Saturday, October 27, 2007
Sunday, October 21, 2007
Posted by Paul Stiles at 10/21/2007 06:09:00 PM
Friday, October 19, 2007
I would have to say that while reading around the blogosphere today I got the sense that people were not that worried about today's selloff. There was some serious technical damage done today and it seemed to me that most folks were shrugging of the decline, saying things like, "Don't worry, we will bounce back."
Such complacency worries me and I'm forced to be a little more cautious about the market. Another day like today and we will be back to the August lows before you can say "Helicopter Ben". That high-volume low is a strong magnet that is begging to be tested.
Posted by Paul Stiles at 10/19/2007 09:00:00 PM
Thursday, October 18, 2007
No wonder why the DeMark indicators cost so much money!!! Look at this chart. I posted the Callaway Golf chart recently and was tempted to buy it at the 16.50 level. I didn't and decided that it would be prudent to wait for a lower risk entry. It came back to the original buy point and I planned on going long today. Unfortunately, the company made a positive announcement pre-market and ELY gapped up before I could buy.
I am amazed at how powerful TD Sequential can be.
Paul Tudor Jones said that when the TD Sequential or TD Combo doesn't work, "it really doesn't work". For this reason, it is sometimes suggested that one go short as soon as a TD Sequential or TD Combo closes below its stop-loss point. I have been looking into this recently and have put together some charts.
Notice how the stop-loss area can be treated as the same stop-loss short postition after the TD Sequential failure. In some cases, the price bounces back and reaches into the stop-loss area. In such a case, this offers someone a late entry point to go short or allows someone who already is short to add to their position.
Given that large short-covering spikes can be so incredibly nerve racking, having a well defined entry and exit strategy would be helpful to those who want to play both the bull and bear sides of the market.
Wednesday, October 17, 2007
Perhaps the most difficult aspect of William O'Neil's Canslim method of buying stocks is that it is usually difficult to determine the proper buy points. Furthermore, for the average investor, it is almost impossible to always be on top of the market, which is what is required if one hopes to buy on those high-volume breakout days.
As I said in a previous post, I have been working on a more systematic way to trade the high momentum IBD stocks. Here are the results of a backtest of one year. Notice the excellent winning percentage and the gain/loss ratio. The three plots are of the buy and hold of the IBD 100, the equity line, and the number of stocks in a buy mode. While the strategy underperforms the buy and hold, what it does do is control the risk of a serious downturn. Say, for instance, that the correction of this summer turned into a bear market, my strategy would have been mostly in cash during the entire hypothetical bear market, thus protecting capital.
The system is basically a volitility based breakout system. I include requirements of volume and making new highs. Selling requires large volume breakdowns. What is especially nice is that this system only requires that someone buys or sells the open after a signal is given. Such a system doesn't require someone to constantly watch the market. All one would have to due is to place their orders the night of the signal.
Out of all the stocks on the IBD 100 I picked out six at random and looked to see how they fared during this last correction. I also wanted to see how close an IBD based buy point lined up with my system's buy point. I think you will be amazed my how well the two lined up. On the six charts I show the IBD buy points and where my system would have made a buy. The green up arrows are my buys, with the grey shaded areas being times when the trade is on. The red down arrows are sells.
Tuesday, October 16, 2007
Restricting one's market to stocks doesn't narrow the choices very much. It is imperative to restrict one's trading candidates to the stocks that are most likely to trend. Nothing fits the bill like the IBD 100. I will be going over the system that I have put together in the near future, but before I do, I wanted to point out an interesting discovery I made.
In order to get a feel for its overall performance, I compiled an equal weighted index chart for the IBD 100. When I was finished, I noticed that the shape of the chart looked very familiar. I compared it to several of the world markets and, as suspected, it matched up with the Hang Seng almost peak for peak. I think there is very little debate that the strongest free-trading market in the world right now is the Hong Kong index. I also think that there is little doubt that the party will come to an end some day. It will be interesting to see how long this correlation between the IBD 100 and the Hang Seng continues.
Monday, October 15, 2007
Sunday, October 14, 2007
I know the retailers are still in serious fundamental and technical trouble and I don't plan on making a buy here, but the VFC chart looks good for a counter-trend trade. It also might be a nice time to enter for a long term hold.
Saturday, October 13, 2007
Not everything is totally extended. Dover Down Entertainment just finished a perfected TD Sequential. Considering how well this indicator has been working lately, buying on the open Monday doesn't seem like a bad idea.
Posted by Paul Stiles at 10/13/2007 10:40:00 AM
Thursday, October 11, 2007
Tuesday, October 09, 2007
Here is a possible buy for a trade, Callaway Golf Co. (ELY). It finished off a TD Sequential and has broken its downtrend in the Combo A/D line. The longer term chart is choppy but the trend is still up.
The chart below shows something I've been experimenting with lately. It uses bands based upon the average high and average lows with one standard deviation of the price added to it. Some backtesting has shown that, after corrections, stocks that close above the upper band will keep moving up. I have been getting some nice results with just an 8% trailing stop. More work to do on this.
Monday, October 08, 2007
Skittishness over the U.S. stock market's record-setting rally is reaching a crescendo among options traders who are preparing for a crash.
This was the lead in a Bloomberg article, entitled "US Market Stumble Presaged by S&P 500 Options", today. This little story had more than just a cryptic title wrong with it. The article pointed out that the price premium for put options are much larger than the premium for call options at the moment. Using this single data point, the article concludes that a crash is coming.
It did make me wonder. Why in the world would someone think that the crowd would be right in picking a top? I'm sure the author of this article has heard of the spike in option trades before a big move in a stock, but that is due to the fact that people usually know something and word leaks out. Typical option volumes are pretty low and it is easy to find unusually large put or call positions being opened. The reality about looking at price premium of entire markets is that they are usually used at contrarian indicators. When the crowd is fearful, you should be greedy. Go do the research yourself. When people are scrambling for put option protection, the market usually moves higher.
While I laughed at the logic (or lack thereof), the article did give me some relief, as I was worried that people were getting too bullish. I fully expect a pullback to at least the 20 day moving average, but the large short interest and high put/call ratios should once again provide some very good support for the market.
Did I mention that NYSE short interest was back at record highs? The chart below gives the put/call premium ratio and the public to specialist short ratio. The short ratio (red) is basically the "dumb money" shorts, and as you can see it is pretty high. The put/call premium ratio 5 year high was in 2003. I don't think I see a crash after that number.
In a side note, I was very disappointed by Tom O'Brien of TFNN today. He didn't mention this article in his radio show. While I know he is a bear, he should still face the reality of current market conditions. I know he read it. Shame on you Tom.
Sunday, October 07, 2007
I'm always on the lookout for a way to gain a trading edge using my scientific training or experience. The hope is that I'll be able to see the true potential of a given high-tech product before Wall Street because I already have an intimate knowledge of that product in the lab.
I have always been fascinated with thermoelectric devices. I used these cool little technological wonders in many of the laser systems I worked on in graduate school. A fairly standard way to generate laser light in the mid-infrared region of the spectrum is to pass another shorter wavelength (high energy) laser through a specially designed crystal (wiki page) that "breaks" the incoming photon into two longer wavelength (low energy) photons. Using the proper crystal, operating at the proper temperature, one can cover a wide range of the infrared spectrum.
Thermoelectric devices are ideal for controlling the temperature of the laser crystal. They are very reliable and can both heat and cool, depending on which way the current flows through the device.
When I first learned about these guys I was amazed by how well they worked. I instantly came up with many of my own ideas of how these devices could be applied to everyday problems. One of my ideas was to place these things in car seats. Everyone knows about car seat heaters, but I grew up in Southern California and all I wanted was a seat that cooled my backside on hot summer days. A properly designed thermoelectric car seat could do both. As it turns out, someone else has already thought of this and are now well on their way to changing the future of car seats.
The company is named Amerigon (ARGN). They are currently selling their seats to car companies and are doing pretty well. The reality is, however, that car seats are just the tip of the iceberg. If the people at Amerigon have any imagination whatsoever, I'm sure we will see many more interesting applications for their products. One particularly promising application will rely on another interesting feature of thermoelectric devices. In the conventional application, a current is passed through the element and one side of it is heated while the other is cooled. Interestingly, if one places the element between an exterior heat gradient (one side hot, the other side cool) the device will produce a current, thus becoming a possible electrical power source. Just think of the possibilities, especially with energy prices continuing to rise.
As for a chart, it looks pretty good. I'm going to keep a close eye on it and will not let it get away from me if it breaks to the upside. ARGN is on the IBD 100, so beware. While you can find thermoelectric devices being used in such mundane applications as wine and beer coolers, I think Amerigon is thinking on the scale that will get these cool little solid-state devices into everyday life. Maybe I'll send them a resume.
Comparing the chart of NYX to the previous post of RTI, it looks like there are many similarities. First of all, there is the perfected TD Sequential buy signal and quick move up. Like RTI, NYX has run into resistance at the TDST level. Should one sell or hold on?
Looking to the Combo A/D line, NYX has broken two shorter time scale downtrends and is approaching the long term downtrend line (red). I would stay long here and see how the A/D line reacts. If it bounces off the line I would take some profits, but also leave some on the table just in case NYX makes another move up.
This is the beauty of catching the bottom. It gives you a big cushion and keeps you from being shaken out of a stock just before the big move.
Ever since I coded up the TD Sequential and TD Combo buy points I have struggled with setting price projections. DeMark likes to use the TD Trend Factor, but I have found that with my limited bankroll using such small price projections are not practical. I also don't have the time to monitor market closely enough. What I would really like is to buy at the bottom of a price reversal and have an indicator that would tell me if the move to the upside will continue or if the price will resume the larger downtrend.
Let me present a recent long position as an example. The short term chart show the TD Sequential countdown and the buy point (red bar). As the price moved up, one can see that it ran into resistance at the TDST line at 83.08 . Does one sell here or does one wait until the price builds strength to bust through overhead resistance?
What the next chart shows is that it might be possible to see a trend break in the TD Combo Advance/Decline line, indicating that a move higher is possible. As you can see, the A/D line has already broken the shorter term downtrends, indicating that one should hold the long position. If it breaks the final line, look for a larger up-move.
Saturday, October 06, 2007
I have put together a advance-decline using the rules of the TD Combo countdown. The basic rules are a follows: When a TD Combo buy countdown day is recorded, a negative number one is assigned. When a TD Combo sell is recorded, a positive number one is recorded. The two results are added together and then summed to give the new indicator. This relatively simple indicator reduces the noise in the typical price chart. It also seems more susceptible to trendline drawing. The charts below are just a couple examples of using the indicator for confirm price breakouts.
Thursday, October 04, 2007
So I've done a little back testing on the three major indexes using my newly constructed TD Combo oscillator. The settings are pretty simple.
Buy = 21 day moving average of the oscillator crosses up through 0.40
Sell = 21 day moving average of the oscillator crossed down through 0.10
With this simple setting I get a nice return. What I especially like is the fact that the conditions keep you out of bear markets and keep you in the bull runs. (Green shaded areas are when the trade is on) More detailed backtesting results are given in each figure.
Wednesday, October 03, 2007
Tuesday, October 02, 2007
I was looking some charts tonight and noticed that Kohl's (KSS) finished up both a TD Sequential and a TD Combo countdown. Since I had such a nice pop with KSWS after my post the other day, I thought that I'd not be so timid about pulling the trigger for another retailer. Plus, there is a nice inverted head and shoulders on the chart.
In a bit of a coincidence, I had the tv on in the background and heard the Fast Money people talking about their bullish outlook on Kohl's. I might pick up some KSS for a short trade tomorrow. I'm not showing the charts but THQI and TDW look pretty good right here too.
In the previous post I argue that the 87 crash did not sneak up on the top Wall Street traders. On the contrary, they expected it and made a killing on it. Here are some quotes from Market Wizards.
Paul Tudor Jones interview with Jack D. Schwager
The week of the crash was one of the most exciting periods of my life. We had been expecting a major stock market collapse since mid-1986 and had contingency plans drawn up because of the possibility we foresaw for a financial meldown. When we cam in on Monday, October 19 (1987), we know that the market was going to crash that day.
Ed Seykota interview with Jack D. Schwager
I made money on the day of the October 1987 crash. I also made money for the month as a whole, and for the year, as well. I lost on the day after the crash, however, since I was short the interest rate markets. Most trend traders were likely either out or short stocks and stock indexes during the crash.
James B. Rogers, Jr. interview with Jack D. Schwager
I remember why I became even more bearish on the weekend before October 19. The week before, Alan Greenspan announced that the balance of trade was getting much better and things were under control. Two days later, the balance of trade figures came out, and they were the worst in history of the world. Right away I said, "This guy is either a fool or a liar. He doesn't have any idea what is going on." Then on the weekend before October 19, you Treasury Sectretary Baker telling the world we were going to stick it to the Germans by letting the dollar go, because the Germans weren't loosening monetary and fiscal policy as Baker had demanded. It looked like the trade wars of the 1930s all over again.
I was in a panic-and I was alrady short! I called Singapore that Sunday night to add to my shorts. So all those guys who came in on Monday to sell had very, very good reasons to sell, andthere were no buyers araound.