We will exit the QQQQ long position on the open Monday as the VLE closed down today more than 4% from its recent swing high and closed below its 25dema. It will require one more day to confirm a new short signal as the 25dema has only declined one day. This applies to the Cabots Tides system as well.
It can be frustrating trading in a month like February for trend following system traders, yet consider how difficult January may have been for those who were trying to buy the bottom. It is probably true that those able to buy the swing lows and sell the swing highs in February made money but this is not where the big money is made in my opinion.
It looks like one more new low for the Qs before a substantial rally begins. However, the best course of action is to wait for a new buy signal before taking a position.
This weekend I will introduce a very simple but effective system based on closing prices that requires very little time to implement. I will recap the status of the system year to date.
The primary lesson to learn from February is not to be discouraged with losses. They are just part of this business.
Friday, February 29, 2008
Wednesday, February 27, 2008
Long & Neutral
Today we exited the Cabot Tides short position on the open at 43.77 for a gain of 14.6%. This is an excellent gain in just less than 8 weeks with an ARR of 95.1%. Not bad for a one trade.
For the VLA system we went long the QQQQ at 43.77. It is interesting to note the number of people calling for a 5th wave breakdown in the Nasdaq 100 based on the formation of a triangle. What the triangle is telling us is that it could be a 4th wave with a new low to follow, or it could be a b wave with new bear market rally highs to follow in wave c. Price trumps pattern - always. Breadth informs our interpretation of pattern. At the present time the Nasdaq summation index is rising, and there are other breadth indicators that are positive. Therefore, it would be risky to trade against price for a reversal here. This is where the market prognosticators mislead the inexperienced trader into taking high risk trades.
Regardless of which system you trade, discipline is the key. Discipline requires the willingness to take losses for the possibility of greater future gains. Hope and fear must be shattered on the altar of discipline.
For the VLA system we went long the QQQQ at 43.77. It is interesting to note the number of people calling for a 5th wave breakdown in the Nasdaq 100 based on the formation of a triangle. What the triangle is telling us is that it could be a 4th wave with a new low to follow, or it could be a b wave with new bear market rally highs to follow in wave c. Price trumps pattern - always. Breadth informs our interpretation of pattern. At the present time the Nasdaq summation index is rising, and there are other breadth indicators that are positive. Therefore, it would be risky to trade against price for a reversal here. This is where the market prognosticators mislead the inexperienced trader into taking high risk trades.
Regardless of which system you trade, discipline is the key. Discipline requires the willingness to take losses for the possibility of greater future gains. Hope and fear must be shattered on the altar of discipline.
Tuesday, February 26, 2008
Two New Signals
The VLE closed above the 25dema and the 25dema has advanced two consecutive days giving us a buy signal. We will go long on the open with the VLA System.
The Cabot Tides System issued a short exit signal today as 3 of the 5 indexes closed above their respective 25demas and the 25demas have advance two days in a row. Therefore, we will exit the short position of the Cabot Tides System tomorrow on the open.
The monthly trend is still down and this rally looks like a bear market upward correction. It may be choppy, so be prepared.
Later on we will examine filters that can be used to reduce whipsaws. After a strong start to the year in January with our short signals, we have been chopped up on the VLE signals.
The Cabot Tides System issued a short exit signal today as 3 of the 5 indexes closed above their respective 25demas and the 25demas have advance two days in a row. Therefore, we will exit the short position of the Cabot Tides System tomorrow on the open.
The monthly trend is still down and this rally looks like a bear market upward correction. It may be choppy, so be prepared.
Later on we will examine filters that can be used to reduce whipsaws. After a strong start to the year in January with our short signals, we have been chopped up on the VLE signals.
Friday, February 22, 2008
Potential Short
If the VLE closes lower today, a new short signal will likely be generated. One note of caution though. The signal is coming at the apparent completion of a triangle. From Elliott Wave Theory we know that this means that the forthcoming decline is probably the end of the impulse wave down from the 10/31/07 high. Therefore, one should not expect the decline to be persistent. If there are multiple gaps down on very increasing volume, it is possible that this is a 3rd wave and the decline will be persistent. The point being that any significant reversal on volume should be respected.
Tuesday, February 19, 2008
No Change
Currently, the VLE is still in Neutral. To confirm a signal it must now close above the 25dema with the 25dema rising for two consecutive days or it must close below 2062.49 to confirm a short signal.
It is of interest to note that the QQQQ has yet to even approach it's 25dema. Later on we will examine whether adding a filter for the QQQQ to close above or below its 25dema to confirm the VLE signal.
The Cabot Tides system is still on a short signal as are most intermediate term systems. Many have been anticipating a change in trend. IBD even called a follow-through day last week. However, the recent distribution days are calling it into question.
It appears that most major markets are working triangle consolidations that most likely will resolve to the downside. If they are indeed triangles, we know from Elliott Wave Theory that the following wave should be the last in the series, so any intermediate term buy signal thereafter should not be ignored.
It is of interest to note that the QQQQ has yet to even approach it's 25dema. Later on we will examine whether adding a filter for the QQQQ to close above or below its 25dema to confirm the VLE signal.
The Cabot Tides system is still on a short signal as are most intermediate term systems. Many have been anticipating a change in trend. IBD even called a follow-through day last week. However, the recent distribution days are calling it into question.
It appears that most major markets are working triangle consolidations that most likely will resolve to the downside. If they are indeed triangles, we know from Elliott Wave Theory that the following wave should be the last in the series, so any intermediate term buy signal thereafter should not be ignored.
Wednesday, February 13, 2008
Short Exit Follow-up
Exited the recent short signal on the open at 44.39 for a loss of 4.82%. This brings the total return for this system year to date to -3.11%. Before you decide that this is unacceptable, you must realize that any trend following system is going to have a drawdown from time to time before the next major trend is established which may change these results for the better.
Exit Short On VLA System
The VLE gave a neutral signal yesterday by closing above its 25dema, but not 4% above its intraday swing low of 2/7/08. The 25dema is also flat. The earliest that a new long signal could be generated is tomorrow if the 25dema rises the next two days and closes above 2140.87.
For those who did not exit the previous long signal using the opening gap stop approach, the course of action is to remain long until the next long neutral or short signal.
For those who went short on the open on 2/7/08, the proper action is to exit short on the open today, or to use the reverse procedure from 2/7/08. In this case you would wait for the first 15 to 30 min to see if a top is put in and then place a stop loss order above that level. However, with the positive news from AMAT and the better than expected retail sales report this morning the opening gap is not likely to be filled.
The Cabot Tides system remains short.
For those who did not exit the previous long signal using the opening gap stop approach, the course of action is to remain long until the next long neutral or short signal.
For those who went short on the open on 2/7/08, the proper action is to exit short on the open today, or to use the reverse procedure from 2/7/08. In this case you would wait for the first 15 to 30 min to see if a top is put in and then place a stop loss order above that level. However, with the positive news from AMAT and the better than expected retail sales report this morning the opening gap is not likely to be filled.
The Cabot Tides system remains short.
Friday, February 8, 2008
Whipsaw Continued
Following the VLA Sysyem, we exited the long position from 45.58 at 42.35 for a loss of 7.1%. Ouch! However, for those able to do so waiting for the early morning low and placing a stop around 42.05 would have allowed you to stay in the position with the chance that it will reverse again and go long or allow for an exit with a lesser loss.
Following the system one would have entered short at 42.35 at the open.
Again, this kind of action is what keeps most traders from following a system. However, the discipline to take losses is what leads to future profits.
I am truly amazed at the amount of excellent material that is available in trading blogs. I can only hope that with experience I will be able to produce that level of work. However, I am also committed to keeping the commentary to a minimum while simply providing trading methods information. Much market commentary is just opinion and confuses the view of things.
Currently, Elliott Wave International is calling for wave 3 of (3) down. If this happens, we will necessarily be short per the systems given. If it doesn't, we won't be holding onto our shorts all the way back to the top waiting for the market to go down to prove us right. It's fine to offer the possibility to give one a framework of potentialities for market movement, but trading should be based on the price action itself. What the understanding of potential outcomes can do is temper one's appetite for risk, i.e. don't bet the farm on a long signal when there is a crash potential.
Relax and follow the trend.
Following the system one would have entered short at 42.35 at the open.
Again, this kind of action is what keeps most traders from following a system. However, the discipline to take losses is what leads to future profits.
I am truly amazed at the amount of excellent material that is available in trading blogs. I can only hope that with experience I will be able to produce that level of work. However, I am also committed to keeping the commentary to a minimum while simply providing trading methods information. Much market commentary is just opinion and confuses the view of things.
Currently, Elliott Wave International is calling for wave 3 of (3) down. If this happens, we will necessarily be short per the systems given. If it doesn't, we won't be holding onto our shorts all the way back to the top waiting for the market to go down to prove us right. It's fine to offer the possibility to give one a framework of potentialities for market movement, but trading should be based on the price action itself. What the understanding of potential outcomes can do is temper one's appetite for risk, i.e. don't bet the farm on a long signal when there is a crash potential.
Relax and follow the trend.
Wednesday, February 6, 2008
Whipsaw
Today we got a VLE sell signal. Tomorrow we will exit the long position for a loss and go short on the open. I suspect this will lead to another loss, but the point is that we do not know. Is this the beginning of a crash, or just a retest of the January low. We do not know. I could present valid arguments for either case, but the fact is that - we just do not know.
For those who have trading experience there is another way to deal with the expected gap down opening in the morning due to the Cisco disappointment. If the QQQQ opens near or below 42, it would most likely bounce after testing the January 41.61 low. After the test one could enter a stop loss just below the morning low. If it holds the QQQQ may run back up to the recent swing high. One could hold to see if a new buy signal is generated. A third approach is to wait to see if the gap is filled at 42.81+ to exit, thereby reducing the loss.
However, what we are doing here is demonstrating that following the system parameters requires the least decision making and trading finesse, while ultimately leading to profits if discipline is maintained.
The Cabot System has remained on a sell.
Remember that you are responsible for your trading decisions.
I am working on adding a sidebar with a spreadsheet to track each system presented.
For those who have trading experience there is another way to deal with the expected gap down opening in the morning due to the Cisco disappointment. If the QQQQ opens near or below 42, it would most likely bounce after testing the January 41.61 low. After the test one could enter a stop loss just below the morning low. If it holds the QQQQ may run back up to the recent swing high. One could hold to see if a new buy signal is generated. A third approach is to wait to see if the gap is filled at 42.81+ to exit, thereby reducing the loss.
However, what we are doing here is demonstrating that following the system parameters requires the least decision making and trading finesse, while ultimately leading to profits if discipline is maintained.
The Cabot System has remained on a sell.
Remember that you are responsible for your trading decisions.
I am working on adding a sidebar with a spreadsheet to track each system presented.
Tuesday, February 5, 2008
Discipline
This is the time that discipline must be exercised. Perhaps nothing is more frustrating to the inexperienced trader than getting whipsawed out of a profitable position. However, as I said in the last post, this is the price to be paid to catch the next big trend or to be able to stay in a strong trend. This is not the time to abandon a good trading system, but rather to accept a few small losses while waiting patiently for the trend to reassert itself.
The VLE closed just shy of 4% below the 2/1/08 swing high and the 25dema has only fallen one day. Therefore, we will maintain the long position until a sell signal is generated, which very well could be tomorrow if the VLE closes lower.
The Cabot System remains short the QQQQ from 51.27.
Discipline - Discipline - Discpline.
The VLE closed just shy of 4% below the 2/1/08 swing high and the 25dema has only fallen one day. Therefore, we will maintain the long position until a sell signal is generated, which very well could be tomorrow if the VLE closes lower.
The Cabot System remains short the QQQQ from 51.27.
Discipline - Discipline - Discpline.
Monday, February 4, 2008
VLA Exit Signal For Profit
We exited the QQQQ at the open today at 45.58 for a profit of 9.56% from the 50.40 short entry on 1/3/08. Not bad for one month. Of course, we gave up some profit from the low, but this is the price that must be paid if we want to capture as much of the longer term trend as possible. We also went long the QQQQ at the open at 45.58 with the VLA System Buy Signal from 2/1/08. Anyone trading the system must be prepared for 2 or 3 whipsaws during this trend consolidation or basing period before the next trend is established. This is the price to be paid for not knowing. We may want to believe that we know based on this or that analysis whether it be elliott wave, chart patterns, sentiment, cycles, etc., but in the end we really do not know.
Please keep in mind that this exercise is for demonstration purposes here. I am not recommending the purchase or short sale of the QQQQ. Each trader must take responsibility for and make his own trading decisions.
Interestingly, the Cabot's Market Timing System presented yesterday, 2/3/08, has not given a short sale exit signal. The reason it did not was that even though more than 3 of the system indexes closed at or above their 25demas, the 25demas have not risen two consecutive days to confirm the signal. This may happen, but it hasn't yet. Even if it did, it would not be a signal to go long due to the long term trend being down based on the system parameters.
Please keep in mind that this exercise is for demonstration purposes here. I am not recommending the purchase or short sale of the QQQQ. Each trader must take responsibility for and make his own trading decisions.
Interestingly, the Cabot's Market Timing System presented yesterday, 2/3/08, has not given a short sale exit signal. The reason it did not was that even though more than 3 of the system indexes closed at or above their 25demas, the 25demas have not risen two consecutive days to confirm the signal. This may happen, but it hasn't yet. Even if it did, it would not be a signal to go long due to the long term trend being down based on the system parameters.
Sunday, February 3, 2008
Cabot's Market Timing System
This month I would like to introduce a market timing system that is used by the Cabot Heritage Corporation. The details are available for free on their website at www.cabot.net. The system is similar in style to the VLA System already presented previously, but uses additional indexes to determine the market trend. I first learned about the Cabot market timing system from the Hulbert Financial Digest. The HFD has ranked Cabot highly in recent years, and their China Timer was the number one performer in 2007 according to a post on Marketwatch.
The system consists of four components: the long term trend, the intermediate trend, the two-second indicator and the Master Sentiment gauge. The Master Sentiment gauge is an auxiliary tool only available to subscribers so we will not be using it here. Later, I may incorporate another sentiment gauge.
The Long Term Trend
The long term trend is determined by the Cabot Trend Lines. These are 20 week and 39 week moving averages of the Merrill Lynch 100 Technology Index and the S&P 500 Index. (It is not stated, but I am assuming that the moving averages are simple moving averages.) If both of the these indices are trading above the lower of the moving averages, then the long term trend is down. Otherwise, it is up. I would require that, at a minimum, the indexes close the week above the lower moving average to give a long signal.
The Intermediate Trend
The intermediate trend is determined by the Cabot Tides. These are the 25 day and 5o day moving averages of five indexes. ( It is not stated, but I am using 25 day and 50 day exponential moving averages here.) The five indexes are the S&P 500, NYSE Composite, Nasdaq Composite, S&P 600 Small Cap and the Merrill Lynch 100 Technology Index. If at least three of these indexes is advancing then the market is considered to be up. To be advancing, the index must be trading above the lower of the two moving averages and that moving average must itself have advanced for at least two consecutive days.
Two-Second Indicator
This is a short term indicator used to help identify market tops. If the number of NYSE new lows is greater than 40 ( although not mentioned now, in the past it was stated that the requirement was for new lows to be greater than 40 for 5 days ) as the market is making new highs, it can be an indication of a market top. If the market is more that 5 days off of its high, then ignore this indicator.
The System
We will use the system as follows:
Long
After a market neutral or sell signal, we will go long the QQQQ on an intermediate term buy signal if the long term trend is up.
Short
After a market neutral or buy signal, we will go short the QQQQ on an intermediate term sell signal if the the long term trend is down.
Neutral
We will exit long positions and go to cash on an intermediate term sell signal if the long term trend is up. We will exit short positions and go to cash on an intermediate term buy signal if the long term trend is down.
Current Status
The S&P 500 closed the week below its 39 week sma on 12/31/07 indicating the long term trend had turned down. The MLO (Merrill Lynch Tech Index) closed below its 39 week sma the following week. Presently, both indexes remain well below their 39 week smas indicating that the long term trend remains down regardless of the intermediate term trend. Looking back at 2006, the MLO closed above its lower 20 week sma on 8/16/06 confirming the long term trend has turned up. This was very close to the time that Investor's Business Daily confirmed a market follow-through day. On 12/31/07 more than three of the Cabot's Tides Indexes were below the lower of the 25dema and 50dema. Therefore, the system went short on 1/2/08 at 51.27. This is congruent with the VLA System. Presently, four of the five Cabot's Tides Indexes are above their lower 25demas. However, one more day will be needed for the moving averages to advance two consecutive days. If this occurs, the system will exit and go to cash on Tuesday at the open, and wait for either the long term trend to turn up or a renewed sell signal.
While I appreciate the desire to predict market outcomes based on patterns and cycles, the following passage from "What Matters Most Is Profit" by Welles Wilder illustrates how we should approach the markets. Unfortunately, I have misplaced my copy of the book, so I will paraphrase.
A father is sitting in front of his computer monitor showing his young daughter how a "special" indicator is saying the market will be going down. He continues to get frustrated as the market moves higher and higher. He tells his daughter, "Just wait it going to go down any minute now". She replies, "But daddy, it looks like its going up to me".
The point is that regardless of our opinions, predictions and expectations, we must follow the markets lead. We can do this by following price, breadth and volume. Our goal is to make money in the markets, not to inflate our egos by being right with our predictions.
It is my hope that the ideas presented here will assist the reader in becoming a profitable trader and any constructive comments toward that end will be much appreciated.
The system consists of four components: the long term trend, the intermediate trend, the two-second indicator and the Master Sentiment gauge. The Master Sentiment gauge is an auxiliary tool only available to subscribers so we will not be using it here. Later, I may incorporate another sentiment gauge.
The Long Term Trend
The long term trend is determined by the Cabot Trend Lines. These are 20 week and 39 week moving averages of the Merrill Lynch 100 Technology Index and the S&P 500 Index. (It is not stated, but I am assuming that the moving averages are simple moving averages.) If both of the these indices are trading above the lower of the moving averages, then the long term trend is down. Otherwise, it is up. I would require that, at a minimum, the indexes close the week above the lower moving average to give a long signal.
The Intermediate Trend
The intermediate trend is determined by the Cabot Tides. These are the 25 day and 5o day moving averages of five indexes. ( It is not stated, but I am using 25 day and 50 day exponential moving averages here.) The five indexes are the S&P 500, NYSE Composite, Nasdaq Composite, S&P 600 Small Cap and the Merrill Lynch 100 Technology Index. If at least three of these indexes is advancing then the market is considered to be up. To be advancing, the index must be trading above the lower of the two moving averages and that moving average must itself have advanced for at least two consecutive days.
Two-Second Indicator
This is a short term indicator used to help identify market tops. If the number of NYSE new lows is greater than 40 ( although not mentioned now, in the past it was stated that the requirement was for new lows to be greater than 40 for 5 days ) as the market is making new highs, it can be an indication of a market top. If the market is more that 5 days off of its high, then ignore this indicator.
The System
We will use the system as follows:
Long
After a market neutral or sell signal, we will go long the QQQQ on an intermediate term buy signal if the long term trend is up.
Short
After a market neutral or buy signal, we will go short the QQQQ on an intermediate term sell signal if the the long term trend is down.
Neutral
We will exit long positions and go to cash on an intermediate term sell signal if the long term trend is up. We will exit short positions and go to cash on an intermediate term buy signal if the long term trend is down.
Current Status
The S&P 500 closed the week below its 39 week sma on 12/31/07 indicating the long term trend had turned down. The MLO (Merrill Lynch Tech Index) closed below its 39 week sma the following week. Presently, both indexes remain well below their 39 week smas indicating that the long term trend remains down regardless of the intermediate term trend. Looking back at 2006, the MLO closed above its lower 20 week sma on 8/16/06 confirming the long term trend has turned up. This was very close to the time that Investor's Business Daily confirmed a market follow-through day. On 12/31/07 more than three of the Cabot's Tides Indexes were below the lower of the 25dema and 50dema. Therefore, the system went short on 1/2/08 at 51.27. This is congruent with the VLA System. Presently, four of the five Cabot's Tides Indexes are above their lower 25demas. However, one more day will be needed for the moving averages to advance two consecutive days. If this occurs, the system will exit and go to cash on Tuesday at the open, and wait for either the long term trend to turn up or a renewed sell signal.
While I appreciate the desire to predict market outcomes based on patterns and cycles, the following passage from "What Matters Most Is Profit" by Welles Wilder illustrates how we should approach the markets. Unfortunately, I have misplaced my copy of the book, so I will paraphrase.
A father is sitting in front of his computer monitor showing his young daughter how a "special" indicator is saying the market will be going down. He continues to get frustrated as the market moves higher and higher. He tells his daughter, "Just wait it going to go down any minute now". She replies, "But daddy, it looks like its going up to me".
The point is that regardless of our opinions, predictions and expectations, we must follow the markets lead. We can do this by following price, breadth and volume. Our goal is to make money in the markets, not to inflate our egos by being right with our predictions.
It is my hope that the ideas presented here will assist the reader in becoming a profitable trader and any constructive comments toward that end will be much appreciated.
VLA Buy Signal
The VLE closed above its 25dema and the 25dema has risen two consecutive days. It had already exceeded the 4% close from the recent low. This is a signal to exit short positions in the QQQQ and go long on Monday's open. Will this signal ultimately be profitable? Only time will tell, however, consider the savings in emotional capital spent worrying about whether this is the bottom or is this an Elliott Wave (1)(2) 1 2 setup for a crash. Personally, I was preparing for a crash, but I don't see it now. Many elliotticians are saying this is it. There are others saying that this correction was an (A)(B)(C) setting us for new bull market highs. I not sure I believe that either. Elliott wave can be very useful in providing a framework for market potentials, but one should not get locked into one's expectations. Ultimately, this will lead to a great deal of lost opportunities and frustration. If the market is going to crash, we will get a sell signal. Perhaps it will be a bit late, but so what, if the market continues higher we will already be long instead of being stopped out of a wrongway short and then debating whether we should reverse and go long.
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