Category Archives: ETFS

The Two Most Important Bond Market Charts

A funny thing happened on the way that bond bear market.  But first the promised charts:
*Figure 1 strongly suggests that the next major move in bond yields is higher (as yields tend to move in roughly 30-year up and 30-year down waves).
1Figure 1 – 60-year bond yield cycle (Courtesy: www.mcoscillator.com)

*Figure 2 displays the 10-year treasury note yield – with a long, long downtrend followed by an advance to a potential “fake out breakout” to the upside.  More to follow.
2Figure 2 – 10-year treasury yields (x10); ticker TNX (Courtesy AIQ TradingExpert)

Now for the recap:
*The 10-year treasury yield (TNX) topped out in the early 1980’s and declined to a low in July 2012.
*TNX then moved higher for about a year, then drifted lower to its ultimate low around 1.35 three years later in 2016.
*From there rates rose to roughly 3.25% by October 2018.  Along the way it took out its 120-month moving average, a horizontal resistance line at about 3.04% and finally a downward sloping trend line in October 2018.
*With “final resistance” pierced many bond market prognosticators assumed that yields were off to the races.
*And then that “funny thing” happened.  10-year yields fell from 3.25% in October to a recent level of roughly 2.90%.
At this point “predicting” where TNX is headed in the short run from here is pure conjecture.  There is a chance that rates will not rally anytime soon and that they may even continue to drift back lower.  Take your pick.  Flip a coin.  Whatever.  The bottom line is that what you see in Figure 2 is entirely in “the eye of the beholder.”
So let’s circle back to Figure 1.  The bottom line is this:
*The odds appear very good that the next 30 years in in bond yield will look a lot different than the last 30 years, when high grade bond yield fell from 15% to roughly 3% (which is OK, because if rates ever go negative and I have to pay the government just to hold my money I am going to be really pissed….but I digress).
*Short-term “traders” can trade long-term bonds to their hearts content.  However, “investors” may be wise to avoid long-term bonds.  Consider ticker TLT, the iShares 20+ year treasury bond ETF.  It presently has a 30-day SEC yield of 3.06% and an “average duration” of 17.42 years.  Here is how to understand that:
Regarding yield, if price remained completely unchanged, and investor would theoretically earn roughly 3.06% in interest over the next 12 months
Regarding duration, if interest rates rose one full percentage point, ticker TLT would theoretically lose -17.42% in value
Long-term bonds may rally from time to time.  However, for long-term investors holding bonds, this is NOT a favorable reward-to-risk tradeoff.
Summary
In the “big picture” we probably are in a long-term bear market for bonds.  But it may not look like it for a while.  So trade in and out as much as you’d like.  But for bond investment purposes I am keeping duration short.
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.

‘Dogs’ ‘Due’ for ‘Days’

While I am by and large an avowed “trend-follower” I also recognize that sometimes things get beaten down so much that they ultimately offer great potential long-term value.  Or, as they say, “every dog has it’s day.”  So, let’s consider some “dogs”.

For the record, and as always, I am not “recommending” these assets – I am simply highlighting what look like potential opportunities.

Dog #1: Soybeans (ticker SOYB)

As I wrote about in this article, soybeans are very cyclical in nature.  According to that article there are two “bullish seasonal periods” for beans and one “bearish”:

*Long beans from close on the last trading day of January through the close on 2nd trading day of May

*Short beans from the close on 14th trading day of June through the close on 2nd trading day of October

*Long beans from the close on 2nd trading day of October through the close on 5th trading day of November

In Figure 1 (ticker SOYB – an ETF that tracks the price of soybean futures) has been beaten down quite a bit.  This doesn’t mean price can’t go lower.  However, given the cyclical nature of bean prices they probably won’t go down forever.

1

Figure 1 – Weekly SOYB; prices beaten down (Courtesy AIQ TradingExpert)

Figure 2 is a daily chart of SOYB and displays the recent “bearish” seasonal period and the latest “bullish” period so far.

2

Figure 2 – Daily SOYB (Courtesy AIQ TradingExpert)

Dog #2: Uranium (ticker URA)

In this article and this article, I wrote about the prospects for uranium and ticker URA – an ETF that tracks the price of uranium.  Since that time URA has basically continued to go nowhere.  As you can see in Figure 3, it has been doing just that for some time.  While there is no guarantee that the breakout out of the range indicated in Figure 2 will be to the upside, historically, elongated bases such as this often lead to just that.  A trader can buy it at current levels and put a stop loss somewhere below the low for the base and take a reasonable amount of risk if they are willing to bet on an eventual upside breakout.

3

Figure 3 – Ticker URA with a long (really long) base (Courtesy AIQ TradingExpert)

Dog #3: Base Metals (Ticker DBB)

Under the category of – I called this one way, way too soon – in this article I wrote about the potential for ticker DBB to be an outperformer in the years ahead.  As you can see in Figure 4, so far, not so good.

4

Figure 4 – Base Metals via ticker DBB (Courtesy AIQ TradingExpert)

Still, the argument for base metals is this:

*In Figure 3 is this article you can see that commodities as an asset class are due for a good move relative to stocks in the years ahead.

*In addition, the Fed is raising interest rates.

As discussed historically base metals have been the best performing commodity sector when interest rates are rising.  Ticker DBB offers investors a play on a basket of base metals.

Summary

Will any of these “dog” ideas pan out?  As always, only time will tell.  But given the cyclical nature of commodities and the price and fundamental factors that may impact these going forward, they might at least be worth a look.

In the meantime, “Woof” (which – as far as I can tell – means “Have a nice day”).

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.

Watch This Indicator

So, the big question on every investor’s mind is “What Comes Next?”  Since this is not an advisory service (and given the fact that I am not too good at predicting the future anyway) I have avoided commenting on “the state of the markets” lately.  That being said, I do have a few “thoughts”:

*The major averages (as of this exact moment) are still mostly above their longer-term moving averages (200-day, 10-month, 40-week, and so on and so forth).  So, on a trend-following basis the trend is still “up”.

0Figure 1 – The Major Index (Courtesy AIQ TradingExpert)

*We are in the most favorable 15 months of the 48-month election cycle (though off to a pretty awful start obviously) which beings Oct.1 of the mid-term year and ends Dec. 31st of the pre-election year.

*Investors should be prepared for some volatility as bottoms following sharp drops usually take at least a little while to form and typically are choppy affairs.  One day the market is up big and everyone breathes a sigh of relief and then the next day the market tanks.  And so on and so forth.

An Indicator to Watch

At the outset let me state that there are no “magical” indicators.  Still, there are some that typically are pretty useful.  One that I follow I refer to as Nasdaq HiLoMA.  It works as follows:

A = Nasdaq daily new highs

B = Nasdaq daily new lows

C = (A / (A+B)) * 100

D = 10-day moving average of C

C can range from 0% to 100%.  D is simply a 10-day average of C.

Nasdaq HiLoMA = D

Interpretation: When Nasdaq HiLoMA drops below 20 the market is “oversold”.

Note that the sentence above says “the market is oversold” and NOT “BUY NOW AGGRESSIVELY WITH EVERY PENNY YOU HAVE.”  This is an important distinction because – like most indicators – while this one may often give useful signals, it will occasionally give a completely false signal (i.e., the market will continue to decline significantly).

A couple of “finer points”:

*Look for the indicator to bottom out before considering it to be “bullish”.

*A rise back above 20 is often a sign that the decline is over (but, importantly, not always).  Sometimes there may be another retest of recent lows and sometimes a bear market just re-exerts itself)

*If the 200-day moving average for the Dow or S&P 500 is currently trending lower be careful about using these signals.  Signals are typically more useful if the 200-day moving average for these indexes is rising or at least drifting sideways rather than clearly trending lower (ala 2008).

Figures 2 through 8 displays the S&P 500 Index with the Nasdaq HiLoMA indicator.  Click to enlarge any chart.

1Figure 2 – SPX with Jay’s Nasdaq HiLoMA ending 2006 (Courtesy AIQ TradingExpert)

2Figure 3 – SPX with Jay’s Nasdaq HiLoMA ending 2008 (Courtesy AIQ TradingExpert)

3Figure 4 – SPX with Jay’s Nasdaq HiLoMA ending 2010 (Courtesy AIQ TradingExpert)

4Figure 5 – SPX with Jay’s Nasdaq HiLoMA ending 2012 (Courtesy AIQ TradingExpert)

5Figure 6 – SPX with Jay’s Nasdaq HiLoMA ending 2014 (Courtesy AIQ TradingExpert)

6Figure 7 – SPX with Jay’s Nasdaq HiLoMA ending 2016 (Courtesy AIQ TradingExpert)

7Figure 8 – SPX with Jay’s Nasdaq HiLoMA ending 2018 (Courtesy AIQ TradingExpert)

Summary

The stock market is in a favorable seasonal period and is oversold.  As long as the former remains true, react accordingly (with proper risk controls in place of course).

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 (Potential) Bullish Case for Bonds

OK, first the bad news.  In terms of the long-term, we are probably in the midst of a rising interest rate environment.  Consider the information contained in Figure 1 from McClellan Financial Publications.

(click to enlarge)0a

Figure 1 – The 60-year cycle in interest rates (Courtesy: www.mscoscillator.com)

Though no cycle is ever perfect, it is only logical to look at Figure 1 and come away thinking that rates will rise in the years (and possibly decades) ahead.  And one should plan accordingly, i.e.:

*Eschew large holdings of long-term bonds. Remember that a bond with a “duration” -Google that term as it relates to bonds please – of 15 implies that if interest rates rise 1 full percentage point then that bond will lose roughly 15% of principal.  Ouch.

*Stick to short to intermediate term bonds (which will reinvest at higher rates more quickly than long-term bonds as rates rise) and possibly some exposure to floating rate bonds.

That is “The Big Picture”.

In the meantime, there is a potential bullish case to be for bonds in the shorter-term.  The “quick and dirty” guide to “where are bonds headed next” appears in the monthly and weekly charts of ticker TLT (iShares 20+ years treasury bond ETF).  Note the key support and resistance levels drawn on these charts.

(click to enlarge)1

Figure 2 – Monthly TLT with support and resistance (Courtesy ProfitSource by HUBB)

(click to enlarge)2

Figure 3 – Weekly TLT with support and resistance (Courtesy ProfitSource by HUBB)

There is nothing magic about these lines, but a break above resistance suggests a bull move, a break below support suggests a bear move, and anything in between suggests a trading range affair.

Now let’s look at some potentially positive influences.  Figure 4 displays a screen from the excellent site www.sentimentrader.com that shows that sentiment regarding the long treasury bond is rock bottom low.  As a contrarian sign this is typically considered to be bullish.

(click to enlarge)3

Figure 4 – 30-year treasury investor sentiment is extremely low (Courtesy Sentimentrader.com)

Figure 5 – also from www.sentimentrader.com – suggests that bonds may be entering a “bullish” seasonal period between now and at least late-November (and possibly as long as late January 2019).

(click to enlarge)4

Figure 5 – 30-year treasury seasonality (Courtesy Sentimentrader.com)

Figure 6 displays the 30-year treasury bond yield (multiplied by 10 for some reason).  While rates have risen 27% from the low (from 2.51% to 3.18%), they still remain below the long-term 120-month exponential moving average.

(click to enlarge)5

Figure 6 – Long-term treasury bond yields versus 120-month moving average (Courtesy AIQ TradingExpert)

Finally, two systems that I developed that deems the bond trend bullish or bearish based on the movements of 1) metals, and 2) Japanese stocks turned bullish recently.  The bond market has fallen since these bullish signal were flashed – possibly as a result of the anticipated rate hike from the Fed.  Now that that hike is out of the way we should keep a close eye on bonds for a potential advance in the months ahead.

(click to enlarge)6a

Figure 7 – Bonds tend to move inversely to Japanese stocks; Ticker EWJ 5-week average is below 30-week average, i.e., potentially bullish for bonds (Courtesy AIQ TradingExpert)

Summary

It’s a little confusing here.

a)  The “long-term” outlook for bonds is very “iffy”, so bond “investors” should continue to be cautious – as detailed above.

b) On the other hand, there appears to be a chance that bonds are setting up for a rally in the near-term.

c) But, in one final twist, remember that if TLT takes out its recent support level, all bullish bets are off.

Are we having fun yet?

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.

New Highs, Check…Now What?

Let’s open with Jay’s Trading Maxim #7.

Jay’s Trading Maxim #7: Being able to identify the trend today is worth more than 1,000 predictions of what the trend will be in the future.

Yes trend-following is boring.  And no, trend-following never does get you in near the bottom nor out at the top.  But the reality is that if you remain long when the trend appears to be up (for our purposes here let’s define this roughly as the majority of major market averages holding above their long-term moving averages) and play defense (i.e., raise cash, hedge, etc.) when the trend appears to be down (i.e., the majority of major market averages are below their long-term moving averages), chances are you will do pretty well for yourself.  And you may find yourself sleeping pretty well at night as well along the way.

To put it more succinctly:

*THE FOREST = Long-term trend

*THE TREES = All the crap that everyone tells you “may” affect the long-term trend at some point in the future

Human nature is a tricky thing.  While we should clearly be focused on THE FOREST the reality is that most investors focus that majority of their attention on all those pesky trees.  Part of the reason for this is that some trees can offer clues.  It’s a question of identifying a few “key trees” and then ignoring the rest of the noise.

A New High

With the Dow Industrials rallying to a new high virtually all the major averages have now reached a new high at least within the last month.  And as you can see in Figure 1 all are well above their respective 200-day moving average.  Long story short the trend is “UP”.

(click to enlarge)1Figure 1 – U.S. Major Market Indexes in Uptrends (Courtesy AIQ TradingExpert)

Now What? The Good News

As strong as the market has been of late it should be noted that we are about to enter the most favorable seasonal portion of the 48-month election cycle.  This period begins at the close of September 2018 and extends through the end of December 2019.

Figure 2 displays the growth of $1,000 invested in the Dow Industrials only during this 15-month period every 4 years.  Figure 3 displays the actual % +(-) for each of these periods.  Note that since 1934-35, the Dow has showed a gain 20 out of 21 times during this period.

2a

Figure 2 – Growth of $1,000 invested in Dow Industrials ONLY during 15 bullish months (mid-term through pre-election year) within 48-month election cycle.

Start Date End Date Dow % +(-)
9/30/1934 12/31/1935 +55.6%
9/30/1938 12/31/1939 +6.2%
9/30/1942 12/31/1943 +24.5%
9/30/1946 12/31/1947 +5.1%
9/30/1950 12/31/1951 +18.9%
9/30/1954 12/31/1955 +35.5%
9/30/1958 12/31/1959 +27.7%
9/30/1962 12/31/1963 +31.8%
9/30/1966 12/31/1967 +16.9%
9/30/1970 12/31/1971 +17.0%
9/30/1974 12/31/1975 +40.2%
9/30/1978 12/31/1979 (-3.1%)
9/30/1982 12/31/1983 +40.4%
9/30/1986 12/31/1987 +9.7%
9/30/1990 12/31/1991 +29.2%
9/30/1994 12/31/1995 +33.1%
9/30/1998 12/31/1999 +46.6%
9/30/2002 12/31/2003 +37.7%
9/30/2006 12/31/2007 +13.6%
9/30/2010 12/31/2011 +13.0%
9/30/2014 12/31/2015 +2.2%

Figure 3 – 15 bullish months (mid-term through pre-election year) within 48-month election cycle

Now What? The Worrisome Trees

While the major averages are setting records a lot of other “things” are not.  My own cluster of “market bellwethers” appear in Figure 4.  Among them the Dow Transportation Index is the only one remotely close to a new high, having broken out to the upside last week.  In the meantime, the semiconductors (ticker SMH), the inverse VIX index ETF (ticker ZIV) and Sotheby’s (ticker BID) continue to meander/flounder. This is by no means a “run for the hills” signal.  But the point is that at some point I would like to see some confirmation from these tickers that often (though obviously not always) presage trouble in the stock market when they fail to confirm bullish action in the major averages.

(click to enlarge)4Figure 4 – Jay’s 4 Bellwethers (SMH/TRAN/ZIV/BID) (Courtesy AIQ TradingExpert)

Another source of potential concern is the action of, well, the rest of the darn World.  Figure 5 displays my own regional indexes – Americas, Europe, Asia/Pacific and Middle East.  They all look awful.

(click to enlarge)3Figure 5 – 4 World Regional Indexes (Courtesy AIQ TradingExpert)

Now the big question is “will the rest of the world’s stock markets start acting better, or will the U.S. market start acting worse?”  Sadly, I can’t answer that question.  The key point I do want to make though is that this dichotomy of performance – i.e., U.S market soaring, rest of the world sinking – is unlikely to be sustainable for very long.

Summary

It is hard to envision the market relentlessly higher with no serious corrections over the next 15 months.  And “yes”, those bellwether and world region indexes trees are “troublesome”.

Still the trend at the moment is inarguably “Up” and we about to enter one of the most seasonally favorable periods for the stock market.

So, my advice is simple:

1) Decide now what defensive actions you will take if the market does start to breakdown

2) Resolve to actually take those actions if the need arises

3) Enjoy the ride as long as it lasts.

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.

Portfolio Strategy Based On Accumulation/Distribution

The AIQ code based on Domenico D’Errico’s article in the August issue of Stocks & Commodities magazine, “Portfolio Strategy Based On Accumulation/Distribution,” is shown below.

“Whether you are an individual trader or an asset manager, your main goal in reading a chart is to detect the intentions of major institutions, large operators, well-informed insiders, bankers and so on, so you can follow them. Here, we’ll build an automated stock portfolio strategy based on a cornerstone price analysis theory.”

!Portfolio Strategy Based on Accumulation/Distribution
!Author: Domenic D'Errico, TASC Aug 2018
!Coded by: Richard Denning 6/10/18
!www.TradersEdgeSystem.com
!Portfolio Strategy Based on Accumulation/Distribution
!Author: Domenic D'Errico, TASC Aug 2018
!Coded by: Richard Denning 6/10/18
!www.TradersEdgeSystem.com

!SET TO WEEKLY MODE IN PROPERTIES
!ALSO VIEW CHARTS IN WEEKLY MODE

!INPUTS:
rLen is 4.
consolFac is 75. ! in percent
adxTrigger is 30.
volRatio is 1.
volAvgLen is 4.
volDelay is 4.

!CODING ABREVIATIONS:
H is [high].
L is [low].
C is [close].
C1 is valresult(C,1).
H1 is valresult(H,1).
L1 is valresult(L,1).

!RANGE ACCUMULATION/DISTRIBUTION:
theRange is hival([high],rLen) - loval([low],rLen).
Consol if theRange < consolFac/100 * valresult(theRange,rLen).
rRatio is theRange/valresult(theRange,4)*100.

!AVERAGE TRUE RANGE ACCUMULATION/DISTRIBUTION:
avgLen is rLen * 2 - 1.	
TR  is Max(H-L,max(abs(C1-L),abs(C1-H))).
ATR  is expAvg(TR,avgLen).

ConsolATR if ATR < consolFac/100 * valresult(ATR,rLen). atrRatio is ATR / valresult(ATR,4)*100. !ADX ACCUMULATION/DISTRIBUTION: !ADX INDICATOR as defined by Wells Wilder rhigh is (H-H1). rlow is (L1-L). DMplus is iff(rhigh > 0 and rhigh > rlow, rhigh, 0).
DMminus is iff(rlow > 0 and rlow >= rhigh, rlow, 0).
AvgPlusDM is expAvg(DMplus,avgLen).
AvgMinusDM is expavg(DMminus,avgLen).           	
PlusDMI is (AvgPlusDM/ATR)*100.	
MinusDMI is AvgMinusDM/ATR*100.	
DIdiff is PlusDMI-MinusDMI. 		
Zero if PlusDMI = 0 and MinusDMI =0.
DIsum is PlusDMI+MinusDMI.
DX is iff(ZERO,100,abs(DIdiff)/DIsum*100).
ADX is ExpAvg(DX,avgLen).

ConsolADX if ADX < adxTrigger. !CODE FOR ACCUMULATIOIN/DISTRIBUTION RANGE BREAKOUT: consolOS is scanany(Consol,250) then offsettodate(month(),day(),year()). Top is highresult([high],rLen,^consolOS). Top0 is valresult(Top,^consolOS) then resetdate(). Bot is loval([low],rLen,^consolOS). AvgVol is simpleavg([volume],volAvgLen). Bot12 is valresult(Bot,12). BuyRngBO if [close] > Top
and ^consolOS <= 5 and ^consolOS >= 1
and Bot > Bot12
and valresult(AvgVol,volDelay)>volRatio*valresult(AvgVol,volAvgLen+volDelay).
EntryPrice is [close].

Sell if [close] < loval([low],rLen,1).
ExitPrice is [close].

Figure 9 shows the summary backtest results of the range accumulation breakout system using NASDAQ 100 stocks from December 2006 to June 2018. The exits differ from the author’s as follows: I used two of the built-in exits — a 20% stop-loss and a profit-protect of 40% of profits once profit reaches 10%.

Sample Chart

FIGURE 9: AIQ. Here are the summary results of a backtest using NASDAQ 100 stocks.

Figure 10 shows a color study on REGN. The yellow bars show where the range accumulation/distribution shows a consolidation.

Sample Chart

FIGURE 10: AIQ. This color study shows range consolidation (yellow bars).

—Richard Denning

info@TradersEdgeSystems.com

for AIQ Systems

Attention Wild-Eyed Speculators

Most people are familiar with ADHD, manic-depressive disorder, depression and schizophrenia.  But one common affliction within our trading community that gets almost no attention is WESS.  That stands for “Wild-Eyed Speculation Syndrome”.  And it’s more common than you think (“Hi, my name is Jay”).

The exact symptoms vary, but generally speaking they go something like this:

*A person gets up in the morning with a hankering to make a trade

*Said person then finds “some reason” to make some trade in something

*If the person happens to make money on that trade then the affliction is reinforced by virtue of IGTS (“I’ve Got the Touch Syndrome”, which is one of the occasional side effects of WESS)

*If the person loses money on the trade the side effects can vary but may include: angry outbursts, kicking oneself in the head (typically figuratively), vows to either stop the behavior or at least do it better, and so on.

*The most common side effect of WESS is a declining trading account balance (which not coincidentally is how this disorder is most commonly diagnosed).

For those suffering from WESS – with the caveat/disclosure that I am not a medical professional (although I have found that ibuprofen really clears up a lot of stuff, but I digress) – I am here to help.

If you find yourself suffering from Symptom #1 above:

The most effective step is to go back to bed until the urge passes.  If this doesn’t work or is not possible (for instance, if you have one of those pesky “jobs” – you know, that 8-hour a day activity that gets in the way of your trading), repeat these two mantras as many times as necessary:

Mantra 1: “I must employ some reasonably objective, repeatable criteria to find a trade with some actual potential”

Mantra 2: “I will risk no more than 2% of my trading capital” on any WESS induced trade (and just as importantly, you must fend off the voice on the other shoulder shouting “But this is the BIG ONE!!”)

Repeat these mantras as many times as necessary to avoid betting the ranch on some random idea that you “read about on the internet, so it must be true.”

Regarding Mantra 1

There are a million and one ways to find a trade.  There is no one best way.  But just to give you the idea I will mention one way and highlight a current setup. IMPORTANT: That being said, and as always, I DO NOT make recommendations on this blog.  The particular setup I will highlight may work out beautifully, or it may be a complete bust.  So DO NOT rush out and make a trade based on this just because you read it – you know – on the internet.

The Divergence

Lots of trades get made based on “divergence”.  In this case we are talking about the divergence between price and a given indicator – or even better, series of indicators.  There is nothing magic about divergence, and like a lot of things, sometimes it works and sometimes it doesn’t.  But the reason it is a viable consideration is that when an indicator flashes a bullish divergence versus price it alerts us to a potential – nothing more, nothing less – shift in momentum.

Let’s look at ticker GDX – an ETF that tracks an index of gold mining stocks.  In Figure1 1 through 4 below we see:

*GDX price making a lower low

*A given indicator NOT confirming that new low (i.e., a positive divergence)

1Figure 1 – GDX and MACD (Courtesy AIQ TradingExpert)

2Figure 2 – GDX and 3-day RSI (Courtesy AIQ TradingExpert)

3Figure 3 – GDX and TRIX (Courtesy AIQ TradingExpert)

4Figure 4 – GDX and William’s Ultimate Oscillator (Courtesy AIQ TradingExpert)

So, do the divergences that appear in Figures 1 through 4 justify a trade?  Well, here is where the aforementioned affliction comes into play.

Average Trader: “Maybe, maybe not.  In either case I am not entirely sure that trying to pick a bottom in gold stocks based solely on indicator divergences is a good idea”

WESS Sufferer: “Absofreakinglutely!!  Let’s do this!!”

You see the problem.

So, let’s assume that a WESS Sufferer likes what he or she sees in Figures 1 through 4.  The good news is that we have met the minimum criteria for Mantra #1 above – we have employed some reasonably objective, repeatable criteria (i.e., a bullish divergence between price and a number of variable indicators) to spot a potential opportunity.

Now we must follow Mantra #2 of risking no more than 2% of my trading capital.  Let’s assume our WESS Sufferer has a $25,000 trading account.  So he or she can risk a maximum of $500 ($25,000 x 2%).

In Figure 5 we see a potential support area for GDX at around $16.40 a share.

5Figure 5 – Ticker GDX with support at $16.40 (Courtesy AIQ TradingExpert)

So, one possibility would be to buy 300 shares of GDX at $17.84 and place a stop loss order below the “line in the sand” at say $16.34 a share.  So if the stop is hit, the trade would lose -$450, or -1.8% of our trading capital (17.84 – 16.34 = -1.50 x 300 shares = -$450).

Summary

Does any of the above fit in the category of “A Good Idea”.  That’s the thing about trading – and most things in life for that matter – it’s all in the eye of the beholder.  Remember, the above is NOT a “recommendation”, only an “example.”

The real key thing to note is that we went from being just a random WESS Sufferer to a WESS Sufferer with a Plan – one that has something other than just an “urge” to find a trade, AND (most importantly) a mechanism for limiting any damage that might be done if things don’t pan out.

And if that doesn’t work, well, there’s always ibuprofen.

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 SPX ‘Magic Number’

According to one simple technique the “Magic Number” for the S&amp;P 500 Index is 2872.87.  According to this simple technique if the S&P 550 Index closes above this number the stock market “should” continue to be bullish for at least another year.

Sounds optimistic? Well, there certainly are no “sure things” in the financial markets.  Still, let’s take a closer look.

The Simple Technique

The technique I mentioned works like this:

When the S&P 500 Index:

*Closes at its highest price in the past 252 trading days

*For the 1st time in the most recent 126 trading days

*It generates a bullish signal for the next 252 trading days

In essence, we are talking about buying when the index makes a 1-year high for the 1st time in 6 months and holding for 1 year.

Figure 1 displays the most recent previous buy signal that occurred on 7/11/16.  The sell date was 252 trading days later on 7/11/17.

1

Figure 1 – 2016 Signal (Courtesy AIQ TradingExpert)

Figure 2 displays the signal before that which occurred on 2/27/12.  The sell date was 252 trading days later on 2/26/13.

2

Figure 2 – 2012 Signal (Courtesy AIQ TradingExpert)

Figure 3 displays all the signals since 1933.

Buy Date Sell Date Buy Price Sell Price %+(-)
5/27/33 4/6/34 9.64 10.95 +13.6
5/18/35 3/20/36 9.87 15.04 +52.4
10/6/38 8/9/39 12.82 11.78 (8.1)
10/7/42 8/10/43 9.17 11.71 +27.7
6/1/44 4/7/45 12.31 13.84 +12.4
5/15/48 4/8/49 16.55 14.97 (9.5)
10/5/49 8/23/50 15.78 18.82 +19.3
3/5/54 3/4/55 26.52 37.52 +41.5
8/4/58 8/4/59 47.94 60.61 +26.4
1/10/61 11/2/62 58.97 57.75 (2.1)
4/15/63 4/15/64 69.09 80.09 +15.9
4/24/67 4/25/68 92.62 96.62 +4.3
4/30/68 6/9/69 97.46 101.2 +3.8
1/8/71 1/6/72 92.19 103.51 +12.3
2/7/72 2/8/73 104.54 113.16 +8.2
6/24/75 6/22/76 94.19 103.47 +9.9
8/1/78 7/31/79 100.66 103.81 +3.1
8/14/79 8/12/80 107.52 123.79 +15.1
10/8/82 10/6/83 131.05 170.28 +29.9
11/7/84 11/7/85 169.17 192.62 +13.9
10/19/88 10/18/89 276.97 341.76 +23.4
5/30/90 2/13/92 360.86 413.69 +14.6
7/30/92 7/29/93 423.92 450.24 +6.2
2/6/95 2/5/96 481.14 641.43 +33.3
9/3/03 9/2/04 1026.27 1118.31 +9.0
11/5/04 11/4/05 1166.17 1220.14 +4.6
10/13/09 10/13/10 1073.19 1178.1 +9.8
11/5/10 11/4/11 1225.85 1253.23 +2.2
2/27/12 2/26/13 1367.59 1496.94 +9.5
7/11/16 7/11/17 2137.16 2425.53 +13.5

Figure 3 – Previous Signals

Things to note:

*27 of the 30 signals (i.e., 90%) have witnessed a 12-month gain

*3 of 30 signals (i.e., 10%) have witnessed a loss

*The last “losing trade” occurred in 1961-1962

*The last 20 signals have been followed by a 12-month gain for the S&amp;P 500

*The average of all 30 signals is +13.9%

*The average for all 27 winning trades is +16.1%

*The average of all 3 losing trades is -6.6%

*The worst losing trade was -9.5%

Two Technical Notes

Believe it or not, into the early 1950’s the stock market used to be open on Saturday.  So those days counted toward the 126 and 252 trading days counts.  This explains why the buy and sell dates prior to 1954 were less than one calendar year apart.

It is possible to get a new signal before an existing signal reaches it’s Sell Date.  In those rare cases we simply extend the holding period an additional 252 trading days.  This occurred in 1961-1962, 1968-1969, 1990-1992.

Figure 4 shows that SPX is very close to generating a new signal.  The most recent high close was in January at 2872.87 which was more than 126 trading days ago.  A new signal will occur if SPX closes above that level.

4

Figure 4 – Potential new signal forming (Courtesy AIQ TradingExpert)

Summary

The Good News is that this technique has a 90% accuracy rate and that one good day in the market could generated a new buy signal.  The Bad News is that – as I mentioned earlier – there are no “sure things” in the market.  Given that this particular method is on a 20-trade winning streak, it is understandable to think that maybe the law of averages is against it this time.

We’ll just have to wait and see what happens.

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.

When It All Becomes Too Obvious

Investors who pay close attention to the financial markets by and large spend a fair amount of time being “perplexed.”  If you take all the “news” related to the markets and combine that with all the day-to-day and week-to-week gyrations of the markets, there often seems to be no rhyme or reason for what goes on (hence the reason I generally advocate a slightly less hyper, more trend-driven approach).

But sometimes it all seems to come crystal clear.  In the most recent fortnight most of the major market averages (with the Dow and S&P 500 being the primary exceptions) have touched or at least teased new highs.  Facebook got crushed and the market didn’t tank.  Tesla struggled mightily before bursting back into the bright sunlight – and the market didn’t tank.  In fact, all kinds of things have happened and still the major U.S. averages march relentlessly higher backed by a strong economy, reasonably moderate inflation and higher, yet by no means high interest rates.

At this point, it appears “obvious” that there is no end in sight to the Great Bull Market.  A number of momentum studies I have read lately seem to all confirm that the U.S. market will continue to march higher to significantly higher new highs.

And the fact that it is so “obvious” scares the $%^&amp; out of me.  Don’t misunderstand.  This is not about to devolve into a hysterical “Sell Everything!” screed.  The trend is bullish therefore so am I.  But the “what could possibly go wrong” antennae still pop up from time to time.  So here are some random views regarding all things stock market.

The Major Averages

Figure 1 displays 4 major U.S. market averages.  All are in uptrends above their respective 200-day moving averages and all are close to all-time highs.  The big question is “what happens when they get there?”  Do they all break through effortlessly?  Or do we get a “struggle?”

(click to enlarge)

1

Figure 1 – The Major U.S. Averages; clearly in up trends, but… (Courtesy AIQ TradingExpert)

Figure 2 displays my own 4 market “bellwethers”, including the semiconductors (SMH), Dow Transports (TRAN), Inverse VIX ETF (ZIV) and Sotheby’s Holdings (BID).  At the moment, none of these are actively “confirming” new highs and they each have a clear “line in the sand” resistance level overhead.  So, for the moment they presently pose something of a minor warning sign.

(click to enlarge)

2Figure 2 – Jay’s Market “Bellwethers”; stuck in “nowhere” (Courtesy AIQ TradingExpert)

While the U.S. economy and stock market appear to be hitting on all cylinders, the rest of the world is sort of “chugging along.”  Figure 3 displays 4 “Geographic Groups” that I follow – The Americas, Asia/Pacific, Europe and Middle East.  The good news is that each group is presently holding above it’s respective 21-month moving average.  So technically, the trend is “Up.”  But the bad news is that each group has some significant overhead resistance, so the current uptrend is by no means of the “rip roaring” variety.

(click to enlarge)

3

Figure 3 – Major Geographic Groups; Hanging onto uptrends but serious overhead resistance (Courtesy AIQ TradingExpert)

The VIX Index

Traders have been pretty much conditioned in recent years to assume that the VIX Index – which measures volatility and by extension, “fear” – is and will remain low as the market chugs higher.  And that may prove to be true.  But when everything gets to “obvious” (i.e., the U.S. market is “clearly” heading higher) and things get too quiet (VIX dropped below 11% for the 1st time in 3 months) it can pay to “expect the unexpected.”

Figure 4 is from www.sentimentrader.com and displays those instances in the past when the VIX Index fell below 11% for the first time in 3 months.  Historically, VIX makes some kind of an up move in the 2 to 3 months following such occurrences.

(click to enlarge)

4

Figure 4 – VIX Index performance after VIX Index drops below 11% for 1st time in 3 months (Courtesy Sentimentrader.com)

Things may or may not play out “like usual” this time around, however, given that…

*The U.S. averages are “obviously” heading higher

*The market bellwethers are so far not confirming

*The rest of the worlds stock markets are nowhere near as strong

*VIX has a history of “spiking”, especially during the seasonally unfavorable months of August and September

…It might make sense to consider a long volatility play (NOTE: Long volatility plays using ticker VXX have a long history of not panning out as ticker VXX is essentially built to go to zero – for more information on VXX and the effects of “contango” please see www.Google.com.  Long VXX trades are best considered).

One example appears in Figures 5 and 6.  This trade involves:

*Buying 5 Oct VXX 31 calls @ $2.74

*Selling 4 Oct VXX 36 calls @ $1.82

(click to enlarge)

5Figure 5 – VXX example trade particulars (Courtesy www.OptionsAnalysis.com)

(click to enlarge)

6

Figure 6 – VXX example trade risk curves (Courtesy www.OptionsAnalysis.com)

The maximum risk is $642 if VXX fails to get above the breakeven price of $32.28 by October 19th.  On the other hand, if something completely not “obvious” happens and volatility does in fact spike, the trade has significant upside potential.

(NOTE: As always, please remember that this is an “example” of a speculative contrarian trade, and NOT a “recommendation.”  If the stock market rallies – as it “obviously” seems to want to do, this trade will likely lose money.)

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.

Dollar and Gold ‘To the Barricades’

This week it is the U.S. dollar and Gold taking their turns testing critical inflection points.

U.S. Dollar

As you can see in Figure 1, on a seasonal basis the dollar is moving into a traditionally weaker time of year.1Figure 1 – U.S. Dollar seasonality (Courtesy Sentimentrader.com)

In Figure 2 you can see that traders have been and remain pretty optimistic.  This is traditionally a bearish contrarian sign.2Figure 2 – U.S. Dollar trade sentiment (Courtesy Sentimentrader.com)

In Figure 3 we see the “line in the sand” for ticker UUP – an ETF that tracks the U.S. Dollar.  Unless and until UUP punches through to the upside there is significant potential downside risk.3Figure 3 – U.S. Dollar w/resistance (Courtesy AIQ TradingExpert)

Gold

As you can see in Figure 4, on a seasonal basis the dollar is moving into a traditionally stronger time of year.4Figure 4 – Gold seasonality (Courtesy Sentimentrader.com)

In Figure 5 you can see that traders have been and remain pretty pessimistic.  This is traditionally a bullish contrarian sign.5Figure 5 – Gold trader sentiment (Courtesy Sentimentrader.com)

In Figure 6 we see the “line(s) in the sand” for ticker GLD – an ETF that tracks gold bullion.

6Figure 6 – Gold w/support (Courtesy  AIQ TradingExpert)

I would be hesitant about trying to “pick a bottom” as gold still looks pretty week.  But if:

a) GLD does hold above the support area in Figure 6 and begins to perk up,

AND

b) Ticker UUP fails to break out to the upside

Things could look a lot better for gold very quickly.

Summary

As usual I am not actually making any “predictions” here or calling for any particular action.  I mainly just want to encourage gold and/or dollar traders to be paying close attention in the days and weeks ahead, as the potential for a major reversal in both markets appears possible.

Likewise, if no reversal does take place – and if the dollar breaks out to the upside and gold breaks down, both markets may be “off to the races.”

So dollar and gold traders – take a deep breath; focus your attention; and prepare for action…one way or the other.

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.