Category Archives: stock market

Chart Patterns: Flag and Pennants

By Steve Hill

President, AIQ Systems

Stephen Hill is President of AIQ Systems. For the past 15 years he has been involved in all aspects of AIQ Systems, from support and sales to programming and education. Steve is a frequent speaker at events in the U.S. and Europe, talking on subjects as diverse as Portfolio Simulation TechniquesAdvanced Chart Pattern Analysis and Trading System Design.

Chart pattern analysis, often thought of as part science part art is a key element in many traders decision process. Common patterns like double tops and bottoms are somewhat self-fulfilling, given that most of us can see these patterns occurring. Measures of what consititues a double top or bottom in good analytical terms we’ll save for another article. In this this article we are focussing on two of my favorite chart patterns; Flags and Pennants

Flags and Pennants are Consolidation or Continuation Patterns

These patterns break out in the direction of the previous trend, confirming the existing trend, suggesting that investors are considering whether the market is overbought or oversold but ultimately deciding to confirm the existing trend. Flags and pennants are of two types, bullish or bearish

Flags and pennants are generally considered continuation patterns as they breakout in the prevailing trend direction. They represent a brief pause especially after a steep run up in an active ticker. They are a fairly common and useful for short term trading.

Bullish Flags – formation

Lower tops and lower bottoms bounded by two parallel trendlines with pattern slanting against the prevailing trend are considered bull flags (figure 1).


Figure 1Bullish flag pattern

Bearish Flags – formation

Higher tops and higher bottoms bounded by two parallel trendlines with pattern slanting against the prevailing trend are considered bear flags. (figure 2).


Figure 2Bearish flag pattern

Elements of bullish flags

  • A rapid and steep price rise of around 20% from bottom of the pole to top.
  • Decreasing volume during the formation of the flag.
  • Breakout occurs to the upside with resumption of increase volume levels
  • Flags length excluding the pole classic should be around 10 days, can be less but not more than 20 days.
Figure 3. Whole Foods Market, Inc (WFMI) bullish flag


Bulkowski noted that the high and tight flag performed best. (source Encyclodpedia of Chart Patterns by Thomas Bulkowski).
2Some 25% of the patterns are horizontal notes Markos Katsanos. (source Measuring Flags & Pennants: Technical Analysis of Stocks and Commodities vol 23 no 4)bullish flag breakout on increased volume note the pole length is 20% + of the price action and the diminishing volume on the flag.


Elements of bearish flags

  • A rapid and steep price decline of around 20% from top of the pole to bottom.
  • Decreasing volume during the formation of the flag.
  • Breakout occurs to the downside with resumption of increase volume levels.
  • Flag length excluding the pole should be around 10 days, can be less but not more than 20 days.

Figure 4 shows MNST classic bearish flag breakout on increased volume note the pole length is 20% + of the price action and the diminishing volume on the flag.

Bullish Pennants – formation

Pennants look very much like symmetrical triangles, on the end of a pole, typically they are smaller in size and duration (figure 5).

Bearish Pennants – formation

An upside down bullish pennant, the triangle is at the bottom of the pole. (figure 6).

Elements of bullish pennants

  • A rapid and steep price rise of around 20% from bottom of the pole to top.
  • Decreasing volume during the formation of the pennant.
  • Pennants look like symmetrical triangles on a pole, price action is converging.
  • Diminishing volume as pennant forms.
  • Breakout to the upside with re- sumption of volume levels.
  • Pennant length excluding the pole should be around 10 days, can be less but not more than 20 days.Figure 7 shows CDW classic bullish pennant breakout on increased volume

Figure 7CDW Computer Centers (CDW) bullish pennant

Elements of bearish pennants

  • A rapid and steep price drop of around 20% from top of the pole to bottom.
  • Decreasing volume during the formation of the pennant.
  • Pennants look like symmetrical triangles on a pole, price action is converging.
  • Diminishing volume as pennant forms.
  • Breakout to the downside with resumption of volume levels.
  • Pennant length excluding the pole should be around 10 days, can be less but not more than 20 days.

How do you trade flags and pennants?

Katsanos study of Flags and pennants revealed that the average breakout was 45% over an average period of 11 days. Bulkowski noted a 63% average gain. to trade these breakouts, set tight stops at low of day before breakout and use trailing stops once breakout occurs.

Target prices are more difficult to predict as these are continuation patterns, but after 11 days you are beyond the average move in days.

AIQ tip

Once a breakout occurs, use AIQ space on right of the chart (rtalerts only) and advance 11 days into the future. Draw a trendline parallel to the pole trend from the breakout point.

A Useful Interest Rate Indicator

2018 witnessed something of a “fake out” in the bond market.  After bottoming out in mid-2016 interest rates finally started to “breakout” to new multi-year highs in mid to late 2018. Then just as suddenly, rates dropped back down.

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Figure 1 displays the tendency of interest rates to move in 60-year waves – 30 years up, 30 years down.  The history in this chart suggests that the next major move in interest rates should be higher.Figure 1 – 60-year wave in interest rates (Courtesy: www.mcoscillator.com)

A Way to Track the Long-Term Trend in Rates

Ticker TNX is an index that tracks the yield on 10-year treasury notes (x10).  Figure 2 displays this index with a 120-month exponential moving average overlaid.  Think of it essentially as a smoothed 10-year average.

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Figure 2 – Ticker TNX with 120-month EMA (Courtesy AIQ TradingExpert)

Interpretation is pretty darn simple.  If the month-end value for TNX is:

*Above the 120mo EMA then the trend in rates is UP (i.e., bearish for bonds)

*Below the 120mo EMA then the trend in rates is DOWN (i.e., bullish for bonds)

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Figure 3 displays 10-year yields since 1900 with the 120mo EMA overlaid.  As you can see, rates tend to move in long-term waves.

Figure 3 – 10-year yield since 1900 with 120-month exponential moving average

Two key things to note:

*This simple measure does a good job of identifying the major trend in interest rates

*It will NEVER pick the top or bottom in rates AND it WILL get whipsawed from time to time (ala 2018).

*Rates were in a continuous uptrend from 1950 to mid-1985 and were in a downtrend form 1985 until the 2018 whipsaw.

*As you can see in Figure 2, it would not take much of a rise in rates to flip the indicator back to an “uptrend”.

With those thoughts in mind, Figure 4 displays the cumulative up or down movement in 10-year yields when, a) rates are in an uptrend (blue) versus when rates are in a downtrend (orange).

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Figure 4 – Cumulative move in 10-year yields if interest rate trend is UP (blue) or DOWN (orange)

You can see the large rise in rates from the 1950’s into the 1980’s in the blue line as well as the long-term decline in rates since that time in the orange line.  You can also see the recent whipsaw at the far right of the blue line.

Summary

Where do rates go from here?  It beats me.  As long as the 10-year yield holds below its long-term average I for one will give the bond bull the benefit of the doubt.  But when the day comes that 10-year yields move decisively above their long-term average it will be essential for bond investors to alter their thinking from the mindset of the past 30+ years, as in that environment, long-term bonds will be a difficult place to be.

And that won’t be easy, as old habits die hard.

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Figure 5 is from this article from BetterBuyandHold.com and displays the project returns for short, intermediate and long term bonds if rates were to reverse the decline in rates since 1982.Figure 5 – Projected total return for short, intermediate and long-term treasuries if rates reverse decline in rate of past 30+ years (Courtesy: BetterBuyandHold.com)

When rates finally do establish a new rising trend, short-tern and intermediate term bonds will be the place to be.  When that day will come is anyone’s guess.  But the 10-year yield/120mo EMA method at least we have an objective way to identify the trend shortly after the fact.

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.

Trend-Following in One Minute a Month (A Quick Update)

This article is intended to be a quick update to this article.  The original idea is based on the theory propounded by Ken Fischer that suggests that one should not worry about a “top” in the stock market until after the market goes at least 3 months without making a new high.

Three things to note:

*Like all trend-following methods the one detailed in the linked article will experience an occasional whipsaw, i.e., a sell signal at one price followed some time later by a new buy signal with the market at a higher price.

*Like any good trend-following method the real purpose is to help you avoid some significant portion of any major longer-term bear market, i.e., 1973-74, 2000-2002, 2007-2009).

*The secondary purpose is to relieve an investor of that constant “Is this the top, wait, what about this this, this looks like the top, OK never mind, but this, this time it definitely has to be the top” syndrome.

The Rules

For a full explanation of the rules please read the linked article.  In general, though:

*A “Sell alert” occurs when the market makes a 6-month high, then goes 3 full calendar months without piercing that high

*The “trigger” price is the lowest low for the 3 months following the previous high

*A “Sell signal” occurs at the end of the month IF the “trigger” price is pierced to the downside during the current month

*The “trigger” is no longer valid if the S&P 500 makes a high above the high for the previous 6 months prior to an actual “Sell signal”

*If a “Sell signal” occurs then a new “Buy signal” occurs when the S&P 500 makes a high above the high for the previous 6 months

Sounds complicated, but its’s not.  Figure 1 displays the signals and alerts and trigger prices since 2005.

Green Arrows = Buy Signal

Red Arrows = Sell Signal

Red horizontal lines = Sell trigger price

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Figure 1 – One Minute a Month Trend-Following Alerts, Trigger prices and Signals (Courtesy AIQ TradingExpert)

Note that actual sell signals occurred in 2008, 2011 and 2015.  The signal in 2008 was a life-saver, while the signals in 2011 and 2015 resulted in small whipsaws.  Sorry folks, that’s just the nature of the beast.

Interestingly, there have been two “Sell alerts” in the last year.  The first occurred at the end of April 2018, however, that alert was invalidated at the end of August 2018 when the S&P 500 pierced the previous 6-month high.  Another alert occurred at the end of December 2018.  The “Trigger price” is the December 2018 low of 2346.58.  That trigger is still active but could be invalidated if the month of May 2019 makes a high above whatever the high for April 2019 turns out to be.

The key point here is that despite the volatility and painful sell-offs in October and December of 2018, the “system” has remained on a buy signal.

Where to from here?  We’ll just have to wait and see.

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.

An Obscure But Useful Trend-Following Tool

Everyone has heard about trend-following.  And most traders have at least a foggy grasp of the relative pros and cons associated with trend following.  And anyone who has ever employed any type of trend-following technique is aware that they are great when there is an actual trend, but that whipsaws are inevitable.

What I am about to show you will not change these facts.  But today’s piece is just a “quickie” to highlight an obscure way to use a common indicator as a “confirmation/ denial” check when assessing the trend of a given security.  For the record, I am making no claim that this indicator generates profitably “trading signals in and of itself.  Its one of those things that – and I hate this phrase as much as you do but – should be used in conjunction with other indicators to get a good sense of the current “state of the trend” for a given security.

Nothing more, nothing less.

MACD Stretched Long

Most traders are familiar with the MACD indicator.  Originally popularized by Gerald Appel, it uses a set of moving averages to attempt to assess the trend in price (and many traders also use it to try to identify overbought or oversold situations).  Standard parameters are 9,26 and 12.  The version I use is different in several ways:

*Whereas the standard MACD generates two lines and a histogram can be drawn of the difference between the two, this version just generates one line – we will call in the trend line (catchy, no?)

*We will use parameters of 40 and 105

*One other note is that (at least according to me) this indicator is best used with weekly data.

The MACD4010501

Here is the formula for AIQ TradingExpert Expert Design Studio:

Define ss3 40.

Define L3 105.

ShortMACDMA3 is expavg([Close],ss3)*100.

LongMACDMA3 is expavg([Close],L3)*100.

MACD4010501Value is ShortMACDMA3-LongMACDMA3.

As I said this should be used with “other” indicators.  For example, one might consider the current price versus a 40-week moving average.

Standard Interpretation:

*If price is above the 40-week moving average (or if whatever other trend-following indicator you are using is bullish), AND

*The MACD4010501 is trend higher THEN

ONLY play the long side of that security

Likewise:

*If price is below the 40-week moving average (or if whatever other trend-following indicator you are using is bearish), AND

*The MACD4010501 is trend lower THEN

ONLY play the short side of that security (or at least DO NOT play the long side)

Finally, DO NOT assume that every change of trend in MACD4010501 is some sort of buy or sell signal.  Consider it only as a filter for your trades.

Some random examples appear in Figures 1 through 4 (click to enlarge any chart)

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Figure 1 – AMZN (Courtesy AIQ TradingExpert)

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Figure 2 – IBM (Courtesy AIQ TradingExpert)

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Figure 3 – WMT (Courtesy AIQ TradingExpert)

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Figure 4 – TLT (Courtesy AIQ TradingExpert)

Summary

To repeat, the proper use of this obscure version of the popular MACD indicator is as follows:

*Consider the trend of MACD4010501

*Consider one or more other trend-following indicators

*If there is bullish agreement, then apply your own shorter-term entry and exit techniques to trade the long side.

*If there is bearish agreement, then apply your own shorter-term entry and exit techniques to trade the short side (or simply stand aside).

Trade on!

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.

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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.

The SPX ‘Magic Number’

According to one simple technique the “Magic Number” for the S&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.

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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.

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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&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.

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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.

A Focus on the Trends in Stocks, Bonds and Gold

In the end it is not so much about “predicting” what will happen next in the financial markets, but rather recognizing – and being prepared for – the potential risks, that makes the most difference in the long run.  So let’s start by looking at current trends.
Stocks
Let’s start with a most simple trend-following model that works like this:
-A sell signal occurs when the S&P 500 Index (SPX) registers two consecutive monthly closes below its 21-month moving average
-After a sell signal, a buy signal occurs when SPX register a single monthly close above its 10-month moving average.
Figure 1 displays recent activity.
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Figure 1 – SPX Trend-Following signals (Courtesy AIQ TradingExpert)
The good news is that this model does a good job of being out of stocks during long bear markets (1973-74, 2000-2002, 2008-2009).  The bad news is that – like any trend-following model – it gets “whipsawed” from time to time.  In fact the two most recent signals resulted in missing out on the October 2015 and March 2016 rallies.
But note the use of the phrase “simple trend-following model” and the lack of phrases such as “precision market timing” and “you can’t lose trading the stock market”, etc.
For now the trend is up.  A few things to keep an eye on appear in Figures 2 and 3.  Figure 2 displays four major averages.  Keep an eye to see if these averages break out to the upside (see here) or if they move sideways to lower.
2Figure 2 – Four Major Market Averages (Courtesy AIQ TradingExpert)
In addition, I suggest following the 4 tickers in Figure 3 for potential “early warnings” – i.e., if the major averages hit new highs that are not confirmed by the majority of the tickers in Figure 3.3
Figure 3 – Four potential “Early Warning” tickers  (Courtesy AIQ TradingExpert)
Bonds
My main “simple bond trend-following model” remains bearish.  As you can see in Figure 4, a buy signal for bonds occurs when the 5-week moving average for ticker EWJ (Japanese stocks) drops below its 30-week moving average and vice versa.
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Figure 4 – Ticker EWJ 5-week and 30-week moving average versus ticker TLT (Courtesy AIQ TradingExpert)
A 2nd model using metals to trade bonds has been bullish of late but is close to dropping back into bearish territory.  Figure 5 displays the P/L from holding a long position of 1 t-bond futures contract ONLY when both the EWJ AND Metals models are bearish (red line) versus when EITHER model is bullish (blue line)
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Figure 5 – T-bond futures $ gain/loss when EWJ OR Metals Models are Bullish (blue line) versus when EWJ AND Metals Models are both Bearish (red line); August 1990-present
Gold
My most basic gold trend-following model is still bearish.  This model uses my “Anti-Gold Index” (comprised of tickers GLL, SPX, UUP and YCS).  It is bullish for gold when a Front-Weighted Moving Average (detailed here) is below the 55-week exponential moving average and vice versa.
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Figure 6 – Jay’s “Anti-Gold Index” versus ticker GLD (Courtesy AIQ TradingExpert)
Summary
So at the moment the stock model is bullish and the bond and gold models are bearish.  Are these trends certain to persist ad infinitum into the future?  Definitely not.  Will the models detailed here provide timely signals regarding when to get in or out the next time around?  Sorry, but it doesn’t always work that way with trend-following.
But as for me I prefer “riding the trend” to “predicting the future.”
Some painful lessons just stick with you I guess.
Jay Kaeppel  Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiqsystems.com) client. 
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.

Four Things to Watch for Warning Signs

First things first: I am primarily a trend-follower (this is based on, a) the relative long-term benefits of following trends and b) my lack of ability to actually “predict” anything – but I digress).
As a trend-follower I love the fact that the stock market has been trending higher and the fact that there is so much “angst” regarding the “inevitable top.”  Still, like a lot of investors I try to spot “early warning signs” whenever possible.  Here are the four “things” I am following now for signs of trouble.
Fidelity Select Electronics
In Figure 1 you see, a) the blow-off top of 1999-2000 and b) today.  Are the two the same?  I guess only time will tell.  But the point is, I can’t help but think that if and when the bloom comes off of the electronics boom, overall trouble will follow.  Here is hoping that I am not as correct here as I was here.
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Figure 1 – Ticker FSELX (Courtesy AIQ TradingExpert)
Just asking.
Transportation Index
As you can see in Figure 2, the Dow Transports has a history of making double tops which is followed by trouble in the broader market.  Are we in the process of building another double top?  And will trouble follow if we are?  Dunno, hence the reason it is on my “Watch List” rather than on my “OH MY GOD SELL EVERYTHING NOW!!!!! List”.
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Figure 2 – Dow Transportation Index (Courtesy AIQ TradingExpert)
I guess we’ll just have to wait and see.
Ticker XIV
Ticker XIV is an ETF that is designed to track inverse the VIX Index. As a refresher, the VIX Index tends to “spike” higher when stocks fall sharply and to decline when stocks are rising and/or relatively quiet.  To put it in simpler terms, in a bull market ticker XIV will rise.  As you can see in Figure 3 one might argue that XIV has gone “parabolic”.  This is a potential warning sign (assuming you agree that the move is parabolic) as a parabolic price move for just about anything is almost invariably followed by, well, let’s just say, “not so pretty”.
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Figure 3 – Ticker XIV (Courtesy AIQ TradingExpert)
Let’s hope not.  Because if it does qualify as  parabolic that’s a very bad sign.
Ticker BID
This one may or may not be relevant but for what it is worth, Sotheby’s (ticker BID) has on several occasions served as something of a “leading indicator” at stock market tops (for the record it has also given some false signals, so this one is more for perspective purposes rather than actual trading purposes). Still, if this one tops out in conjunction with any or all of the above, it would likely serve as a useful warning sign.
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Figure 4 – Ticker BID (Courtesy AIQ TradingExpert)
Summary
There is no “urgent action” to be taken based on any of this.  Bottom line: Nothing in this article should trigger you to run for the exits.
Still, it might be wise to at least take a look around and “locate the exit nearest you.”
You know, just in case.
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (Courtesy AIQ TradingExpert) client. http://jayonthemarkets.com/
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.

March and April (and the Train Rolls On)

The stock market is off to a flying start in 2017.  We have a buy signal from the January Barometer, the 40-Week Cycle just turned bullish  and most of the major U.S. indexes soaring to new all-time highs.  See Figure 1.

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Figure 1 – Major U.S. Average hitting new highs (charts courtesy AIQ TradingExpert Pro)

With the turn of the month near, what lies ahead for March and April?  Well, it’s the stock market, so of course no one really knows for sure.  Still, if history is an accurate guide (and unfortunately it isn’t always – and I hate that part), the odds for a continuation of the advance in the months just ahead may be pretty good.

Figure 2 displays the growth of $1,000 invested in the Dow Jones Industrials Average ONLY during the months of March and April starting in 1946.

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Figure 2 – Growth of $1,000 invested in the Dow Jones Industrials Average ONLY during the months of March and April (1946-2016)

For the record, the months of March and April combined:

*Showed a gain 53 times (75% of the time)

*Showed a loss 18 times (25% of the time)

*The average UP year showed a gain of +5.2%

*The average DOWN year showed a loss of (-3.3%)

*The largest Mar/Apr gain was +15.9% (1999)

*The largest Mar/Apr loss was (-6.0%) (1962)

Summary

So is the stock market train sure to “roll on” during the March/April timeframe?  Not at all.  But with “all systems Go” at the moment and with a historically favorable period approaching – and despite a lot of overly bullish sentiment beginning to bubble up – I feel compelled to stay on board at least until the next stop..

Jay Kaeppel

Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiqsystems.com) client. http://jayonthemarkets.com/

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.

Out With The Old (Part 1)

Before moving on to 2017 I want to revisit a couple of “old” ideas I wrote about recently.
One 9/23/16 I wrote this article detailing a very aggressive bond trading strategy.  The model detailed essentially combined two other models that I have used for a number of years – one a “timing” model, the other  a “seasonal” model.  If either model is bullish then ticker TMF (a triple leveraged long-term treasury bond fund) is held.
As shown in Figure 1, the first model turns:
*Bullish for Bonds when the 5-week moving average for ticker EWJ drops below the 30-week moving average for ticker EWJ
*Bearish for Bonds when the 5-week moving average for ticker EWJ rises above the 30-week moving average for ticker EWJ
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Figure 1 – Bond Bull and Bear signals using ticker EWJ (Courtesy AIQ TradingExpert)
The second model simply holds bonds during the last 5 trading days of each month
The rules for Jay’s Very Risky Bond Model (JVRBM) are as follows:
Bullish for TMF if:
*Ticker EWJ 5-week MA < Ticker EWJ 30-week MA, OR
*Today is one of the last 5 trading days of the month
Bearish for TMF if:
*EWJ 5-week MA > EWJ 30-week MA AND today IS NOT one of the last 5 trading days of the month
Figure 2 displays the growth of $1,000 invested in TMF if the bullish conditions above apply since 4/16/2009 (when TMF started trading).
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Figure 2 – Growth  of $1,000 invested in ticker TMF when JVRBM is Bullish (4/16/2009-12/30/2016)
Figure 3 displays the growth of $1,000 invested in TMF is the bearish conditions above apply since 4/16/2009 (when TMF started trading).
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Figure 3 – Growth  of $1,000 invested in ticker TMF when JVRBM is Bearish (4/16/2009-12/30/2016)
For the record:
*During the Bullish periods in 2016 ticker TMF gained +72%
*During the Bearish periods in 2016 ticker TMF lost -43%
Figure 4 displays the growth of  $1,000 invested in ticker TMF during the Bullish versus Bearish periods in 2016.
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Figure 4 – Growth of $1,000 invested in TMF during Bullish versus Bearish periods (12/31/2015-12/31/2016)
All in all not a bad year (Just don’t forget high degree of risk).
Summary
Make no mistake, this is a trading method that entails a great deal of risk.  One can reasonably ask if a long position in a triple leveraged fund of any kind is really a good idea.
But, hey, the phrase “high risk, high reward” exists for a reason.
Jay Kaeppel

Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiqsystems.com) client. http://jayonthemarkets.com/