The Trading Digest

Nicely done if I do say so myself (pat pat). System goes back to cash and waits for the next pop back below 20 on the T2108.

I also include a chart of interest for breakout players.

Those are some big ass bars to work with huh?

Dave

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

Now that the T2108 UO system has gone all to cash after the exit of IEO I can review the trades for you. Here is a graphic showing entries and exits. I also included a graphic showing the T2108 plunges below 20 where we were looking to go long with ETF’s that crossed below 30 on the Ultimate Oscillator.

Remember from the very first day we defined the parameters of the setup. This included:

• entry condition (T2108 under 20 and UO crossed below 3o)
• exit condition (3% Profit Target or UO crossing 50)
• number of holding the system will take (8 in this example)

So in an 8 position portfolio a 3% gain contributes 0.38% to the whole system performance (3.0 /8). The next component that would be up to the individual trader would be how much of your overall equity would this particular system represent? That would be entirely based on how aggressive you may be. I would not be incredibly aggressive but 25% sounds about right to me. Based upon this information the system returned 0.55% and if the system were only 25% of the total portfolio then you would divide that by 4.

This may seem small but remember the market fell over 10% since that first trade was triggered. We had 6 trades and 5 were winners. The larger loser EWS was larger than what backtesting showed but that was more raw luck of selection versus what we saw if we looked at every symbol that triggered. Overall this is a great way for you to see how you can begin to piece systems together. The trading blogospere is littered with recent blow ups that occured because people want to bet rather than trade. Here is the secret…..Position size is critical. Using leverage can cause large losses. And large gains. That is the allure. But the betters that risk their precious capital on a single concept rarely win in the long run. Preservation of capital is critical.

People want 200% gains with minimal drawdown. Yet to attain those gains consistently you would be constantly putting the overall portfolio in the risk of ruin position over and over. I am sure you have seen people that advertise tremendous returns with options strategies. But if that strategy returned 250% annually (unlikely) could you use your whole portfolio to trade that system? or would maybe 5% seem more reasonable based upon the obvious risk of losing 50-100% of total capital? Setting realistic goals is critical to not only your success as an investor but in reality your long term staying power as a trader. People scoff at 20% annual returns but at that rate your money will double every 3.5 years approximately. Meaning that a $50,000 account would grow like this:

In 3.5 years 100k

In 7 years 200k

in 10.5 years 400k

in 14 years 800k

in 17.5 years 1.6 mil

Preservation of capital and the application of small edges over the long term are what drive account values upward in the long term. Betting your account on the hopes that the market will bounce when you feel it should is an absolute recipe for disaster. If you click on the archive from mid December until now you can follow all the posts related to this system.

Have Great Weekend!

Dave Johnson

This recent foray below 20 was met with an extremely emotionally charged market action. We are above 20 again so the system waits for the next plunge below. Yesterday EWG (Germany) nailed the 3% profit target right away in the morning. The other holding IEO (US Oil and Gas) came withing 3 cents of our profit target but the Ultimate Oscillator crossed above 50 so it is an exit at today’s open. The other holding we are carrying from the last punch below 20 is EWS (Singapore) pushed right to the cusp of a 50 cross as well. My data shows no cross so we’ll see where it is after the close today.

I think (hope) that the past 2 days succinctly pointed to the need to develop some sort of strategy that will try to do something in these fear/panic market environment to the long side. Again and this is the key, remember position size. That is the piece of the puzzle that you must put together. Based on my risk how much of my portfolio would a system like this be allocated 20% 50% 10% ?? That is only a question you can answer. One thing we should note though is the this “system” never had more than 3 holdings in a 8 position portfolio. We played and set it up conservatively. I did that intentionally in order to try to highlight the fact as the trader/developer I test and design these things in ways I feel comfortable based on historical backtests taking into account that things in the past can always overwhelmed by a worse current situation. I wanted to show readers that although these trades seem aggressive it is really a matter of how much equity you allocate to the idea. I tried to show you it could be done in a very conservative way.

After the last position closes I will review all the trades and we’ll assess how we did and use this realtime trade information so that we can maybe apply some of that knowledge in the next poke through 20.

On a side note the 2 stocks I mentioned also hit the respective 5% profit targets that individual equities use.

Have a Great Day!

Dave Johnson

Not bad having both our entries from this morning hit our 3% targets in short order. Excellent. I hope some of you profited from those trades.

Have a Great Day!

Dave Johnson

Man that was a quick in and out on XLE. Maybe DIA will get the 3% as well?

Have a Great Day!

Dave Johnson

Well as many of you have probably guessed I was waiting patiently for the market to reach the under 20 level on the T2108. For those who have not followed along in the past this indicator represents the percentage of stocks above their 40 day moving average. A reading below 20 has tended to mark the areas of extreme deviations than can lead to small or even large snap back rally’s.

The last time we crossed this level I described a simple system that would allow you to trade to the long side with a portion of your portfolio that may be in cash now. I set it up as a system that would only buy ETF’s that have crossed below the 30 level on the Ultimate Oscillator when T2108 is below 20.

The system can hold a maximum of 8 holding and can only add 2 holdings per day. Our last foray below T2108 we added VNQ which hit it’s 3% profit target and EWS which has not hit an exit yet. It is down about 11% from entry so the system is overall down about 1% since I highlighted the system, certainly way outperforming the market in this wretched time for long equities. Having met all the conditions on Friday I am going to add DIA and XLE on Mondays open. This will bring the portfolio to 3 out of a possible 8 holdings. Remember a system does not have to represent your whole portfolio. You could have a series of systems each with their own percentage of equity of the entire portfolio.

If we remain below 20 on the T2108 after Mondays close we will look to add more ETF exposure if we remain below that 20 level. I had also mentioned in the original post that you could use individual stocks with this method. A couple more liquid stocks that were below a reading of 25 on the Ultimate Oscillator now and may participate in any snapback are:

ADBE

GNTX

The exit is a cross of 50 on the UO or a 3% profit target on ETF’s and 5% on stocks. Whichever comes first. But for the sake of record keeping I will stick to tracking the ETF portfolio for you. Let’s hope futures gap down Monday and not up huge.

Have a Great Week!

Dave Johnson

John and I have in the past showed you how the T2108 indicator can be used to pinpoint extreme pessimism and with that a potential for a snap back upward in the swing timeframe on daily bars. The T2108 indicator is part of the Worden Telecharts package and plats the percentage of stocks below the 40 day moving average. I have used it in various systems that I have developed to filter the fear/pessimism environments.

One of the systems I recently tested was stumbled upon the last time the T2108 crossed below the level of 20 in mid November. This also coincided with a period that I was testing the Ultimate Oscillator as another tool to trigger oversold conditions in ETF’s and individual stocks. The knowledge of edges in each of these indicators allowed me to combine them into a system for trading stocks and ETF’s.

Seeing a chart with the 2108 indicator on it during bull and bear markets may help you visualize what these periods look like. In both these charts I used the SPY to represent the SP-500 and noted a period in the last bear market as well as the most recent bullish period we have just gone through. The blue buy dots you see are only showing a period when the indicator went to single digits which we discussed back in August. I circled the clusters of days where the indicator was below 20.

Bear Chart (click to enlarge)

Bull Chart (click to enlarge)

The system I created will only begin to trigger buys when T2108 is below 20, which closed at 19.93 today after the selloff into the close. Now that the condition is turned “on” I can now look for the trigger with the individual stock or ETF. With ETF’s I want the Ultimate Oscillator to close below a reading of 30 and on individual stocks a close under 25. Today 7 ETF’s closed below 30 from my list of about 100 very liquid ETF’s. They are:

EWJ
EWS
FXI
HHH
VNQ
VTV
XLY

With this system any of these would be considered a buy. But as with any system we need to determine how much capital to deploy and how to enter the positions based on past drops. My testing has shown using a 8-10 position portfolio where on each day no more that 2-3 entries is triggered is about the best. So lets say we are going to use 8 holdings and we can add 2 new holdings on any one day while older positions are open. So if tomorrow is still below 20 on the T2108 we will look and see if any ETF’s are still below 30 on the Ultimate Oscillator. The exit for the system is like any system and is hard coded. It is either a 3% profit target or a cross above 50 on the Ultimate Oscillator indicator- which ever comes first. The 3% target can trigger intraday. A time out exit also comes into play beyond a 40 day holding period. That is it. Really quite simple,

For my portfolio I will be buying EWS and VNQ. Tomorrow we’ll see what other setups are brought to us. Oh yes the entry is at the open the day following the condition triggering. So my entry will be at tomorrows open. Here are those charts:

This system is truly a standout in terms of winning percentage, drawdown, and profit factor. In the last 8 years a total of 116 buys have triggered and 88% of them were winners. The average winner was 3% and the average loser was about 2.3%. I have tested beyond this period but I don’t want to go too deep into the past for now because we would have to confront some backtesting challenges and I want tokeep it simple for the blog. Needless to say the period beyond 8 years is just as good and provides validity to the most recent data.

Each wave that dips into these areas are unique and it would not be unusual to see a foray into these areas that are not profitable so as always allocate a reasonable percentage of the portfolio to a system like this and follow it to the letter.

Oh yes I mentioned the individual stocks portion of the system. Today from the Nasdaq 100 I have only SBUX triggering. So I will keep an eye on that one as well.

Have a Great Night!

Dave Johnson

Earlier today before the release of the Fed Minutes at 2:00 EST I had made a rare intraday post to point to an oddity that had occurred on my 500 tick SP Futures chart (the ES). I like this chart because it makes turning points and flag edges quite clear to me on a longer term basis in order for me to time my entries on the shorter timeframes.

Anyway, this printed a pretty double “tent stake” - so named for their sharp bottoms and broad tops, an inverse of their brethren the “church steeple” top (hammers more appropriately). We had a decent rally off those and then after the Fed Minutes we printed more of these long wicks on the candles. Now if you trade intraday and especially on emotional big down days, any break of these long wick candles can spell trouble. Your typical breakout play that can certainly gather steam.

But if that emotional level is punctured and very quickly pops back up trapping those that played the breakout the fuel for a quick pop and potentially more is in place. That is exactly what we had happen today. The support of the long wicks were broken and the very quickly reversed. But the clincher was the volume in that reversal.

I drew in the emotional break down line. You can see that red candle (key bar) that punctures below the lows and closes below the obvious support level (naked close). This brought in massive trade size and which now sets me to watching the top of that bar as well as the emotional line. Remember breakout players played short below that level. As what typically happens when the breakout fails a quick snapback occurs with some follow through that takes out the emotional level as well as the key bars high (reversal).
So we have printed tons of reversals and ultimately print the clincher naked close reversal. Now what happens after the pop? We begin to trail back lower. But look at that volume as she rolls back. Nada. Shorts/Sellers flat out ran out of gas. I especially like these Naked Close Reversals to be on big volume and in key support and resistance areas. The volume should be the tell if it is.

In this case the ensuing rally pounced upon the lack of sellers and found a key support area for a very large advance into the close.

One more trading day until Turkey Time. If I don’t post before then….Have a Great Night and a Glorious Holiday!

Dave Johnson

I received some questions today if todays big up move confirms the long entry in the SP-500. It does not. Remember the entry is an up day with volume greater than the previous 21 days. We had an up day but volume was not even close.

Could be tough in the short term to overcome that big volume bar from 4 days ago. But hey who knows.

Have a Great Night!

Dave Johnson

In doing some research to show that not all high volume reversals are the same (one’s after fear are better) I came across a stat that just blew me away. I scanned for days with volume being greater than the previous 22 trading days and the day was up greater than 1% from the previous days close in the SP-500.

Since 1966 we have had at least 160 days that this happened or about 8 times per year. A fairly common event. As a matter of fact we have had at least one happen every year since 1966 without any years skipped. Well not every year. As a matter of fact we have not had one happen in a while.

Here is my challenge to you. Can you find that day for me? The last trigger in the SP-500? Put it in the comments if you find it. If I do not get an answer today I will post the stunning answer tonight. The first to get it correct gets my copy of “There Must Be A Pony In Here Somewhere” by Kara Swisher about the AOL - Time Warner debacle.

Have a Great Day!

Dave Johnson

With the recent protracted slide in the financial sector many market observers have noted how this could be a sign of worse things to come for the limping market. In last weeks post I noted how a slide on the magnitude of 16% in the course of only 20 days pointed to a wild ride ahead.

The sector has slid more this week and I wanted to update the stats and present you with a trade that I think is setting up. We now have that same S&P Banking Index down 18% in 24 days as of the close on Wednesday. This has only happened on only 6 other occasions since 1983. Truly a noteworthy occurrence. As I reviewed the charts of the periods that triggered this condition I noticed that at times the SP-500 was in sync with the weakness in the Banking Index and at times only mildly so. One thing that generally happened fairly soon after this big drop in the Bank Index was a high volume reversal in the SP-500. I defined the high volume as the highest volume in the previous month and happening on a positive closing day.

If I were to test this condition (highest volume up day) on its own the resulting pop tends to be quite unimpressive but if this high volume pop up is preceded by the large banking drop the results are huge.

As I had mentioned an 18% drop in 24 days has only occurred on 6 separate dates that I have listed below.

The dates listed are the day after a close below the 18% level. If after this date we begin to look at the SP-500 chart and look for a reversal as defined by an up day on volume greater than all days in the previous month (21 days we’ll use) we would look to go long the next day at the market on the SP-500. We are going to look for a target in the 4-5% range.

Below you will find all of the charts of the SP-500 with the trigger date listed, the reversal day noted, and the profit target area were looking to hit. In each of these cases the target was hit very quickly even after entering after the large up move. The second entry date listed in 1998 actually happened while waiting for the earlier date to trigger a buy so we will only see 1 historical chart below for the 1998 entry.

This chart above of the 1998 entry shows our exit hitting in less than 2 weeks.

______________________________________________

______________________________________________

Again the entry in 1999 above hits our target in only 11 trading days.

______________________________________________

______________________________________________

The 2001 trade above hit out target in just over a week.

______________________________________________

______________________________________________

In this the first of two 2002 entries our target is attained in only 2-3 days.

______________________________________________

______________________________________________

In this second entry of 2002 we again hit our target area in just a few days.

_______________________________________________________

_______________________________________________________

On average we see the large volume reversal entry day within 12 days after the large drop condition triggers. 1999 was the one that took much longer. All the others happened very quickly.

On average, our target area is hit in about 5-6 trading days. Think about that a 4-5% upside move in the SP-500 in 5 days.

Based upon this analysis I will be on the lookout for the high volume upward punch that will catch the shorts covering and those with limited equity exposure trying to catch the ride. As for me it is a trade. Nothing more. After my exit the markets can tank all they want. All I am doing here is trying to frame a trade. In terms of a stop - based on this historical snapshot I’d say a stop in the 7% area should allow enough room for the trade to work.

Keep your eyes peeled because if we get it. I won’t miss it.

Have a Great Weekend!

Dave Johnson

All week on financial television and media I have heard how volatile the market has been. All I can do is pull from SenatorLloyd Benson’s famous quote and say “Nasdaq today you are no Nasdaq of yesteryear”

I am in no way implying about future movement but those were spectacular moves. That you had to have been through to truly have a concept of massive moves.

Also this weekend I will be doing a follow up on my Bank index post from last week. And pointing to a specific trade that could provide a huge opportunity in the near future.

Have a Great Weekend!

Dave Johnson

The SP Bank (BIX–X) index has dropped 16% in the last 20 trading days and I wanted to test what sort of market action has happened after this magnitude of a decline. Since 1993 this has happened on 7 occasions.

In my test I bought the bank index the first open following the 16% drop in 20 days and sold in 10 days. Simple. On average that index has shown random 10 day holding periods to change in price on average about +0.39% . After this condition has triggered the average 10 day move has been about +5.07%. Wow massive. The volatility coming into this period tends to continue. If you look in the last 2 columns in the spreadsheet within the graphic you can see MAE% and MFE%. These represent Max Favorable Excursion and Max Adverse Excursion. This shows us how high (favorable) and low (adverse) price deviated within the 10 day holding period.

August 28, 1998 had the largest adverse excursion of 13.1% and ultimately finished 5% negative after the 10 day period. These periods are very volatile periods for the market as a whole and point to underlying concerns with growth and interest rate direction.

Over the next 2 weeks I expect to see what our small snippet of history has shown us.

• Massive volatility in the market and banking in particular
• A tendency towards a upward reaction after a panic low is put in
• I would expect the range in the Bank Index to have a range of >7% low to high over the next 2 weeks

Have a Great Night (and next couple weeks)!

Dave Johnson

Ever since I recorded my intraday trades I have received an endless stream of readers looking for further tips. The videos themselves are an excellent resource to see some of the types of entries I might take during the day. But the basis for framing biases are really based upon very very simple ideas of identifying trends.

An up trend is a series of higher highs and lows. While a downtrend is a series of lower highs and lows. I have mentioned before that I found Stan Weinstein’s work in this area a great way to frame the “where are we now?” Trendlines can play an important role as well to see logical  resistance and exhaustion points on a chart.

Todays mid morning action was a trend down type scenario in the Nasdaq futures that for me exemplified some logical entry points as well as clear swing high points that would have changed the picture enough that I would have been able to see I was wrong.

Those turn point areas on the indicator make nice entry points with definable risk as marked by the red line at swing highs. Remember waves. If it does not look like a wave - it’s not. Today had some clear wave patterns I liked. Keep an eye out for those.

In my videos I was trying to show you how to play band to band mostly, where fading moves into logical resistance were the plays. With this other type of trading we are recognizing a trend or bias is in place and we want to trade with that. Those are clearly 2 diametrically opposed type of systems but sometimes the fading of extremes type entries can lead to being able to add to a position once the trend entry kicks in. Big waves and wavelets each with their own risk and position size is how I try to trade and analyze the market as it unfolds each day.

Have a Great Night!

Dave Johnson

The massive runup from the extreme oversold lows of Mid-August gave me an idea to test. Let’s test a rate of change that just occurred from the lows on the Nasdaq 100 37 days ago. As of Fridays close we were greater than 12% higher than price 37 days ago. A big big move.

So if we screen for that condition and enter the next day at the open. (noted in blue dot)

And code an exit logic that looks like this:

We exit no matter what after 22 days (about 1 month) at the following open

or

We hit a 10% profit target

We do this on the Nasdaq 100 Index going back to Feb 1988 (beginning of data)

This condition triggered on 62 occasions - 69.35% were profitable - with an average profit of 2.65% - the dollar profits and drawdown are based on $15,000

Thats massive. As a matter of fact the average return over any 22 day period would be +1.22% yet we are seeing +2.65% average return.

The 10% profit target probably was only hit once or twice right? Wrong. Out of the 62 trades 16 hit the 10% target before the 22 day timeout exit. That is about 25% of the time. I put a link below where you can download a PDF showing all the trades.

Here is a PDF with all those trades listed

I am not here to expouse a particular bullish or bearish view. I can only show you what I am seeing in this test. I have no bias and I will not make any particular trade based upon this test. This data is very similar to a test I ran on the old blog that everyone dismissed at the time (here and here). Also some of the newer readers may benefit from a post on the old blog that talked about my portfiolio construction. That has changed only slightly from when I wrote that and has done very well for me. But that is another post for another day.

Have a Great Day!

Dave Johnson

Over at the Wall St. Warrior blog I happened to catch the chart he posted this morning on the Nasdaq Composite. He always has lots of graphs and data that can be helpful knowing where the market is. Thanks Jaime for a great blog.

I repost that chart here with his notes. I want to run a simple backtest based on something I am seeing.

Look at the RSI indicator in the upper pane. It appears to have just crossed under the value of 68 yesterday. I wanted to test what that may portend for the market going forward.

We will buy the open the day after the cross under of 68 on the 14 period RSI and test exits at 5,10,and 20 days later. I tested on the Nasdaq Composite going back 20 years. Here are the results of that scan.

Not what you may expect but the level of out performance in the 5 and 10 day holding periods is over 2 times the average 5 and 10 day hold. Even 20 days later were still almost 1.5 times an average 20 day hold. Does this mean we definitely go up these amounts. Not at all. There were many losing trades as well. But were looking at all of the trades in aggregate.

Typically these high readings happen in bullish environments and those tend to be supportive in the short term at least. As to what will happen - who knows?

As I was playing around with the parameters of the test I inputed the MACD level as well. notice in the chart it is above the 40 level. If I add this parameter to the backtest what do you think this does? Lessens the number of trades but average winners increase dramatically in the shorter timeframes.

5 days - 0.94%

10 days - 1.58%

20 days - 1.79%

Pretty Dramatic - I love this stuff…..

Have a Great Night!

Dave Johnson

I hear many trading “rules” that through my backtesting I have been able to debunk, but the one that I hear most frequently is that during market weakness a trader should focus on the stocks that have held up the best. In a market downswing if you are comparing 2 stocks the one that fell the least or has a higher RSI reading would be the better candidate right? We’ve all heard this but does this theory hold water?

I ran some very simple tests to show you what the data looks like. Here are the rules of this backtest:

Condition : McClellan Oscillator is below -100 (a pullback in the market)

I ran 4 separate backtests on the Nasdaq 100 stocks over the last 5 years. In order to trigger a trade the pullback condition must be met and the individual stocks can be in one of 4 classifications:

RSI under 25

RSI 25 -50

RSI 50-75

RSI 75-100

The 5 period RSI is used in each of these cases. I will now exit the trade after 5 days. Here is a graphic showing the results of that test:

Of principle concern in the test I want to see what the average profit and loss per trade in each of these RSI segments will be. Notice how as RSI increases the average profit declines. The most trades and the most common area for stocks would be in the 25 to 50 RSI reading after the market pullback. Also I should note that I allocated 1% of equity to each trade which allows us to hold every Nasdaq 100 stock. You can see this by the very low exposure readings but this allows me to ensure that I am seeing every trade.

Of particular interest is when you compare the 50-75 group to the under 25 group you will notice about the same number of trades occurred. Yet the average winner in the “weaker” group is 42% larger than the “stronger” group with readings of 0.97% and 0.68% respectively.

I have seen this demonstrated in not only the Naz 100 but also in any other grouping of stocks I have tested whether it is the SP500, Russell 1000, and any random grouping of symbols in not only bull markets but bear markets as well.

So do we have the Makings of a Market Myth? I think we do.

Have a Great Day!

Dave Johnson

On Monday morning I posted a headline that caught my eye. Remember last weekend? What were we worried about? Growth Fears. Thats right. Time to go short right?

Here we are on Friday. Dow had the best week since April I believe. BEST.

What can we learn from this? A week where people flail their ams shouting how horrible forward performance will be, yet it ends up being the best week in 5 months. Stick to YOUR plan. And don’t be diverted by the headlines.

This is by no means a bullish rant. The chart is clearly at a crossroads but I implore you to always be extremely wary of the “obvious” trade. It is never ever that easy.

People in the blogospere who understand this “it is what it is” concept are few and far between..

The best blogs out there in my opinion are:

Stephen Vita - original and daring but willing to ride a trend

Bob’s advice for stocks- Bob is not only a gentleman but a market maven when researching IBD type growth stocks

Dr. Brett’s site - as a trader if you have not been here you haven’t been anywhere - best of breed

Technically Speaking with Ron Sen- a must read who makes being a contrarian almost anti-contrarian. A trader with an eye most closely aligned with my own.

HeadlineCharts - a new one for me but one I enjoy reading and find to be unemotional and extremely helpful inside the big picture

In my blogroll you will find others I find either enjoyable to read or helpful in trading. All come highly recommended in my opinion.

One thing these guys all have in common is that they post regularly. John and I tend to post rather infrequently and a bit irregularly. My only excuse is that I try to avoid the mundane and hop on the most salient points I see developing in the markets. Obviously these tend to trigger at extremes. My hat is doubly off to those that I have highlighted above, who gracefully weave frequent quality commentary with highly enjoyable reading. Hats off Gents.

Have a Great Weekend!

Dave Johnson

Well that sure makes trading this week easy. Go short at Mondays open. Because “stocks are expected to extend their losses next week”. Man you can’t make this stuff up. Ok I am not saying they won’t be right but I’d put the probability at just around the levels of a coin flip. Certainly headlines such as these encourage average investors to make emotional decisions after having seen an erosion in their 401k values since mid July - but create opportunities for astute swing traders with an eye on statistical probabilities.

As always look for clues of potential intermediate turning points in emotional “guaranteed” markets that can catch the crowd leaning the other way - such as:

• those sharp up turns that leave extreme high volume footprints behind
• solid and wide reversal patterns such as inverted head and shoulders
• diamond bottoms
• double bottoms  - (support)
  
• triple bottoms  - (more support)

you get the picture.

But most likely these reversals happen after punching through an obvious area everyone is watching such as recent support or a important trendline. Be especially vigilant after gaps through these key areas. You can see a couple obvious ones as we head into this week.

So instead of fearing periods like these. Relish them because invariable one side of the boat just gets a bit too crowded. You must stay vigilant and strike when the odds (not the headlines) are in your favor and the lemmings decide they are on the wrong side of the boat.

Have a Great Night!

Dave Johnson

This chart of the SP500 futures says it all. Today is going to be fun.

Have a Great Day and Long Weekend!

Dave Johnson

The compelling trade I noted last night ended up positive on the day and will not trigger an exit until T2108 crosses the value of 12 - were at 10.79 as you see below.

Have a Great Night!

Dave Johnson

With todays market selloff I was looking forward to the close to see if the T2108 indicator (% stocks under 40 day moving average) had closed in single digits. And lo and behold it had - it actually closed at a value of 8.24 today. Very low indeed. I ran a backtest to see what a close below 10 implied and how I might be able to frame a trade to the long side.

Here are the parameters of that trade.

• a close below 10 on T2108
• buy the open following the close below a 10 reading
• exit when T2108 closes above a value of 12 - (a small improvement)
• a stop-loss based upon historical deviations will be at 6%

I ran on data back to 1990 on the SP-500

It has triggered on only 6 occasions -  1990 (twice), 1994, 1998, 2001, 2002 and of course today.

Here are the results of that scan:

So the average winner is a whopping 5.7%! with only a 6 day holding period. Any other 6 day holding period would have an average change of about 0.15%. Truly volatile as John has shown in the previous two T2108 trades. Max adverse excursion on these trades was in the 5% area. So it has at times taken some adverse movement before the advance pushed through.

Here are charts of each of those signals (click to enlarge) :

The two signals close together in 1990

the 1994 setup

the 1998 setup

the 2001 setup

the 2002 setup

and where we stand today…….

And remember this would be a trade. That’s all. Well, I have framed the trade. Who’s taking it?

Have a Great Night!

Dave Johnson

We will exit MDRX at the open tomorrow. See how this mechanical stuff works? It closed today above the highs of the previous 2 days. That is the exit. Simple and unemotional. We’ll do that over and over and see what happens.

The new entry will be KWK a pick sent from a reader of the blog. Looks pretty darn nasty.  We’ll add it to the portfolio.

I also wanted to note the huge Naked Close Reversal that occurred at todays low of the day on a 5 minute chart of the SP-500 futures. It is denoted with a close above or below an an obvious breakout point. In this case below. These typically occur on big volume, near psychological woosh points, in areas of obvious stops, and in very rapid trade. In this case it was defended throughout the rest of the day.

Have a Great Night!

Dave Johnson

Last week I had thrown out to you a swing trade that had triggered in my swing trading system. This system is throughly backtested and has clear entry and exit rules. The trade in ETFC is a good example of some key trading concepts that cannot be stressed enough when system trading as well as discretionary trading.

As you can see noted with the red arrow we are presently below that entry price. The exit for this trade is Thursday’s open.  No ifs, ands, or buts. An exit in system trading is an exit. PERIOD. Most traders do not seem to grasp the concept of closing a position before it goes profitable. What you must understand is that I have hundreds of thousands of trade examples in my backtest data and I certainly am not able to assimilate all of this information on a trade by trade basis by eye. In the end 65-70% of all trades close profitably. The data speaks for itself. The exit I have passed along to you for this trade is quite simple. Exit when price closes above the high of the previous 2 bars. Keep an eye on those in any timeframe you may monitor.

Another broad concept I want to convey that maybe you had missed. This trade had occurred during weakness in both the major market indexes as well the stock itself, ETFC in this example. These are even higher probability swing plays when looking for the when and what to swing trade. I know this flies in the face of conventional swing trading wisdom - but again I can prove it outperforms those conventional methods by far based on my extensive backtesing in all of the various market conditions.

So in the end I passed along a trade that had about a 85% chance of winning. But dang if it didn’t (well maybe it will gap up tomorrow). Which leads me to the last lesson. No matter how much data, backtesting, and confidence you have in a trade - it is NOT a sure thing. Based on this knowledge you must spread your trades and risk across various systems and market positions. This is absolutely critical to have enough ammunition for the next fight.

In that same post I had also posted the SP500 chart noting its consolidating pattern , where you had a confluence of a few patterns of a bullish and possibly bearish look. What ultimately happened was what I thought was the most likely occurrence. A run through the previous wave low and taking out stops of the players looking for a high risk/reward trade. Classic. (Compare chart to previous post)

Let’s see if that upper trend line and a general resistance area slow things down this week and next.

And for those who have asked when my live futures trades are coming again all I can say is soon

Have a Great Night!

Dave Johnson

I just wanted to give you the official update on the SP-500 swing long trade. McClellan (T2106) closed above the zero reading. This was the exit I was looking for. The exit is Mondays open. 40+ SP points as of todays close.

Let’s look at how backtesting can give you an edge.

• gave me an idea of historical after entry drawdown
• gave me an idea of the average holding period
• gave me an idea of the types of return to expect

Let’s look at the graphic I posted last week with the original trade recommendation:

Let’s see what this trade looks like:

+2.83% Return

6 Bars Held

MAE = -0.22

Kind of an average trade eh? THAT is the power of backtesting in a crystal clear example. A historical edge was demonstrated with a clear and concise picture of past trades. This time it worked out in my favor. I hope it did for you too. Let me know how you played the trade.

Have a Great Night!

Dave Johnson

I had noted that the T2106 (McClellan) indicator in my Worden Telecharts package had crossed below the -200 level. This reading indicates an extremely short term oversold condition. I ran a backtest in Wealth-Lab that tested a trade with these parameters:

• Tested on the SP-500 back to September 1986 when my McClellan data began
• I entered the day following a close below the -200 reading  - at the market and at the open
• My exit was when the indicator closed above the zero reading - again at the market and at the open the following day

The results are quite good. 13 trades - all winners. The average holding period was about 7 days. I have included a graphic with the test results and a list of the individual trades. The September 11th related period had the largest Max Adverse Excursion while in the trade.

I took a snapshot of a recent period when a couple entries occured.

And here is what todays chart looks like……….

Clearly we are entering a period of volatility but based on historical tendencies being long here is the trade.

Have a Great Night!

Dave Johnson

The long setup I had proposed for Tuesdays open in the SMH would be an exit today. I ask you. Would you have been stopped out of this trade? Maybe we can get into Market Myth 2- STOPS - maybe this weekend.

Dave Johnson

Today I figured I would tell the story of a weakening market with photos instead of video. So while CNBC and their cohorts were lauding the strong market all day they were caught by surprise by the strong late day reversal. I will say I missed this trade because I had to leave the trading desk during this setup at 3:00 PM EST but it played out as I had a notion it would.

During the strong upward phase of the morning move in all the major indexes the higher beta ones such as the Semis (SMH) - Nasdaq (QQQQ/NQ) - Russell 2000 (IWM/ER2) were moving powerfully upward and leading the way higher by outpacing the lower beta SP500 and Dow 30. But as this was happening the Accumulation/Distribution indicator that I apply to the SPY (SP-500 ETF) continued to make lower highs and lows. I have come to rely on that indicator and chart as a pretty good indication of underlying strength and weakness in conjunction with my other forms of potential evidence.

As you can see Accumulation/ Distribution was having nothing to do with the strong advance up to the lunch time period. I was noting this thinking I might be able to look for a large topping pattern to look for a possible short in the afternoon for a longer term hold versus a short term scalp. Just something to keep in mind because remember these trade entries require a weight of evidence on my side.

The next thing that I noted was that the high beta stuff (SMH- NAZ) was starting to lag as the Dow went to new highs at about 2:50 EST.

SMH

(arrow noted the point before waterfall drop)

Naz Futures

(many were noting the inverse head and shoulders as a sign we were going back to high of day)

Dow Futures (YM) Look at that high of day not confirmed by the previous charts.

So by having a heads up and a plan, a trader could have been ready for the 3:00 drop.

As a final clincher look how prior to the drop AMEX Tick busted a trend line on the 2:58-2:59 bars while having the ergodic indicator cross on that chart.

So while chasing the market in most instances is a poor strategy there are times when having a bias based on a weight of evidence can lead to very strong entries that can give a level of confidence in scaling into a position as long as the conditions your noting remain the same.

If you are trying to use discretion such as this analysis in your trading I can pass along some pointers unrelated to your analysis and trade parameters that I find critical in my trading.

1) Sit back in your chair (keep your nose off your screen)

2) Relax your shoulders

3) Be aware of your breathing pattern - slow and even

4) Allow the chart to “give” you the trades

5) Keep playing out scenarios and how you might react - act when one plays out

I will try to get some more videos up this week. I just hate having to take a mediocre trade for the sake of the video. So if I see some interesting setups I’ll try to pass them along.

Also guys, give John some feedback on the previous post. What do you think he is using as an entry criteria? Something simple….. Yet seems to have quite remarkable performance with very little market exposure. And….It worked in the bear market.  (Damian got the exit

Have a Great Night!
Dave Johnson

Today while sitting at my screen trading I saw one those absolutely clear and concise patterns on the SPY 1 minute chart that I took a screen shot. In Japanese candlestick terms those are referred to as “shooting stars”, but before I knew what Japanese candlesticks were I used to call them “church steeples” and if they were at a bottom I called them “tent stakes” , as a group they were generally referred to as “stickout bars”. Those names have kind of stuck with me through the years and though probably technically incorrect, thats what they look like to me, and they can be quite profitable if used properly.

Stickout bars for me offer opportunities when they are as clear and concise as this example. Todays were. Clearly resistance was coming into play as sellers stepped on price rapidly to send price back to the low of the bar in quick fashion with rapid and hefty volume action. But the opportunity not only lies in going in the direction of those sellers, but also if the tops of those bars do get taken out they can become solid support levels for future trades. These become important lines in the sand that I keep an eye on. Not only with intraday bars but with any timeframe from daily to weekly to monthly.

As you can see subsequent action throughout the day wilted to the resistance and created solid swing levels for the future going into tomorrows FOMC meeting.

Speaking of, If your a gambler and like to let trades fly around the FOMC release then this may be strategy is for you (not for me).

Also if you have seen some of the intraday videos I recorded recently you can expect more to come. I am working out some details as far as which video site to host with and the format to save those videos in. I created a page where I am going to load these so we don’t clutter up the front page on the site. You can see that page in the upper left hand side of the page near the email link. I posted one video as a test. I will try to get a new one recorded tomorrow.

Have a Great Night!

Dave Johnson