The Trading Digest

Many people out there think Goldman can do no wrong and is able to manipulate the market at will. This may be true (I don’t buy it), but evidently they’re unable to manipulate everything…

-John

I would be looking to enter the SMH (semiconductor ETF) Monday with an exit being a close above the high of 2 days prior. That is at the close of subsequent days, look back at the high of 2 days prior. If your higher - exit next day at the market. It’s an exit that is used quite frequently in our backtested systems and is also very simple to see visually.

A pop up in the semis would most likely be in conjunction with the market as a whole - so it’s possible the recent weakness in the Semis point to a upward pop in the market.

Does anyone have a clue as to what the entry criteria is for the QQQQ KISS trading system John had posted last week? Look at the number of entries. Look at the returns. Remember it can take 8 potential entries - so each entry is 1/8 th of portfolio size and the exit is as I descibed above (wait did he reveal that yet?). No one has guessed it yet and I am so surprised. At least guess!

Anyway think about it. It’s really so simple as to blow the mind.

Have a Great Rest of your Holiday!

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

I did not record a live trade yesterday due to the FOMC decision. In actuality there were some decent opportunities along the way yesterday. Today I will record one for you. I want to start focusing on the setup I did from 2 videos ago. Basically the micro scalp using the tick for your entry. I will be on the look out for those today.

Some morning links:

Did you hear tha the Milwakee Brewers we offering tickets to a future home game if you receive a rectal exam at the stadium? The comment page on Digg is hilarious.

And you thought our sun was big?

Lol. Cramer the Cowboy

Have a Great Day!

Dave Johnson

Being that today is the day for a rate announcement I will most likely pass on a trade video today. We’ll see.

So does this meeting in some way change the tone of the current market? Do we get a strong pullback? or possibly a strong positive reaction? or just a ho-hum reaction with no discernible change? Curious what you the readers are thinking because I can’t even venture a logical guess.

I’ll leave you with some links:

LOL. An intersting strategy for those stubborn laggard stocks.

How to piss off a psychic

What does the World Bank do?

This honeybee thing is one strange story

and……

Best case for understanding this silly political climate we are in - and from TV

Have a Great Day!

Dave Johnson

I took this snapshot of the Nasdaq futures and the Semiconductors ETF (SMH). I think it the first time I had ever seen the semiconductors gapping above previous high of day and the Nasdaq gapping below the previous low of day.

Have a Wild One!

Dave Johnson

I recently read the book “Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets“, which contained interviews with different global macro hedge fund managers in a similar style to the Market Wizards books. One theme that stuck with me after reading the book was the multiple references to “risk premium” which was used to describe the premium/return from holding an instrument for a specified time (ie overnight). Based on what I read in the book, I was curious if such a premium did exist and if so, how much of a premium it is.

My first stop in my research was this excellent post on TraderFeed where Dr. Steenbarger shows the difference in performance of the SPY in the overnight vs day session over the last three years. My next step was to see if a similar premium existed for individual equities as well. To test this, I created two simple scripts in Wealth-Lab. The first script would buy $10,000 worth of each Nasdaq 100 stock at the open and sell at the close for the previous year. The second script would also buy $10,000 worth of each Nasdaq 100 stock but this time buy at the close and sell at the next open, to isolate the “overnight premium”. Both were run in Wealth-Lab without any slippage or commission taken into account.

Here are the results for the “daytrade” script that buys the open, sells the close:

Here are the results for the “overnight” version that buys the close and sells the next day’s open:

What becomes obivous from these results is that over the past 12 months, a period in which the Nasdaq 100 performed very well, over 2/3rds of the total profit in the individual equities came from holding overnight. Furthermore, the profits are much more consistent and the maximum drawdown is a fraction of the daytrading script’s drawdown. Now obviously this is a relatively small sample size, but when combined with the above findings from TraderFeed, I start to think there could be something here.

What i found most suprising was when I looked to see how valid the often repeated axiom of “holding overnight is too risky” fared in this test. It turns out that the average volatility of holding overnight is actually less then holding it from the open to the close. This can be seen in the Average Profit % and Average Loss % which is 1.35% & 1.30 %for the daytrading script and only 0.67 %and 0.62% respectively for the overnight script. Therefore, the average Nasdaq 100 stock on up days moves 1.35% intraday and only 0.67% overnight, while having moves of -1.30% and 0.62% on down days.

I also investigated the relative # of large (> 10%) winners and losers between the scripts. On the overnight scripts, this are mostly gaps up and down related to earnings or other news related factors. Here are the results:

* Day trading script - 5 losers > 10%, 9 winners > 10%

* Overnight trading script - 22 loser > 10%, 24 winners > 10%

Obviously there will be more large winners and losers when holding overnight, but the ratio is not too far off for this small of sample size.

To help provide a visual example of the difference between the two scripts, I created this chart of GOOG for the last year. It graphs the previous 12 months and is normalized to start at a value of 0. The green line is the # of points gained by GOOG overall. The blue line is the # of points gained by the overnight script (buy each close, sell next open) and the red line is the # of points gained by the daytrading script (buy each open, sell each close).

This is still very much a research project work in progress, but I felt the results were already interesting enough to share with all of you. I look forward to any comments or emails with ideas of if this premium is really persistent and if so, how it could be used.

- John

I have seen TraderMike and the Kirk Report reference their use of the T2108 indicator available in Telecharts. They certainly have highlighted very effective uses of these tools to show oversold and overbought conditions. I call these groups of Telecharts indicators the T Indicators because they all start with T’s. One of my personal favorites is T2120 which is new highs for the last 26 weeks divided by new highs + new lows.

Pretty cool, but on their own they are really a bit to scattered and erratic. So I placed a very wide Bollinger band (10 bar, 5 Standard Deviations) around the indicator and from those Bollingers derived a Stochastic (70 period, 7 period %k, 12 period %d, D is plotted) that shows bottoms pretty well.

My initial reaction when looking at this is that the blue Bollinger lines need to drop into that 20 range. The red stochastic line in a perfect word penetrates oversold and price represented by the green line chart (Nasdaq) has a yucky, scare the pants off you day. But unfortunately markets are not that compliant in our lofty goals. So they do silly things like chop around for 6 months. Or go down for 6 months. Or turn on a dime and leave you in the dust. Either way have a system, or systems, in place to take advantage of whichever scenario plays out.

I also wanted to mention Gold as a possible play on market strength and weakening dollar. As you might remember our trend following system triggered second entry add-on buys in some of the commodities (oil, gold) and concurrently triggered a buy in the Euro currency. If this plays out I could see Gold being the big beneficiary as world markets strengthen (commodity demand increase) and the Euro continues it’s strength against the dollar. This would in my opinion could create a decent environment for some price appreciation in Gold. But this is really trying to fit the world to my buy signal. And if it rolls over and I get an exit signal then all this is just macro BS and will be nothing more than silly hyperbole.

Have a Great Night!

Dave Johnson

In yesterdays post i told you that the indexes trading through the March 5 low would be a quick slam dunk trade for 2-5 SP5OO points. When the SPY traded at 137.32 - one tick below the March 5 low it triggered a short at the market in the Emini SP500 futures contract. It entered at 1381.25. The chart with one minute bars shows you exactly what happened.

And we seem to have rebounded nicely off those levels. Definitely a ray of hope.

And John referring to the good people over a Kiplinger as conspiracy theorists may be pushing the envelope sir. Curious to hear what readers think on that subject.

Have a Great Day,

Dave Johnson

I see that John mentioned the trend following entry in to USO in the last post. Typically all of the major equity indexes are out of the markets now after the big down day on February 27th. The way I now look at the markets will require any trend type entries to be non-equity correlated until these equity indices begin to trigger trend entries to the upside again. This is not picking bottoms. Just brute force trend following. In the chart below we can see what part of the 2006 up move was captured.

Not too bad. During that window of time when the trend systems are turned on it is a clear signal to me to turn “on” other modules of the portfolio. This allows me to trade in my equity ETF systems. It allows me to use my system that trades in IBD type stocks. But right now those portions of the portfolio are turned “off”. I had given a rough breakdown in how I assemble my portfolio modules in a post on the old blog from October 2005.

But Oil John? I like it. Also I should note that as well as oil triggering so are all of the Bond type ETF’s such as IEF and TLT . These types of trend following trades can be very frustrating because you will have many false signals before you actually catch a good ride. But having worked with thee Fuzzy script John created, it is one of the best out there. It will surely give us a heads up as to what is moving and we’ll be following those triggers here on the blog.

Here’s to a having a good trading week. And if you want a good grasp at what the week has in store the Minyanville Trading Radar is a good tool.

Have a Great Week!

Dave Johnson (I have to remember to sign these - with 2 of us writing the blog)

I wanted to post this chart of the SP500 that everyone sees developing. The trade is to get short. The trade has clear delineation in terms of stops and targets. It’s just that it looks too damn obvious. Maybe that will keep others from the trade. I will be looking to get into this trade next week. Go through your charts of the SP500 this weekend.

Look through past years what has happened when after a hard pullback from highs led to a small rally and then the low is broken. Typically a good chunk of points can be garnered on the short side right below those lows. Obvious? Yes.