can risk a maximum of $500 ($25,000 x 2%).
In Figure 5 we see a potential support area for GDX at around $16.40 a share.
Figure 5 – Ticker GDX with support at $16.40 (Courtesy WinWayCharts TradingExpert)
So, one possibility would be to buy 300 shares of GDX at $17.84 and place a stop loss order below the “line in the sand” at say $16.34 a share. So if the stop is hit, the trade would lose -$450, or -1.8% of our trading capital (17.84 – 16.34 = -1.50 x 300 shares = -$450).
Summary
Does any of the above fit in the category of “A Good Idea”. That’s the thing about trading – and most things in life for that matter – it’s all in the eye of the beholder. Remember, the above is NOT a “recommendation”, only an “example.”
The real key thing to note is that we went from being just a random WESS Sufferer to a WESS Sufferer with a Plan – one that has something other than just an “urge” to find a trade, AND (most importantly) a mechanism for limiting any damage that might be done if things don’t pan out.
And if that doesn’t work, well, there’s always ibuprofen.
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.
Aug 27, 2018 | chart patterns, educational newsletters
According to one simple technique the “Magic Number” for the S&P 500 Index is 2872.87. According to this simple technique if the S&P 550 Index closes above this number the stock market “should” continue to be bullish for at least another year.
Sounds optimistic? Well, there certainly are no “sure things” in the financial markets. Still, let’s take a closer look.
The technique I mentioned works like this:
*Closes at its highest price in the past 252 trading days
*For the 1st time in the most recent 126 trading days
*It generates a bullish signal for the next 252 trading days
In essence, we are talking about buying when the index makes a 1-year high for the 1st time in 6 months and holding for 1 year.
Figure 1 displays the most recent previous buy signal that occurred on 7/11/16. The sell date was 252 trading days later on 7/11/17.
Figure 1 – 2016 Signal (Courtesy TradingExpert)
Figure 2 displays the signal before that which occurred on 2/27/12. The sell date was 252 trading days later on 2/26/13.
Figure 3 displays all the signals since 1933.
| Buy Date |
Sell Date |
Buy Price |
Sell Price |
%+(-) |
| 5/27/33 |
4/6/34 |
9.64 |
10.95 |
+13.6 |
| 5/18/35 |
3/20/36 |
9.87 |
15.04 |
+52.4 |
| 10/6/38 |
8/9/39 |
12.82 |
11.78 |
(8.1) |
| 10/7/42 |
8/10/43 |
9.17 |
11.71 |
+27.7 |
| 6/1/44 |
4/7/45 |
12.31 |
13.84 |
+12.4 |
| 5/15/48 |
4/8/49 |
16.55 |
14.97 |
(9.5) |
| 10/5/49 |
8/23/50 |
15.78 |
18.82 |
+19.3 |
| 3/5/54 |
3/4/55 |
26.52 |
37.52 |
+41.5 |
| 8/4/58 |
8/4/59 |
47.94 |
60.61 |
+26.4 |
| 1/10/61 |
11/2/62 |
58.97 |
57.75 |
(2.1) |
| 4/15/63 |
4/15/64 |
69.09 |
80.09 |
+15.9 |
| 4/24/67 |
4/25/68 |
92.62 |
96.62 |
+4.3 |
| 4/30/68 |
6/9/69 |
97.46 |
101.2 |
+3.8 |
| 1/8/71 |
1/6/72 |
92.19 |
103.51 |
+12.3 |
| 2/7/72 |
2/8/73 |
104.54 |
113.16 |
+8.2 |
| 6/24/75 |
6/22/76 |
94.19 |
103.47 |
+9.9 |
| 8/1/78 |
7/31/79 |
100.66 |
103.81 |
+3.1 |
| 8/14/79 |
8/12/80 |
107.52 |
123.79 |
+15.1 |
| 10/8/82 |
10/6/83 |
131.05 |
170.28 |
+29.9 |
| 11/7/84 |
11/7/85 |
169.17 |
192.62 |
+13.9 |
| 10/19/88 |
10/18/89 |
276.97 |
341.76 |
+23.4 |
| 5/30/90 |
2/13/92 |
360.86 |
413.69 |
+14.6 |
| 7/30/92 |
7/29/93 |
423.92 |
450.24 |
+6.2 |
| 2/6/95 |
2/5/96 |
481.14 |
641.43 |
+33.3 |
| 9/3/03 |
9/2/04 |
1026.27 |
1118.31 |
+9.0 |
| 11/5/04 |
11/4/05 |
1166.17 |
1220.14 |
+4.6 |
| 10/13/09 |
10/13/10 |
1073.19 |
1178.1 |
+9.8 |
| 11/5/10 |
11/4/11 |
1225.85 |
1253.23 |
+2.2 |
| 2/27/12 |
2/26/13 |
1367.59 |
1496.94 |
+9.5 |
| 7/11/16 |
7/11/17 |
2137.16 |
2425.53 |
+13.5 |
Figure 3 – Previous Signals
*27 of the 30 signals (i.e., 90%) have witnessed a 12-month gain
*3 of 30 signals (i.e., 10%) have witnessed a loss
*The last “losing trade” occurred in 1961-1962
*The last 20 signals have been followed by a 12-month gain for the S&P 500
*The average of all 30 signals is +13.9%
*The average for all 27 winning trades is +16.1%
*The average of all 3 losing trades is -6.6%
*The worst losing trade was -9.5%
Believe it or not, into the early 1950’s the stock market used to be open on Saturday. So those days counted toward the 126 and 252 trading days counts. This explains why the buy and sell dates prior to 1954 were less than one calendar year apart.
It is possible to get a new signal before an existing signal reaches it’s Sell Date. In those rare cases we simply extend the holding period an additional 252 trading days. This occurred in 1961-1962, 1968-1969, 1990-1992.
Figure 4 shows that SPX is very close to generating a new signal. The most recent high close was in January at 2872.87 which was more than 126 trading days ago. A new signal will occur if SPX closes above that level.
The Good News is that this technique has a 90% accuracy rate and that one good day in the market could generated a new buy signal. The Bad News is that – as I mentioned earlier – there are no “sure things” in the market. Given that this particular method is on a 20-trade winning streak, it is understandable to think that maybe the law of averages is against it this time.
We’ll just have to wait and see what happens.
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.
Aug 8, 2018 | educational newsletters, ETFs, indexes, jay kaeppel
Investors who pay close attention to the financial markets by and large spend a fair amount of time being “perplexed.” If you take all the “news” related to the markets and combine that with all the day-to-day and week-to-week gyrations of the markets, there often seems to be no rhyme or reason for what goes on (hence the reason I generally advocate a slightly less hyper, more trend-driven approach).
But sometimes it all seems to come crystal clear. In the most recent fortnight most of the major market averages (with the Dow and S&P 500 being the primary exceptions) have touched or at least teased new highs. Facebook got crushed and the market didn’t tank. Tesla struggled mightily before bursting back into the bright sunlight – and the market didn’t tank. In fact, all kinds of things have happened and still the major U.S. averages march relentlessly higher backed by a strong economy, reasonably moderate inflation and higher, yet by no means high interest rates.
At this point, it appears “obvious” that there is no end in sight to the Great Bull Market. A number of momentum studies I have read lately seem to all confirm that the U.S. market will continue to march higher to significantly higher new highs.
And the fact that it is so “obvious” scares the $%^& out of me. Don’t misunderstand. This is not about to devolve into a hysterical “Sell Everything!” screed. The trend is bullish therefore so am I. But the “what could possibly go wrong” antennae still pop up from time to time. So here are some random views regarding all things stock market.
Figure 1 displays 4 major U.S. market averages. All are in uptrends above their respective 200-day moving averages and all are close to all-time highs. The big question is “what happens when they get there?” Do they all break through effortlessly? Or do we get a “struggle?”
(click to enlarge)
Figure 1 – The Major U.S. Averages; clearly in up trends, but… (Courtesy TradingExpert)
Figure 2 displays my own 4 market “bellwethers”, including the semiconductors (SMH), Dow Transports (TRAN), Inverse VIX ETF (ZIV) and Sotheby’s Holdings (BID). At the moment, none of these are actively “confirming” new highs and they each have a clear “line in the sand” resistance level overhead. So, for the moment they presently pose something of a minor warning sign.
While the U.S. economy and stock market appear to be hitting on all cylinders, the rest of the world is sort of “chugging along.” Figure 3 displays 4 “Geographic Groups” that I follow – The Americas, Asia/Pacific, Europe and Middle East. The good news is that each group is presently holding above it’s respective 21-month moving average. So technically, the trend is “Up.” But the bad news is that each group has some significant overhead resistance, so the current uptrend is by no means of the “rip roaring” variety.
(click to enlarge)
Figure 3 – Major Geographic Groups; Hanging onto uptrends but serious overhead resistance (Courtesy TradingExpert)
Traders have been pretty much conditioned in recent years to assume that the VIX Index – which measures volatility and by extension, “fear” – is and will remain low as the market chugs higher. And that may prove to be true. But when everything gets to “obvious” (i.e., the U.S. market is “clearly” heading higher) and things get too quiet (VIX dropped below 11% for the 1st time in 3 months) it can pay to “expect the unexpected.”
Figure 4 is from www.sentimentrader.com and displays those instances in the past when the VIX Index fell below 11% for the first time in 3 months. Historically, VIX makes some kind of an up move in the 2 to 3 months following such occurrences.
Figure 4 – VIX Index performance after VIX Index drops below 11% for 1st time in 3 months (Courtesy Sentimentrader.com)
Things may or may not play out “like usual” this time around, however, given that…
*The U.S. averages are “obviously” heading higher
*The market bellwethers are so far not confirming
*The rest of the worlds stock markets are nowhere near as strong
*VIX has a history of “spiking”, especially during the seasonally unfavorable months of August and September
…It might make sense to consider a long volatility play (NOTE: Long volatility plays using ticker VXX have a long history of not panning out as ticker VXX is essentially built to go to zero – for more information on VXX and the effects of “contango” please see www.Google.com. Long VXX trades are best considered).
One example appears in Figures 5 and 6. This trade involves:
*Buying 5 Oct VXX 31 calls @ $2.74
*Selling 4 Oct VXX 36 calls @ $1.82
The maximum risk is $642 if VXX fails to get above the breakeven price of $32.28 by October 19th. On the other hand, if something completely not “obvious” happens and volatility does in fact spike, the trade has significant upside potential.
(NOTE: As always, please remember that this is an “example” of a speculative contrarian trade, and NOT a “recommendation.” If the stock market rallies – as it “obviously” seems to want to do, this trade will likely lose money.)
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.
Jul 30, 2018 | EDS, EDS code, Stocks & Commodities Traders Tips
The WinWayCharts EDScode based on Markos Katsanos’ article in this issue, “A Technical Method For Rating Stocks,” is shown below.
Synopsis from Stocks & Commodities June 2018
I’s it possible to create a stock rating system using multiple indicators or other technical criteria? If so, how does it compare with analyst ratings? Investors around the world move billions of dollars every day on advice from Wall Street research analysts. Most retail investors do not have the time or can’t be bothered to read the full stock report and rely solely on the bottom line: the stock rating. They believe these ratings are reliable and base their investment decisions at least partly on the analyst buy/sell rating. But how reliable are those buy/sell ratings? In this article I will present a technical stock rating system based on five technical criteria and indicators, backtest it, and compare its performance to analyst ratings.
!A TECHNICAL METHOD FOR RATING STOCKS
!Author: Markos Katsanos, TASC June 2018
!Coded by: Richard Denning, 4/18/18
!www.TradersEdgeSystems.com
!INPUTS:
MAP is 63.
STIFFMAX is 7.
VFIPeriod is 130.
MASPY is 100.
MADL is 100.
SCORECRIT is 5.
W1 is 1.
W2 is 1.
W3 is 1.
W4 is 1.
W5 is 2.
!VFI FORMULA:
COEF is 0.2.
VCOEF is 2.5.
Avg is ([high]+[low]+[close])/3.
inter is ln( Avg ) - ln( Valresult( Avg, 1 ) ).
vinter is sqrt(variance(inter, 30 )).
cutoff is Coef * Vinter * [Close].
vave is Valresult(simpleavg([volume], VFIPeriod ), 1 ).
vmax is Vave * Vcoef.
vc is Min( [volume], VMax ).
mf is Avg - Valresult( Avg, 1 ).
vcp is iff(MF > Cutoff,VC,iff(MF < -Cutoff,-VC,0)).
vfitemp is Sum(VCP , VFIPeriod ) / Vave.
vfi is expavg(VFItemp, 3 ).
!STIFFNESS
ma100 is Avg.
CLMA if [close] < MA100.
STIFFNESS is countof(CLMA,MAP).
!CONDITIONS:
! MONEY FLOW:
COND1 is iff(VFI>0,1,0).
!SIMPLEAVG:
SMA is simpleavg([close],MADL).
COND2 is iff([close]>SMA,1,0).
!SIMPLEAVG DIRECTION:
COND3 is iff(SMA>valresult(SMA,4),1,0).
!STIFFNESS:
COND4 is iff(STIFFNESS<= STIFFMAX,1,0).
!MARKET DIRECTION:
SPY is TickerUDF("SPY",[close]).
COND5 is iff(EXPAVG(SPY,MASPY)>=
valresult(EXPAVG(SPY,MASPY),2),1,0).
SCORE is W1*COND1+W2*COND2+W3*COND3+
W4*COND4+W5*COND5.
buy if Score>=SCORECRIT and hasdatafor(300)>=268.
Figure 11 shows the summary results of a backtest using NASDAQ 100 stocks during a generally bullish period from April 2009 to April 2018. Figure 12 shows the backtest using the same list of NASDAQ 100 stocks during a period that had two bear markets (April 1999 to April 2009). The average results are similar except that there are fewer trades during the period that contained the two bear markets. Both backtests use a fixed 21-bar exit.
FIGURE 11: AIQ, BULL MARKET. Here are the summary results of a backtest using NASDAQ 100 stocks during a generally bullish period from April 2009 to April 2018.
FIGURE 12: AIQ, BEAR MARKET. Here are the summary results of a backtest using NASDAQ 100 stocks during a period from April 1999 to April 2009 that contained two bear markets.
Jul 13, 2018 | chart patterns, educational newsletters, ETFs, gold
This week it is the U.S. dollar and Gold taking their turns testing critical inflection points.
As you can see in Figure 1, on a seasonal basis the dollar is moving into a traditionally weaker time of year.
Figure 1 – U.S. Dollar seasonality (Courtesy Sentimentrader.com)
In Figure 2 you can see that traders have been and remain pretty optimistic. This is traditionally a bearish contrarian sign.
Figure 2 – U.S. Dollar trade sentiment (Courtesy Sentimentrader.com)
In Figure 3 we see the “line in the sand” for ticker UUP – an ETF that tracks the U.S. Dollar. Unless and until UUP punches through to the upside there is significant potential downside risk.
Figure 3 – U.S. Dollar w/resistance (Courtesy TradingExpert)
As you can see in Figure 4, on a seasonal basis the dollar is moving into a traditionally stronger time of year.
Figure 4 – Gold seasonality (Courtesy Sentimentrader.com)
In Figure 5 you can see that traders have been and remain pretty pessimistic. This is traditionally a bullish contrarian sign.
Figure 5 – Gold trader sentiment (Courtesy Sentimentrader.com)
In Figure 6 we see the “line(s) in the sand” for ticker GLD – an ETF that tracks gold bullion.
I would be hesitant about trying to “pick a bottom” as gold still looks pretty week. But if:
a) GLD does hold above the support area in Figure 6 and begins to perk up,
b) Ticker UUP fails to break out to the upside
Things could look a lot better for gold very quickly.
As usual I am not actually making any “predictions” here or calling for any particular action. I mainly just want to encourage gold and/or dollar traders to be paying close attention in the days and weeks ahead, as the potential for a major reversal in both markets appears possible.
Likewise, if no reversal does take place – and if the dollar breaks out to the upside and gold breaks down, both markets may be “off to the races.”
So dollar and gold traders – take a deep breath; focus your attention; and prepare for action…one way or the other.
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.
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