The Trading Digest

Today marks the one year anniversary of our collective2.com system. When we started it on 2/28/2008, the S&P 500 opened at 1398.64.  It closed today at 1380.02 for a one year return of -1.33%. During that same time our system returned 9.1% for an outperformance of the S&P 500 by 10.43%. Not too shabby if I do say so myself. Obviously the path has not been straight up and unfortunately we had quite a few subscribers join near the highs (Oct), only to leave during the lows (Jan), but for the ones who have stuck with it, they have handily outperformed the S&P 500 placing orders once a day, without day trading, without using extreme margin and without and risk of a complete account blowup.

- John

As Robert guessed, the lower chart below was DRYS.  It was at ~77 at the time of the posting and this was in IBD tonight:

10 The Greek dry-bulk carrier said profit jumped more than fivefold to $4.50 a share ex items, beating views by 46 cents. Revenue almost tripled to $233.4 mil, above views. After a Nov. to mid-Jan. plunge, shipping firms have been rebounding as several long-term contracts hit the market (NYSE:BHP - News). DryShips (NasdaqGS:DRYS - News) expects to have 17% more fleet operating days in ‘08. Its shares rose 7% after hours.

Yahoo is showing it trading @ ~91+ right now.   Fortunately, I closed my last DRYS short at the close on 2/6 so I avoided this runup.  Based on these strong earnings (I’m assuming guidance was strong), I don’t think it would be an attractive short for awhile.

- John

One of these charts I’m considering for a long.  The other I have played on the short side and am considering another short.  Which is which?

- John

Those are some big ass bars to work with huh?

Dave

Teenie weenie though

Oh wait we have to like give the whole trade. Phooey.

Ok faithful readers. Do we buy this? How? What trade size? Do we set a stop? Are we adding to a portfolio full of holdings? or maybe one bursting with cash? Does that affect our decision process?

Have a Great Night!

Dave Johnson

No trigger but maybe you can be ready next time we get it.

I wanted to make a quick clarification of the 4 Red Candle System I mentioned last night. The 4 red candles all need to be a down days. Meaning each candle’s close is lower than the previous close. So although you can have a red candle on an up day (close lower than open but close higher than previous close), that would not fit the criteria for this system.

Happy Trading!

Dave Johnson

Here’s my amazing stat of the week.  I ran test where the first day of each month I buy the S&P 500 and wait for the end of a month where the close is higher than my purchase price before selling.  I only hold one position at a time.  Obviously, 99% of the trades are profitable (since I won’t exit until it’s profitable).  What’s interesting though, is to look at the periods where the holding time was the longest (ie the longest time the S&P 500 had between taking out a previous month’s open price.

Going back to 1963, the three longest holding times are 90 months, 79 months and 42 months.   The 90 and 42 are both from the horrible bear market of the late 60’s and 70’s.  The 79 month was from 10/2000 -> 5/2007.   The S&P opened 10/2000 at ~1441, today it’s at 1326.  7.5 years and a loss of 5%+.  It’s hard to find many periods of S&P performance worse than that.

- John

I wanted to present another system that presents an opportunity to buy fear in a weak market. This particular system has quite a good track record and thought I would mention it because it could trigger on tomorrows close. The system is quite simple. It first requires 4 consecutive red candles. Meaning four consecutive days where the close is lower that the open.

I ran some tests on the SP500 tracking ETF to give you an idea how powerful this setup is. Your job as a trader, based upon the data I present would be to “frame” the trade. Maybe you like the historical data - maybe not. But if you decide to take the trade you must use proper risk management. What percentage of your portfolio do you allocate? That would have to based on many factors I can not see for anyone but myself. Each trader needs to do his/her own analysis.
Ok, so here is what you looking for if you decide to watch/trade this. We have had 3 consecutive red candle days - and tomorrow would need to close below the open. Oh yes and the close needs to be a down day as well. Keep in mind we will most likely gap down based off the CSCO news and we would need to close below that open. If we do you’ll need to buy the closing price of the SPY.

The exit is quite simple:

• a 3% profit target
• holding for 7 days

Whichever triggers first. That is it. Simple.

Now I shall present the data of this setup since the beginning of the SPY in 1988. It is actually quite good. Many systems of this nature tend to have good win percentages but it is at the expense of having losers a bit larger that winners. That is not the case with this system over the past 25 years. I have included a link to a spreadsheet showing all the trades below. And a graphic showing some visual stats.

spreadsheet-of-all-trades.xls

Basically we have seen 71% winners - with winners averaging about 2.27% and losers about 1.24%. Quite impressive. Maybe a red candle is not always such a bad thing.

Have a Great Night!

Dave Johnson

Everyone enjoy the game tonight. I think New England will finalize the undefeated season.

Dave