Wednesday, April 30, 2008

Is It Over Yet?

Today's selloff in the afternoon session, presumably on a negative reaction to the Fed decision, has brought out the bears again. However, a review of seasonal tendencies shows that there is a sharp selloff in the afternoon on April 30 more than 60% of the time. This selloff is usually reversed strongly on one of the strongest up days of the year - May 1. May 1 has been positive every year this decade except 2006. The weak May 1 that year portended a sharp selloff.

From a technical perspective, all systems are still long and only a move on volume below 45.93 in the Qs and 12,656 for the Dow would derail this rally. It is more likely that a short term top will be seen sometime next week. If it happens that today was the high with a sharp selloff tomorrow, then that would be particularly bearish. Otherwise, the longs have it.

Tomorrow, I will introduce a new system and review the charts of the Dow and Garmin.

Stay disciplined and you will succeed.

Sunday, April 27, 2008

Rally Still Underway

(Click To Enlarge Chart)

The rally from the low of March 17, 2008 is still underway. I am amazed at the wide range of opinions regarding the potential for this rally. They range from its nearly over with the the bear resuming almost immediately to the markets are going to soar to new highs before the summer is over. Most of these views seem to be backed up by rational arguments, but can such speculations really help us to make money in the markets? Possibly, but they should be used to help see the range of probable outcomes rather than for taking actual positions. Trading positions should be based on what the market is doing and has done instead of what we think it will do.

Presently, the rally is intact. It may end tomorrow, but for now it is still going up. A look at the chart above shows two very important facts that underscore the current weakness in this rally. One, volume is below average and average volume is falling. Two, on balance volume is not confirming. In other words, this rally does not have the institutional support to go too far. That doesn't mean that it cannot pullback and blast off, but that would not appear too likely at the moment.

From a cycles perspective, we are currently in the first half of the 9 month cycle which bottomed on January 24. The March low was not the cycle low. We should expect at least a mild correction of this rally to ensue sometime by late May to early June with a bottom most likely in late June. If that bottom is a lower low, it would be particularly bearish. If it is not a lower low, then we should expect a higher high in July or August to end the rally. If that high is a new all time high, that may or may not be all that bullish, but it most likely will not be a new all time high. I would expect the bear market to resume in full force after that late summer high.

From an Elliott wave perspective, the rally appears to be corrective, and while some are already saying it is nearly over, there are several possible paths to a late summer high.

May 1 tends to be a strong up day. So, with the above in mind, even though the trend following indicators are long, it would be prudent to begin taking profits after May 1 to May 5. While at the same time, it may not be prudent to load up on shorts at that time.

I will be posting my current view on the 9 month cycle in the near future. Later on, I will be discussing how to take profits.

Sunday, April 20, 2008

Are You Still Short?

(Click to enlarge chart)

The Dow Jones Industrial Index broke out of a large head and shoulders bottom formation on Friday. The measured height of the pattern from the bottom to the neckline is 1018.86 points. The first target is .50*1018.86+12720.56=13230.00. The second target is 1.0*1018.86+12720.56=13739.42. 12720.56 is the breakout point on the neckline as of Friday.

The 50% retracement to the October 2007 high is 12916.46, and the 62% retracement is 13218.93. Friday's high fell just short of the 50% retracement, and failed to breakout above the downtrend line from the October and December highs. The Dow also closed above resistance at the November 2007 low. 13230 is a highly probable target. 13739.42 may not be reached, but 13500 is certainly within reach. A pullback to test the neckline is a good bet.

All systems on the System Tracker are long. This rally may move in fits and starts but with so many long signals firing off, I would be surprised to see it end next week. Nevertheless, price rules over opinions. Trade the price.

May you be successful in your trading efforts this week.

Friday, April 18, 2008

VLE Long Signal & Elliott Wave

The VLE flipped back to Long today. It will go long on the open on Monday 4/21/08. The Tides remains in Neutral, and all other systems remain long.

I am a subscriber to a couple of elliott wave sites and also read some other free posts with elliott analysis. I must admit that I have spent a significant amount of time training myself to count waves, and I have become fairly adept at it. Oftentimes, I have seen the wave count that eventually revealed itself even when the professional sites did not present it. However, I can't say that it has helped me in trading to any great degree.

When you read a lot of advisory services including elliott wave sites, the analysts seem to be bi-polar - flipping from one view to another every other day, or staying with one view against the crowd for an extended period and then when there is finally no doubt that they are wrong they switch to the opposite view.

Please tell me how that is any different than the VLE System? At least with a price-based system there is no underlying bias that might keep the trader from taking the trade.

Elliott wave has its place and it is definitely valuable at certain times, but it should not be used in isolation. I think that the best use for Elliott wave analysis is to provide the trader with a framework for seeing market potentials beyond the standard pattern trading, but should be not used alone for trading. That is just an opinion.

Wednesday, April 16, 2008

Rally Back On Track

The VLE and Tides Systems flipped back to Neutral today. The Weekly Signal and Modified Donchian Trend Systems kept us in on the long side.

Most importantly, the Qs are back above the critical support level of 44.39 from the August 16, 2007 low. A measured move from yesterday's low gives a target of 48.98.

While there may be some additional consolidation, it would not be surprising to see this rally continue to the latter part of May, which may be the high of the rally.

Good entries are important to trading success, but good exits are what book the profits. Trend following systems by design tend to give back a lot of profits except on a few very strong trends, which can be a source of great frustration. One of the areas that I am investigating at the moment is how to incorporate rational targets for profit taking in a trend following system.

It is true that trends tend to last longer than anyone expects, but it is also true that trends come to an end. The question is - Does trying to stay in to catch the big move add to the rate of return over taking profits at high probability target zones?

Pullback Complete?

The pullback from the April 7 high of 46.41 in the Qs likely completed yesterday, 4/15/08, in a ABC correction at .05 below the 50% retracement of the rally from the March 17 low at 43.73. If so, a measured move from the correction low would give a target of 49.04 in as little as 3 weeks. However, I suspect that the correction from 4/7/08 may extend into a large sideways consolidation lasting 1 to 2 more weeks, afterwhich it will probably move to the above target zone.

Leading stocks are holding up quite well, but if you scan through the Nasdaq 100 and other large cap indexes you will see a large number of stocks are still in strong downtrends. In other words, this rally is probably a fake, being supported by only a few stocks.

Regardless of all of the above ruminations, the trading systems are our guide, and the current status is mixed.

Note: GRMN is down 14.3% from its breakdown point from the "Ending Diagonal Triangle" discussed previously. If short, caution is advised here as a strong countertrend rally may be on the horizon. A positive macd divergence is developing.

Tuesday, April 15, 2008

New Signals

The VLE & Tides went to short as of yesterday's close, while the Weekly Trend and Modified Donchian remain long. Although the Qs closed below last week's low, which was the low of the high week, the volume was well below average and less than Friday's volume. While price gave a sell in the intraweek system, volume did not confirm.

The Qs are approaching a 10 day closing low in the Modified Donchian system, which often provides support. Fibonacci support is at 43.74 and 43.10.

Sunday, April 13, 2008

Food For Thought

(Click To Enlarge)

The 55 day cycle seems to be on track. It is too early to tell if the current 55 day cycle marks a cycle high and a return to the bear market, but I suspect that we are in a period like June 1, 2007 where the cycle marked the mid-point of the uptrend. If so, we might be looking at another Fibonacci 34 days to complete this current rally. This would mark the rally termination at May 30, 2008.

The VLE is now on Neutral. The Tides and the VLE could go to Short on another down day on Monday. The Weekly Signals are still long as is the Modified Donchian system.

Wednesday, April 9, 2008


The decline of the last two days has the feel of a shakeout. Notice that the Qs bounced nicely off of the 50dema and are well above the 10 day closing low. The macd is positive. The only near term negative is the lack of volume on the rally, which suggests a bear market rally. Nevertheless, higher prices are likely unless the Qs fall below 43.33, so don't be too quick to dump your long positions. Bear market rallies tend to be choppy affairs. The .618 retracement of the last advance from the 3/28/08 low is 44.51. Ideally this level should hold.
One update on the System Tracker.

Tuesday, April 8, 2008

A Note On Garmin

Garmin GRMN recently completed a falling wedge. As we discussed here previously, despite the Elliot Wave practitioners' contentions to the contrary this may not be a particularly bullish sign. If GRMN does not reverse here soon, there is a significant chance of a decline to the 30 to 35 support zone. On the other hand, if it does reverse here a thrust to the February high around 73 should ensue.

Sunday, April 6, 2008

A Modified Donchian Trend Channel System

The success of the turtle traders which became legendary created a tremendous interest in trend following methods. One of the original systems used was the Donchian Channel System. As described in the Way Of The Turtle by Curtis Faith, the system uses a 20 day breakout for entries and a 10 day breakout for exits with a 25dema and 350dema trend filter. Only longs are taken when the 25dema is above the 350dema and only shorts are taken when the 25dema is below the 350dema. It also uses a 2 ATR (average true range) stop.

This system obviously worked well for the turtle traders who primarily traded commodities, but anyone who has tried to use it on stocks has quickly realized that it just doesn't seem to work as profits are often given back entirely by the time the exit signal is generated. I tried to use it several years ago and abandoned it right away for the above reason. However, in looking at it again recently, it occurred to me that a few qualifiers might improve the performance and I believe that the following Modified Donchian System will produce profits for stocks. It does take some practice and experience to implement the changes, but it is not so difficult.

Modified Donchian Trend Channel System


Enter long on the next day's open after any 20 day closing high, i.e. if a stock or market closes above the highest closing price of the previous 20 days. Use a stop loss below the previous swing low.

A 10 day or 20 day closing low is not in itself an exit signal. An exit signal will be generated under the following conditions:

Price closes below the previous 2o day closing low, or
Price make a 10 day closing low, makes a lower 10 day closing high and then makes
another 10 day closing low. This is called a 10 day swing failure.
Price makes a double top without making a 20 day closing high above the previous
20 day closing high or closing only one day above the previous 20 day closing high
and then makes a 10 day closing low with tops at least 4 weeks apart.

We will consider the benefit of adding a trailing stop at a later date.


Reverse the above for shorts, except shorts may only be taken if price closes below the 2oodema.

Given the above rules a short signal was generated on 1/4/08 with an entry of 48.41 in the Qs on 1/7/08. A double bottom was formed on 3/10/08 with a 10 day closing high exit signal on 3/18/08 with an exit of 43.51 on 3/19/08. A 20 day closing high occurred on 3/24/08 with a long entry of 44.68 on 3/25/08. The system remains long to date.

I apologize for not having a chart to illustrate the above system. I am working on it an will provide charts in the near future.

Have a good week trading.

Wednesday, April 2, 2008

Stock Breakouts

Several of the stocks mentioned in yesterday's post broke out today, buy most on weak volume. See FSLR, CRM, ZMH.

The markets have had a big run-up the last couple of days. It would be prudent to wait for a pullback here in case these break outs are fake outs.

CALM appears to have completed a sharp correction to the 50ema. New highs are possible with a target of 60.

VLE Long Signal

The VLE confirmed a long signal today. The System will go long the Qs tomorrow on the open.

Tuesday, April 1, 2008

Breakout Day

As was expected, the markets broke out today with the Qs in a new monthly uptrend by trading above the March high. Several other major indexes also broke out. Only the Dow is remaining to confirm the change in trend. Breadth was strong, but volume was only average. A sharp pullback would not be unexpected, but now that the trend has changed, the rally may last several weeks. I expect the VLE to confirm a long signal tomorrow. The Tides System will be in neutral.

I am working on inserting charts, which I will need to present the next system. Please check back this weekend for the Modified Donchian Channel System.

The following stocks look ready to breakout: MON, GDI, ACL, CRM, ZMH, MA

Other stocks of interest: GMCR, GME, PCLN, AKS, TMO, FSLR, RHT

Uptrend Confirmation

A close above yesterday's high of 44.02 on higher volume will establish the weekly price trend as up. A breakout above last week's high of 45.07 on above average volume will establish the monthly price trend as up.

The VLE and the Tides will need a couple of more days to confirm, but I expect that they will do so.

You can trade the Systems straight up or look at rational retracement targets for this rally.

The cup and handle breakout target for the Qs is 47.08. The .618 retracement of the January range is 47.70 and the .618 retracement of the entire decline from October 31 high is 49.71.

Ultimately I expect the rally will hit the 49 to 50 zone, but probably in two waves. Therefore, if long it would be prudent to take profits at the first target on a closing basis. If the Qs explode through the first target, then hold on for the higher one. If they fade out at the first target, take profits and wait for another entry.