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The V-Trade, Part 5: Technical Analysis—Moving Average Support & Resistance And Volatility Bands

The AIQ EDS file for Sylvain Vervoort’s July 2018 article in S&C, “The V-Trade, Part 5: Technical Analysis—Moving Average Support & Resistance And Volatility Bands,” can be obtained on request via email to info@TradersEdgeSystems.com. The code is also available below.

!THE V-TRADE, PART 5
!Author: Sylvain Vervoort, TASC July 2018
!Coded by: Richard Denning 11/15/18
!www.TradersEdgeSystems,com

!ABBREVIATIONS:
C is [close].
C1 is valresult(C,1).
C2 is valresult(C,2).
C3 is valresult(C,3).
C4 is valresult(C,4).
C5 is valresult(C,5).
C6 is valresult(C,6).
C7 is valresult(C,7).
C8 is valresult(C,8).
C9 is valresult(C,9).
C10 is valresult(C,10).
C11 is valresult(C,11).
C12 is valresult(C,12).
C13 is valresult(C,13).
C14 is valresult(C,14).
C15 is valresult(C,15).
C16 is valresult(C,16).
C17 is valresult(C,17).
C18 is valresult(C,18).
C19 is valresult(C,19).
PD is {position days}.
PEP is {position entry price}.

!MOVING AVERAGES:
!SIMPLE MOVING AVERAGES:
smaLen1 is 50.
smaLen2 is 100.
smaLen3 is 200.
esaLen is 20.
esaBandPct is 10.

sma1 is simpleavg(C,smaLen1).
sma2 is simpleavg(C,smaLen2).
sma3 is simpleavg(C,smaLen3).

!LINEAR WEIGHTED 
LWMA is (C*20+C1*19+C2*18+C3*17+C4*16
      +C5*15+C6*14+C7*13+C8*12+C9*11
      +C10*10+C11*9+C12*8+C13*7+C14*6
      +C15*5+C16*4+C17*3+C18*2+C19*1)/210.

!ESA BANDS:
esa is expavg(C,esaLen).
upperESA is esa*(1+esaBandPct/100).
lowerESA is esa*(1-esaBandPct/100).

!BOLLINGER BANDS:
!SET PARAMETERS FOR BANDS:
 BBlen 	is 20.!Default is 20
 Mult1 	is 2. !Default is 2
 Mult2 	is 2. !Default is 2

Variance is Variance([close],BBlen).
StdDev is Sqrt(Variance).
SMA is simpleavg([close],BBlen).
UpperBB is SMA + StdDev *  Mult1.
LowerBB is SMA - StdDev *  Mult2.

ShowValues if 1.

Squeeze if upperESA > UpperBB and lowerESA < LowerBB.

SqIndicator is iff(Squeeze,1,iff(not Squeeze,0,-1)).

Buy if upperESA < UpperBB  and valrule(Squeeze,1)
	 and C > sma3 and C<LWMA. 
Sell if (PD>=3 and  LWMA < valresult(LWMA,1)) or C < PEP.

The EDS file contains the code for the various moving averages mentioned in the article as well as code for the Bollinger Bands and exponential bands. I did not code the SVE bands discussed by Vervoort in his article. I coded a system that uses the concept of a squeeze, as discussed in the article.

A squeeze occurs when the Bollinger Bands are inside the exponential bands. Figure 8 shows a sample trade from the system on NVDA.

Figure 9 shows the EDS summary report for a four-year backtest using the NASDAQ 100 list of stocks.

Sample Chart

FIGURE 8: AIQ. This shows a sample trade from the squeeze system.

Sample Chart

Bean There, Done That

In this piece I wrote about a strong seasonal tendency in corn based on the planting cycle.  Turns out soybeans are in the same boat.  This can be a good thing for traders who are, a) willing to speculate, b) not dumb enough to the bet the ranch.

The Trend

Figure 1 displays the annual seasonal trend for soybeans (from www.sentimentrader.com).  Just as with corn, the months of February through April tend to see positive results.  Please note the use of the word “tend” and the lack of the words “sure” or “thing”.

bean seasonality

Figure 1- Soybean Annual Seasonal Trend (Courtesy Sentimentrader.com)

The History

Figure 2 displays a monthly chart for soybeans going back 4 decades.

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Figure 2 – Monthly chart for Soybeans (Courtesy ProfitSource by HUBB)

Here are the two things to note (using some pretty technical terms):

*Soybeans (like most commodities)  spend a lot of time “churning”, “grinding”, “consolidating” and generally going “nowhere”

*HOWEVER, “when beans go they really go!” (hopefully that wasn’t “too technical”)

*The primary thing to remember is that when soybeans get going to the upside, typically the best thing to do is to banish the word from “overbought” from your trading lexicon.  See Figure 3.3

Figure 3 – Big moves in Beans (Courtesy ProfitSource by HUBB)

Now let’s focus on the months of February, March and April.  Figure 4 displays the hypothetical $ growth (no slippage or commissions) from holding long a 1-lot of soybean futures during February, March and April every year starting in 1976.

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Figure 4 – Long 1 soybean futures contract during Feb-Mar-Apr every year since 1976

The Results

Some things to note regarding Feb-Apr in soybeans:

*# of times UP = 33

*# of times DOWN = 10

*Average $ gain = +$3,808

*Average $ loss = (-$1,788)

*Largest gain = +$15,025

*Largest loss = (-$3,775)

In sum, a winners to losers ratio of 3.3 (or 76% winners), an average win to average loss ratio of 2.13-to-1

Bottom line: these are great numbers for traders BUT they entail the assumption of significant risk (2017 saw a loss of over -$3,400)

An Alternative Way to Play

Ticker SOYB is the Teucrium ETF designed to track the price of soybeans.  SOYB allows traders to buy soybeans just as they would buy shares of stock.  Just remember that you don’t get the same leverage buying SOYB as you would buying a futures contract.

Figure 5 displays a monthly chart for SOYB and Figure 6 displays a daily chart.  Note the significant resistance level at around $16.96 a share.  If SOYB takes out that level sooner than later it might be a bullish sign.

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Figure 5 – SOYB Monthly (Courtesy AIQ TradingExpert)

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Figure 6 – SOYB Daily (Courtesy AIQ TradingExpert)

Summary

Soybeans have been beaten down a bit over the last several years.  If (and “yes”, that is a big “If”) beans are going to make a move higher, history suggests that the Feb through April period is a likely time for that to happen.

Am I “recommending” or even “merely suggesting” that you should buy soybean futures or ticker SOYB?  Not at all.  I adhere to that old media adage of “We (I) report, you decide.”

Which is better I think than the current motto of major media which appears to be “We decide, then we report our decision.”

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

Can Corn?

It’s January.  It’s cold.  And the ground in the Midwest is frozen (and getting more frozen by the moment I might #$%^ add).  So of course, it is time to thinking about planting corn!

Wait, what!?

Well, yes as it turns out just about everyone involved in the agricultural industry has questions (doubts?) about corn planting in the spring and the eventual crop harvested in fall.  And the big questions are, “How will planting go?” and “how much corn will be produced?”  As it relates to corm the whole supply/demand thing you learned about way back when hinges on the ultimate answers to those two questions.

In a nutshell, there is “doubt.”  No surprise really as there is absolutely not a single corn seed planted anywhere in the Midwest at this moment.  So, who knows for sure?

One thing we do know for sure is that a lot of people are aware of this phenomenon in corn and feel compelled to “hedge their bets”, typically on an annual basis.  Figure 1 displays an annual seasonal chart for corn futures from www.sentimentrader.com.1Figure 1 – Annual Seasonal trend for Corn (Courtesy Sentimentrader.com)

As you can see, price strength is typical in the first 4 to 5 months of the year.  This should not be surprising because – as I described above – doubt about supply causes buying pressure (typically).

So for traders the real question is “should I be buying corn in anticipation of buying pressure?”  The answer is “definitely, maybe!”  Let’s take a closer look.

Figure 2 displays spot corn prices since 2001.

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Figure 2 – Spot Corn prices (Courtesy ProfitSource by HUBB)

We can notice two things:

*Corn is presently in a fairly prolonged consolidation/compression range

*Previous consolidation/compression ranges have been followed by some significant advances

Despite this, one should not necessarily assume that corn is about to burst higher in price.  So let’s look at things from a more technical/tactical trading point of view.

How to Play Corn

*The “purest’ play is corn futures.  However, corn futures are not for most people.  In Figure 2, corn is trading at “350”, which equates to $3.50 a bushel in corn futures parlance.  Here is what you need to know:

If one were to buy a corn futures contract at $3.50 a bushel, a move to $4.50 a bushel would generate a gain of +$5,000 and a move to $2.50 a bushel would generate a loss of -$5,000.

In sum, a great way to make a lot of money if you are right and a great way to lose a lot of money if you are wrong.  There is an alternative for the “average” investor.

*Ticker CORN is the Teucrium Corn ETF which allows investors to trade corn like they would trade shares of stock.  Figure 3 displays a daily chart for ticker CORN.

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Figure 3 – Ticker CORN with a significant resistance level around $16.53 (Courtesy AIQ TradingExpert)

Note that I have drawn a horizontal line $16.53, which connect the January 2018 low and the December 2018 high.  As with any line that one might arbitrarily draw on a bar chart, there is nothing “magic” about this price level.  But it does represent a potential line in the sand that be utilized in the following “highly complex” manner:

*CORN above $16.53 = (Possibly) Good

*CORN below $16.53 = Bad

The Choices

So what’s an investor to do?  As always, there are choices.

Choice #1 is flush this idea and forget all about corn.

Choice #2 is to buy now in hopes of an upside breakout, possibly with a stop-loss under the September 2018 low of $15.39.

Choice #3 is to wait for an upside breakout above $16.53 as confirmation that an actual bullish trend is forming.

Summary

I don’t make “recommendations” here at JOTM, so whether you prefer #1, #2 or #3 above is entirely up to you.  The key points though are:

It appears that there may be an opportunity forming (higher seasonal corn prices based on perceptions of problematic weather for planting and a long consolidation/compression in price).

A trader considering this idea needs to make decisions regarding what to trade (futures or CORN ETF), when to actually get in (before the breakout or after) and where to place a stop-loss.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

A Long and Short-Term Bond Market Perspective, Part I

Meanwhile, back in the bond market.  Yes, the stock market has been the place for “action” recently.  First a massive decline in short order followed immediately by a stunning advance.  But many investors also look to the bond market in order to achieve their long-term goals.  So, let’s try to put things in perspective a bit.

The Main Points

*Point ARates will likely work their way higher over time

There has historically been a roughly 60-year cycle in interest rates (See Figure 1).  If this holds to form, odds are the next 30 years will not look anything like the last 30 years in the bond market, i.e., rates will likely work their way higher over time.

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Figure 1 – 60-year cycle in rates suggest higher yields in years ahead (Source: mcoscillator.com)

*Point BInvestors should be wary of buying and holding long-term bonds

Figure 1 does not mean that rates will rise in a straight-line advance.  But again, odds are that rates will rise over time, so as a result, investors should be wary of buying and holding long-term bonds (as they stand to get hurt the most if rates rise).  That being said, in the short-term anything can happen, and long-term bonds may still be useful to shorter-term traders, BUT…

…Short to intermediate term bond funds are better now for investors than long-term bonds (if rates rise over time investors in short/intermediate term bonds can reinvest more quickly at higher rates, while long-term bond holders just lose principal).

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Figure 2 – Affect of rising rates on bonds of various maturities (Source: AAII.com)

*Point CIt appears to be too soon to declare a confirmed “Bond Bear Market!!!”

Bond yields looked in 2018 like they were staging a major upside breakout – and then reversed back to the downside.  So – Point A above not withstanding – it appears to be too soon to declare confirmed “Bond Bear Market!!!”

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Figure 3 – 10-year treasury yield “breakout fake out” (Source: AIQ TradingExpert)

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Figure 4 – 30-year treasury yield tested 120-month moving average, then failed  (Source: AIQ TradingExpert)

*Point DCorporate bonds as a whole carry more risk than in years past

The risk associated with corporate bonds as an asset class are higher than in the past due to A) a higher rate of debt, and B) a large segment of the corporate bond market is now in the BBB or BBB- rating category.  If they drop one grade they are no longer considered “investment grade” and many institutional holders will have no choice but to sell those bonds en masse.  Which raises the age-old question, “too whom?”

For more on this topic see herehere and here.5Figure 5 – Rising corporate debt (Source: Real Investment Advice)

*Point E:

On the brighter side, two bond market models that I follow are presently bullish.  More about these in Part II.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

A Long and Short-Term Bond Market Perspective, Part II

In Part I here I laid out my main thoughts regarding the bond market.  The final point mentioned that two trading models for bonds that I follow are presently bullish.  So in Part II let’s bring those up-to-date.

#1. Japanese Stocks (EWJ) vs. Long-Term Treasuries (TLT)

I have written about this model on several occasions in the past (herehere and here).  But in a nutshell:

*The Japanese stock market (using ETF ticker EWJ as a proxy) and long-term U.S. treasury bonds (using ETF ticker TLT as a proxy) tend to have an inverse relationship over time.

Therefore:

*A bearish trend for EWJ (5-week moving average below 30-week moving average) tends to be bullish for bonds.

*A bullish trend for EWJ (5-week moving average above 30-week moving average) tends to be bearish for bonds.

Figure 1 displays the EWJ on top with TLT on the bottom.  Note the general inverse correlation in price movement.

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Figure 1 – T-Bonds (ticker TLT in bottom clip) tend to move inversely to Japanese stocks (ticker EWJ with 5-weel and 30-week moving averages in top clip) (Courtesy AIQ TradingExpert)

#2. Gold/Copper Ratio versus Bonds

I have written about this before here.  In a nutshell:

*The gold/copper ratio has a relatively high correlation to the price of t-bonds (current correlation coefficient = 0.73; a reading of 1.00 means they mirror each other, a reading of -1 means there are trade exactly inversely).

Figure 2 displays treasury bond futures prices (blue) versus the Gold/Copper Ratio (x10) since 2001.  The correlation is fairly obvious to the naked eye.

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Figure 2 – T-bond futures price (blue) versus Gold/Copper ratio (x10); 12/31/01-1/11/2019

*When the gold/copper ratio is in an uptrend (see here for how that designation is made) this indicator is considered bullish for bonds

*When the gold/copper ratio is in a downtrend this indicator is considered bearish for bonds

Putting the Two Together

*If either of the models is bullish that is considered bullish for bonds

*If both models are bearish that is considered very bearish for bonds

Figure 3 displays the gain or loss from holding a long position in a treasury bond futures contract depending on whether, a) neither model is bullish (red), or, b) one or more of the models is bullish (blue)

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Figure 3 – Cumulative $ gain (loss) from holding long t-bond futures if 1 or more model is bullish (blue) versus if neither model is bullish (red); 7/22/96-1/11/19

As you can see, a bullish reading in no way guarantees higher bond price and a bearish reading in no way guarantees lower bond price.  Still, given the stark differences between the performance of the blue line and the red line, that would seem to be the way to bet.

For what it is worth, both models detailed above are bullish at the moment.

Summary

*In Part I, I basically inferred a preference for short to intermediate term bonds for people who buy and hold bonds (or bond funds) as part of a longer-term investment strategy (if rates rise 1 percentage point, a 30-year bond paying 4% a year, will lose -15% in principal – too much risk from my perspective).

*At the same time, as highlighted here in Part II, long-term bonds can still offer outstanding trading opportunities both on the long side and the short side – for those inclined to play.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

All Eyes on Key Bellwether Support Levels

First the reality.  Nobody knows what the market is going to do.  Yes, I am aware that there are roughly a bazillion people out there “prognosticating” (myself included) about the stock market.  And yes, if one makes enough “predictions”, the law of averages dictates that one will be correct a certain percentage of the time.

Still, the market does offer clues.  Sometimes those clues turn out to be false leads.  But sometimes they do offer important information.  For example, Figure 1 displays four major market indexes.  As you can see, in the Aug-Sep-Oct time frame all four of these averages “broke out” to new all-time highs (i.e., The Good News) and then broke back down below the previous resistance line drawn on each chart (i.e., The Bad News).

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Figure 1 – Four major indexes breakout then fail (Courtesy AIQ TradingExpert)

False breakouts happen all the time.  And the reality here is that sometimes they mean something and sometimes they don’t.  But when all four major average do the same thing, a warning sign has been issued to those who are interested in seeing it.  That’s why it can be useful to seek “confirmation”.  For my purposes I look to what I refer to as my 4 “bellwethers”, which are:

SMH – Semiconductors

TRAN – Dow Transportation Average

ZIV – Velocity Shares Inverse VIX Index

BID – Sotheby Holdings

These tickers appear in Figure 2 (click to enlarge).

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Figure 2 – Jay’s Market Bellwethers (Courtesy AIQ TradingExpert)

While the major indexes were testing new highs in Aug/Sep and then breaking down in October:

SMH – Never really came close to breaking out above its March high

TRAN – Followed the major indexes by hitting new highs in Aug/SP and then breaking down in October

ZIV – Never came anywhere close to its Jan-2018 high

BID – Broke to a new high in Jun/Jul, then failed badly.

In a nutshell, the failed major index breakouts were accompanied by absolutely no positive signs from the 4 bellwethers. So, the warning signs were there if one wished to see them.

So where are the bellwethers now?  Another close look at Figure 2 reveals that:

SMH – the key support level at 80.92

TRAN – the key level for the Dow Transports is 8744.36

ZIV – the key support level is 60.60

BID – a potential support level is 32.95 (the Apr 2013 low)

Summary

*Given the washed-out/oversold level that many indicators and sentiment surveys have reached…

*…Combined with the fact that we are in the seasonally favorable pre-election year (no down pre-election years since the 1930’s)

*There is a chance that 2019 could be surprisingly bullish, and shell-shocked investors should not stick their heads in the sand to the possibility.

At the same time:

*Based solely on trend-following indicators ALL of the major market indexes are technically in confirmed bear markets.  As a result, there is absolutely nothing wrong with having some portion of one’s capital in defensive positions at the moment (30% cash or short-term bonds?).

*Keep a close eye on January performance.  A bullish January would be a positive sign just as a negative January could – in this case – signal a continued market decline.

*Keep a close eye on the 4 Bellwethers relative to their respective support levels.

In a nutshell:

*Up January + Bellwethers holding above support = GOOD

*Down January + Bellwether breaking down below support = BAD

Those are all the “clues” I can offer at the moment.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

The 2018 updated SP500 Group and Sector

The 2018 updated SP500 Group and Sector structure for TradingExpert Pro is now available


This completely updated structure is current through the end of December 2018. Many sectors and groups have been renamed by S&amp;P and the new structure reflects these changes. The old SP500 structure in your program will be replaced if you choose to install the update. 

The complete install and further instructions are available at http://aiqsystems.com/sp500_update_2019.html


The SP500 structure in AIQ Charts and Data Manager showing new group and sector naming shown below

Weekly & Daily Stochastics

The AIQ code based on Vitali Apirine’s article in the September issue of Stocks and Commodities, “Weekly and Daily Stochastics, is provided below

Using Apirine’s weekly and daily stochastic indicators and a moving average to determine trend direction, I created an example system (long only) with the following rules:

Enter long next bar at open when all of the following are true:

  1. The 200-day simple average of the NDX is greater than the day before
  2. The 200-day simple average of the stock is greater than the day before
  3. Both the weekly and daily stochastic indicators have been below 20 in the last five days
  4. Both the weekly and daily stochastic indicators are greater than the day before.

I tested three exits. Figure 8 shows a 21-day hold then exit. Figure 9 shows a three-moving-average trend-following exit. Figure 10 shows an exit using only the weekly &amp; daily stochastic, once both are lower than the day before.

Sample Chart

FIGURE 8: AIQ, BUY and HOLD. Here is the sample equity curve (blue) compared to the NDX (red) for the test using a 21-day hold exit.

Sample Chart

FIGURE 9: AIQ, TREND-FOLLOWING EXIT. Here is the sample equity curve (blue) compared to the NDX index (red) for the test using a trend-following exit.

Sample Chart

FIGURE 10: AIQ, W and D STOCHASTIC EXIT. Here is the sample equity curve (blue) compared to the NDX index (red) for the test using the weekly and daily stochastic indicators.

The 21-day hold test showed a 11.2% return with a maximum drawdown of 29.3%. The trend-following exit test showed a 17.6% return with a maximum drawdown of 28.8%. The test using an exit based on only the weekly and daily stochastic indicators showed a return of 2.9% with a maximum drawdown of 32.5%. All the tests used the same entry rule and were run on an old 2016 list of the NASDAQ 100 stocks with the stocks that are no longer trading deleted.

!WEEKLY AND DAILY STOCHASTIC
!Author: Vitali Apirine, TASC Sept 2018
!Coded by: Richard Denning 7/7/2018
!www.TradersEdgeSystems.com

!INPUTS:
Periods is 14.
Periods1 is 3.
Pds is 70. 
Pds1 is 3.
smaLen1 is 70.
exitType is 1.

!ABBREVIATIONS:
C is [close].
H is [high].
L is [low].

!INDICATOR CODE:
STOCD is (C-LOWRESULT(L,Periods))/(HIGHRESULT(H,Periods)-LOWRESULT(L,Periods))*100. 
SD is Simpleavg(Stocd,Periods1).
StocW is (C-LOWRESULT(L,Pds))/(HIGHRESULT(H,Pds)-LOWRESULT(L,Pds))*100.
SW is Simpleavg(Stocw,Pds1).
HD if hasdatafor(1000) &gt;= 500.
SMA200 is simpleavg(C,200).
SMA200ndx is tickerUDF("NDX",SMA200).

!SYSTEM CODE:
Buy if SMA200ndx &gt; valresult(SMA200ndx,1)
          and SMA200 &gt; valresult(SMA200,1)
          and SW &gt; valresult(SW,1) 
          and SD &gt; valresult(SD,1) 
          and countof(SW &lt; 20,5)&gt;=1 
          and countof(SD &lt; 20,5)&gt;=1 
          and HD.
smaLen2 is smaLen1*2.
smaLen3 is smaLen1*4.
SMA1 is simpleavg(C,smaLen1).
SMA2 is simpleavg(C,smaLen2).
SMA3 is simpleavg(C,smaLen3).
PD is {position days}.

!EXIT TYPE 1 USES THE INDICATOR ONLY
!EXIT TYPE 2 IS TREND FOLLOWING
Sell if (SD &lt; valresult(SD,1) and SW &lt; valresult(SW,1) and exitType=1)
       or (exitType = 2 
           and ((Valresult(C,PD)valresult(SMA1,PD) And Cvalresult(SMA2,PD) And Cvalresult(SMA3,PD) And C 250)).

RSS is C/valresult(C,120).
RSL is C/valresult(C,240).

—Richard Denning

info@TradersEdgeSystems.com

for AIQ Systems

When to Buy Energy Stocks

Crude oil and pretty much the entire energy sector has been crushed in recent months. This type of action sometimes causes investors to wonder if a buying opportunity may be forming.

The answer may well be, “Yes, but not just yet.”

Seasonality and Energy

Historically the energy sector shows strength during the February into May period.  This is especially true if the November through January period is negative.  Let’s take a closer look.

The Test

If Fidelity Select Energy (ticker FSENX) shows a loss during November through January then we will buy and hold FSENX from the end of January through the end of May.  The cumulative growth of $1,000 appears in Figure 1 and the yearly results in Figure 2.

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Figure 1 – Growth of $1,000 invested in FSENX ONLY during Feb-May ONLY IF Nov-Jan shows a loss

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Figure 2 – % + (-) from holding FSENX during Feb-May ONLY IF Nov-Jan shows a loss

Figure 3 displays ticker XLE (an energy ETF that tracks loosely with FSENX).  As you can see, at the moment the Nov-Jan return is down roughly -15%.

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Figure 3 – Ticker XLE (Courtesy AIQ TradingExpert)

All of this suggests remaining patient and not trying to pick a bottom in the fickle energy sector. If, however, the energy sector shows a 3-month loss at the end of January, history suggests a buying opportunity may then be at end.

Summary

Paraphrasing here – “Patience, ah, people, patience”.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

Focus on “Investing” (not “the Market”)

I don’t offer “investment advice” here at JOTM so I have not commented much on the recent action of the market lest someone thinks I am “predicting” what will happen next.  Like most people, predicting the future is not one of my strengths.  I do have some thoughts though (which my doctor says is a good thing).

The Big Picture

Instead of talking about “the markets”, let’s talk first about “investing”, since that is really the heart of the matter.  “The markets” are simply a means to an end (i.e., accumulating wealth) which is accomplished by “investing”.  So, let me just run this one past you and you can think about it for a moment and see if it makes sense.

Macro Suggestion

*30% invested on a buy-and-hold basis

*30% invested using trend-following methods

*30% invested using tactical strategies

*10% whatever

30% Buy-and-Hold: Avoid the mistake that I made way back when – of thinking that you should always be 100% in or 100% out of the market.  No one gets timing right all the time.  And being 100% on the wrong side is pretty awful.  Put some portion of money into the market and leave it there.  You know, for all those times the market goes up when you think it shouldn’t.

30% using trend-following methods:  Let me just put this thought out there – one of the biggest keys to achieving long-term investment success in the stock market is avoiding some portion of those grueling 30% to 89% (1929-1932) declines that rip your investment soul from you body and make you never want to invest again.  Adopt some sort of trend-following method (or methods) so that when it all hits the fan you have some portion of your money “not getting killed”.

30% invested using (several) tactical strategies: For some examples of tactical strategies see hereherehere and here.  Not recommending these per se, but they do serve as decent examples.

10% whatever:  Got a hankering to buy a speculative stock?  Go ahead.  Want to trade options?  OK.  Want to buy commodity ETFs or closed-end funds or day-trade QQQ?  No problem.  Just make sure you don’t devote more than 10% of your capital to your “wild side.”

When the market is soaring you will likely have at a minimum 60% to 90% of your capital invested in the market.  And when it all goes south you will have at least 30% and probably more out of the market ready to reinvest when the worm turns.

Think about it.

The Current State of Affairs  

What follows are strictly (highly conflicted) opinions.  Overall sentiment seems to me to be very bearish – typically a bullish contrarian sign.  However, a lot of people whose opinions I respect are among those that are bearish.  So, it is not so easy to just “go the other way.”  But here is how I see the current “conflict”.

From a “technical” standpoint, things look awful.  Figures 1 and 2 show 4 major market averages and my 4 “bellwethers”.  They all look terrible.  Price breaking down below moving averages, moving average rolling over, and so on and so forth.  From a trend-following perspective this is bearish, so it makes sense to be “playing defense” with a portion of your capital as discussed above.

(click any Figure to enlarge)

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Figure 1 – Major market averages with 50-day and 200-day moving averages (Courtesy AIQ TradingExpert)

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Figure 2 – Jay’s Market Bellwethers with 50-day and 200-day moving averages (Courtesy AIQ TradingExpert)

On the flip side, the market is getting extremely oversold by some measure and we are on the cusp of a pre-election year – which has been by far the best historical performing year within the election cycle.

Figure 3 displays a post by the esteemed Walter Murphy regarding an old Marty Zweig indicator.  It looks at the 60-day average of the ratio of NYSE new highs to New Lows.  Low readings typically have marked good buying opportunities.

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Figure 3 – Marty Zweig Oversold Indicator (Source: Walter Murphy on Twitter)

Figure 4 displays the growth of $1,000 invested in the S&amp;P 500 Index ONLY during pre-election years starting in 1927.  Make no mistake, pre-election year gains are no “sure thing.”  But the long-term track record is pretty good.

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Figure 4 – Growth of $1,00 invested in S&amp;P 500 Index ONLY during pre-election years (1927-present)

There is no guarantee that an oversold market won’t continue to decline.  And seasonal trends are not guaranteed to work “the next time.”  But when you get an oversold market heading into a favorable seasonal period, don’t close your eyes to the bullish potential.

Summary

Too many investors seem to think in absolute terms – i.e., I must be fully invested OR I must be out.  This is (in my opinion) a mistake.   It makes perfect sense to be playing some defense given the current price action.  But try not to buy into the “doomsday” scenarios you might read about.  And don’t be surprised (and remember to get back in) if the market surprises in 2019.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services,