Monday, March 31, 2008

Bullish Day

With the typical March 31 end of quarter day down, today's positive close with only mild afternoon selling is supportive of a rally continuation. Tomorrow should be up, if it isn't then expect more selling later in the week.

The VLE and Tides are still neutral and the Weekly Trend is down.

The Qs closed above last week's 43.60 breakout level.

Sunday, March 30, 2008

Another Shakeout Coming

The VLE and Tides Systems only need one more down close to confirm new short signals. Although we will track these signals as per the rules in the System Tracker, I would not recommend taking a short position on these signals.

There are times when discretion and experience need to be applied before taking a trade. A look at historical results for March 31, the end of the first quarter, shows that the market generally sells off in the afternoon, particularly in the last hour, as the funds and institutions unload their first quarter losers. Then on April 1, the market generally trades higher in the afternoon, particularly in the last hour, as funds and institutions load up for the usually anticipated summer rally. Therefore, any short signal generated on March 31 (this year) is likely to be reversed on April 1.

The best course of action then is to wait to see what happens after April 1. If we have trend system short signals, and the market closes below this current pullback low, assuming it does not exceed the March 25th high, it would confirm the short signals. On the other hand, if it closes above the March 25th high, it would confirm the current rally.

FSLR formed a double top on 3/28/08 at 237.35. The double top is against the 2/14/08 high and below the all-time high of 283. A successful test of the 50ema might provide an early entry to a double top breakout. A close above 237.35 would confirm the breakout with a first target of the all-time high at 283.

System Tracker Updated

The System Tracker Spreadsheet is now up and running with the QQQQ trading results year to date.

There were two corrections on the VLE System which resulted in slightly better results. We should have gone to neutral from short on the 1/31/08 VLE close above the 25dema exiting on 2/1/08, and to neutral from long on the 2/5/08 VLE close below the 25dema exiting on 2/6/08.

I will be presenting the next system later this week. It is a modified Donchian Trend Channel System.

In May, we will look at Bollinger Band Breakout System.

In June, we will review a Dow Theory Trend Channel System.

Friday, March 28, 2008

Shakeout Day

The VLE is still long, but the Tides are in danger of slipping back into a sell signal. Even if it did, it would not make sense to go short until the Qs successfully take out the March 17 low of 41.05.

The Qs have formed a beautiful cup and handle bottom which has an initial target of 47.08 and a second target of 49.09. See for details on this important pattern.

RIMM broke out of a head and shoulders bottom on 3/24/08. The target is the previous high around 137.

MA has broken out of large triangle which targets 260 to 275.

CRM is forming a large triangle, but the fundamentals may be weak.

FWLT has formed a double bottom base. Using IBDs shakeout plus 3 rule, a close on increasing volume above 62.67 would be a buy signal. The initial target is 95.

PCLN broke out on 2/15/08, and is now testing its 50ema.

This new uptrend is still developing, so go slow and don't commit all of your capital immediately. It would be prudent to spread out new positions over the next two to three weeks in case this rally fails.

Tuesday, March 25, 2008

VLE & Tides Signals

The VLE system confirmed the trend change today with two closes above the 25dema which has risen two consecutive days. The Tides system also confirmed the trend change today with 5 indexes above their respective 25demas which have all risen two consecutive days. However, the long term trend is still down as determined by the Cabot's Trend indexes below their 20 week smas and most indexes making new price lows this month.

Therefore, it would be prudent to enter new long positions over time to allow the new uptrend to prove itself.

I will update the system tracker link this weekend to bring all systems up to date.

Monday, March 24, 2008

Trend Change Follow-up

I need to amend the earlier commentary on the O'Neill follow-through day. Investor's Business Daily called it after Thursday's advance in the Dow which qualified by rising 2.2% on higher volume. I thought the options expiration effect might leave some doubt on the volume, but in any case today's continued follow-through confirms Thursday's signal.

Trend Change

Barring an unexpected selloff this afternoon, this mornings rally above last week's highs on all stock indexes confirms that the intermediate term trend has changed to up. I have exited all short positions and taken one new position long the QLD. The VLE and Tides systems will need one more day to confirm the trend change; however, the % change today on increasing volume meets the criteria of an O'Neil follow-through day.

While some profits were given up with the wild swings of the last 8 weeks, the market should be in the mood to trend for a while now given it has gone nowhere fast of late. Nevertheless, as always if the systems indicate a trend change we will follow the trend.

Downtrend Still In Force

The stock market certainly seems to want to go up. Yet, it hasn't. The Qs remain below the 25dema. The VLE remains below its 25dema, and 3 of the 5 Tides indexes remain below their 25demas. The Qs have yet to close above the prior week's high. While a close above last week's high of 43.60 might be enough to reverse the trend, the real resistance is the August 16, 2007 low of 44.39. The Qs will need to close above that level to prove that a strong countertrend rally (counter to the primary monthly downtrend) is underway. Even though it looks like such a move is imminent, do not jump the gun. Let the market prove itself.

Trend followers argue that we can never know when the trend is going to end, so we need to wait for a complete reversal to exit a position. It is not clear to me that this will yield the best results in the stock market. It may work for commodities, but stocks tend to advance in bursts with substantial corrections. I am looking at alternative exit strategies that may yield better results.

I will also be presenting my next intermediate term trading strategy next weekend. Until then, be patient. This market has yet to prove it is going up.

Wednesday, March 19, 2008

Bull Trap In Play?

First things first. There was a question in the comments about trading the SKF, which is the double inverse ETF of the financial sector. Trading any of the double return ETFs can be extremely risky as the correlation is not always twice the underlying. When volatility increases, the ETF can move more than double the underlying due to the derivatives used to give the double return. So, you must take this into account in your position sizing.

The SKF did bounce off of support and gapped up to a new high on Monday's open. However, it has collapsed back down to the same support level and is in danger of breaking down. At this point only a solid close above 130 would confirm a resumption of the uptrend.

The indexes had large gains today, but the downtrend has not been reversed. Only the Dow has closed above last week's high and volume declined from Monday. It is now facing resistance at its 50dema. It is too early to call a new uptrend. The Tides and the VLE are still in downtrends. If there is another solid gain next week, then a new intermediate uptrend may be in force. Until then, I am holding short, painful as it is.

Sunday, March 16, 2008

The Bottom Is In, The Bottom Is In???

What a week!! I must admit that my emotions ran the gamet from elation when the downtrend continued on Monday, to disappointment on Tuesday morning when the Fed increased its funding limits, to regained optimism on Thursday morning when the futures were down big, to frustration Thursday afternoon as the markets closed well and then back to elation again on Friday as the markets reacted negatively to the the Bear Stearns news. No, I am not happy that the economy and the markets are falling apart. I know a lot of people that are being hurt by the current circumstances. However, I do feel happy when my positions are working out as planned.

The main thing to remember though is not to trade your emotions, but to trade the markets and to trade your system. The only position I exited this week was a position in the SKF, the double inverse financials ETF. It was the only prudent thing to do as half of my profits evaporated before the open on Tuesday and there was no way to know if the markets were going to melt up for the rest of the week. When the SKF reversed off of support on Wednesday, I re-entered a smaller position in the SKF on Thursday, which appears to be working out so far.

You must have a plan so that you know how to react when unexpected events such as Tuesday's Fed announcement occur. I don't remember who said it, but, in general, when such events occur "get out quickly, and ask questions later". So, I exited the position without hesitation, and I re-entered the position when it appeared that the trend was not changed. Later on this year, I will talk about the rules that I use to deal with the unexpected. Most of the time, the best thing to do is to do nothing, but there are a couple of situations that require a response to protect your capital.

System Status

Even with all of the volatility this past week, nothing about the trend has changed. It is still down. The VLE is down. The Tides is down. The weekly price trend is down.

This past week there has been a constant barrage of people calling for the bottom. Maybe Monday was the bottom in the Qs. I just don't know. I have seen all manner of Elliot wave forecasts, some calling for new all-time highs, some calling for a large rally, and one showing an imminent crash, but one in particular really piqued my interest. It is the falling wedge pattern. In Elliot wave theory it is known as the ending diagonal triangle. It is commonly asserted that falling wedges are particularly bullish and that they retrace to the point of origin very quickly. I have found that this assertion is not that accurate. When the bullish resolution does work out, the retracement is very rapid, but the positive outcome is not such a high probability.

One example of a falling wedge was XMSR. On 1/25/06 it appeared that XMSR had completed a 5th wave down with an ending diagonal triangle and a rally was imminent. The stock collapsed and did not bottom until July 2006.

On the bearish side, there is the rising wedge. AKS appeared to have completed a rising wedge on 4/13/07. From there it exploded upward and has since doubled in price.

While the Qs appear to forming a falling wedge, it should not be assumed that the outcome is bullish. And when it isn't bullish, it can be very bearish.

Trading patterns can be tricky business and requires a different approach than trend following. Pattern trading can yield positive results, but a different approach to the entries and exits and risk management must be used.

So, since the market is down on all counts, we remain short until it proves otherwise.

Wednesday, March 12, 2008

Fed Squeeze

The markets rallied strongly yesterday, presumably on the Fed announcement that it is increasing the amount of liquidity available to the TAF, but has anything changed besides giving up some of the unrealized profit in the current short position? The answer is no. The VLE did not rise 4%. The Tides are still bearish. The markets are still below last week's highs.

One media source reported that this was the largest market rally since March 2003, and by implication, that it is the start of a new bull market. However, for the Dow 30, at least, this is not true. On July 5, 2002 the Dow soared 3.58% closing the day at 9379.50. The volume was lighter, but that may have been due to the holiday. In any case, the Dow went a little higher the next day only to reverse at the 25dema and eventually closed at 7702.34 on July 23, 2002 down 17.88%. I am not saying that this will happen again, but rather traders cannot assume that Monday was the bottom. There is still a lot of work to do to confirm a new rally.

I personally think these government interventions when the markets are closed are extremely manipulative and dangerous. While it is certainly true that large and fast swings can occur when the markets are open, such announcements by government officials pre-market are designed to create panic buying which is counter to free-market principles. An announcement during market hours would have possibly allowed the shorts to exit in a more orderly fashion. However, it should be kept in mind that these interventions rarely are the real catalyst to change the market trend that they are believed to be. Just look at the graph at the top of the front page of IBD today. There is no correlation between Fed action and subsequent market movement.

As far as the three systems presented here this year to date, all are still on a sell. The huge short covering rally yesterday probably had more to do with the fact that the McClellan Oscillator was at -215.28, a level from which many rallies have begun, but not every such rally succeeds. It will take several days to prove the direction one way or the other.

Sunday, March 9, 2008

Week In Review

As the markets finished in the red for the week, there has been a great deal of speculation about a successful test of the January lows. While that is certainly a possibility, the trend is most definitely down and we will stay with the trend until it isn't.

Some analysts have noted that sentiment has become very bearish, even more so than at the 2002 lows by some measures, but one should be extremely cautious in using such evidence to justify taking a long position at this time. Cherry picking sentiment surveys to rationalize a contrary stance can get you in trouble. We must look at the entire picture.

A number of breadth indicators have only just turned down again including advance/decline lines, McClellan Summation index, and the 5ma of new highs - new lows among others. The volatility indexes have only just turned up from the February consolidation after reversing off of the 20 period 2.0SD Bollinger Band. The Investors Intelligence survey is only a little bearish, even though the Bull/Bear spread is bullish. The 10ma of the total put/call ratio is not near its past highs of 1.30 at market bottoms. Finally, stocks are not as oversold as measured by the 5 period RSI being below 5% as they were in January. The initial January thrust down had 850 out of 2857 Russell 3000 stocks below 5% versus the current reading of 552 on March 6.

The conclusion is that while sentiment has definitely become bearish, there is potentially a great deal of room for additional downside before all measures of sentiment become bearish. Therefore, one should not trade against the trend at this time. Either be short or stay out until there are valid long signals. As an additional note, Investors Business Daily called the market in correction again on Friday March 7. While it is possible that a reversal could happen two days later, I would not trade against IBD.

Tuesday, March 4, 2008

Short Entry Followup

We went short today on both the VLA System (hereafter called the VLE for short) and Cabot's Tides System (hereafter called the Tides for short) in the QQQQs at 42.41. Of course, as expected, the markets rallied off the late afternoon low to finish nearly flat on the day. I would not make too much of this as it is too early too anticipate a bottom, and we are not in the business of anticipating anything here, just following the market.

However, if the markets rally past the late February highs or rally for more than 3 to 5 days, a move to new rally highs would be likely. Therefore, it would be prudent to exit the Qs on any solid close above 44.53 regardless of the system status. This is how markets wear out otherwise disciplined traders. Just when they throw in the towel and start trying to find something else that works the market goes on a multi-month tear leaving the frustrated trader sitting in the dust. So no matter how many times we get whipsawed, we will keep on following the trading signals.

Note that the Monthly Price Bar trend is down and the weekly signal is on a sell. Only a close on volume with range expansion above last week's high of 44.53 will change this.

Monday, March 3, 2008

New Short Signals

Today the VLE and the Cabot's Tides confirmed the downtrend as the 25demas for all were down 2 consecutive days. We will go short on both systems tomorrow on the open. However, don't be surprised to see a rally. Fakeouts have been the norm for the last 4 weeks. Unless there is a montser rally tomorrow, it would take at least 3 days and probably 4 or 5 to reverse these signals, so don't be too concerned about a rally unless the Qs take out 44.53 convincingly.

Sunday, March 2, 2008

Following The Trend - Trading the Price

"Trading is simple, but it is not easy." John Carter, in Mastering The Trade.

The above statement is perhaps the greatest truth that can be made about trading, but why is it not easy? The answer is plainly that we do not believe what we see. We are inundated with more information than we can process by various financial news media, financial advisers, websites and blogs. We don't trust our own perceptions. As a beginning trader one certainly should not trust one's own views. A mentor is needed. Unfortunately, finding the right mentor or trading information is extremely difficult. A review of Mark Hulbert's Hulbert's Financial Digest shows why this is true. Out of hundreds of advisory newsletters, only a small fraction consistently produce profitable results. A trader could spend years bouncing around from advisor to advisor hopelessly trying to find a winner. However, there is a better way, and that is to take responsibility for one's own trading decisions by learning to trade for oneself.

In 2002, after substantial losses in the tech meltdown, I decided that I would learn to trade for myself. Since I didn't know who to believe, the only course of action that seemed reasonable at the time was to test all the trading methods and approaches that I could find. It was readily apparent to me that while paper trading does yield some insight, and I advise that everyone backtest and paper trade a new method, ultimately it does not demonstrate the value of the method. The trader must put money on the line. I did this over and over again until the winning strategies began to emerge. Fortunately, I realized the value of risk management, and although I continued to lose money in the process, my losses were relatively small.

What I found truly amazed me. The best strategies and methods are the ones that are the simplest. They are the ones that are the most robust. For the intellectually oriented individual, the desire to get ahead of the crowd by devising more and more complex systems can be tempting. Yet, the results just do not prove this out in my opinion and experience.

So, how simple can it be? Well, quite simple.

The method for this month is Trading the Price. Every method boils down to the following three steps:

1. Determine the trend.
2. Plan entries and exits.
3. Execute the plan.

For the stock markets, we will determine the trend by looking at the monthly prices. If the market is trading below the low of the most recent swing high month, then the trend is down. If it is trading above the high of the most recent monthly swing low, then the trend is up.

One can wait for the end of month close to confirm a change in trend, or use one of the following:

1. If the market has a daily close above the high of the most recent monthly swing low on
above average volume ( at least 30% above the 50 day average ) and the price gain is
at least 1% and preferably 1.7%, the trend has changed from down to up.
2. If the market has a weekly close above the high of the most recent monthly swing low
on an increase in volume from the prior week, the trend has changed from down to up.

Reverse for a change from up to down. The same principle applies to the weekly trend using daily bars.

When the trend changes, we can take a position immediately or wait for a confirmation. The confirmation can be a continuation day on increasing volume and expanding range or a retest followed by a renewal of the new trend whether using the daily or weekly bars. Subsequent entries and exits should be made using the weekly trend.

Using the above approach, we can examine the QQQQs from November to see the results and the current state of the market.

On 11/9/07 the Qs closed below the October low with a loss of -3.34% and well above average volume. This indicated that a change in trend had occurred. Since the decline from the high had been substantial, it would have been prudent to wait for a retracement and a new weekly sell signal to take a position. The Qs rallied but still closed the month below the October low, confirming the change in trend.

On 12/17/07 the Qs closed below the low of the week ending 12/14/07, but volume was well below average. Therefore it would have been prudent to wait for a weekly close to confirm the signal. On 12/21/07 the Qs closed above the low of the week ending 12/14/07, so the signal was not confirmed. On 1/2/08 the Qs closed below the lows of the weeks ending 12/14/07 and 12/28/07. Although volume was only average, the fact that the high of the week ending 12/28/07 was a lower swing high was sufficient to confirm the signal. Therefore, it would have been prudent to go short on 1/3/08 at 50.40, which amazingly was the same as the entry from the VLA System. The signal was again confirmed on the weekly close of 1/4/08, so one could have also gone short on the close of 1/4/08 at 48.41 or the open of 1/7/08 at 48.40.

Since that point, there has not been a single daily or weekly close above the high of the swing low week of 1/25/08 at 45.87 indicating significant weakness. The trade remains open and short from 50.40.

The weekly swing high from the 1/23/08 low occurred on 2/1/08 at 45.88. The low of the week was 43.57. There was a failed continuation signal on 2/6/08. The week failed to close below 43.57. However, on 2/29/08 the Qs closed below 43.57 for the day and week on above average daily volume and increasing weekly volume confirming a continuation short signal.

At this point only a high-volume daily close above 45.88 or a weekly close above 45.88 on increasing weekly volume would negate this signal. Although a close above 44.53, last week's high, would be enough to exit for a stop loss. One note of caution here is that the only other indexes to confirm the above signal are the Nasdaq Composite and the SOX (The SMH did not). Therefore, before adding to an existing short signal or taking a new short position, it would be prudent to wait for continuation in the other indexes, particularly the SP-500, DJ-30 and Russell 2000. This fits with the close calls in the VLA and Cabot's Tides systems.

From a seasonal perspective, March 1 is typically positive. So it may be Tuesday or Wednesday before the markets continue downward. Given this, a lower close on Monday would be particularly bearish.

I have tried to present this analysis in as much detail as possible so that the decision making process can be clear. I am sure that a chart or two would be helpful. I hope the reader will bear with me until I learn how to insert charts and spreadsheets.

You can see from the above that there is no evaluation of chart patterns, moving averages, breadth, sentiment, fundamentals, or cycles required to read the price trend. Just an understanding of how to interpret the monthly and weekly swing highs and lows with a bias toward trading with the monthly trend.