Category Archives: Uncategorized

All Eyes on Energy

The energy sector – not just unloved, but pretty much reviled not that long ago – is suddenly everybody’s favorite sector.  And why not, what with crude oil rallying steadily in the last year and pulling pretty much everything energy related higher with it?

Anecdotally, everything I read seems to be on board with a continuation of the energy rally. And that may well prove to be the case. But at least for the moment I am waiting for some confirmation.

Two Concerns

The first – which I mentioned in this article – is the fact that the best time of year for energy is the February into early May period.  See Figure 1.

0

Figure 1 – Ticker XLE Seasonality (www.Sentimentrader.com)

With that period just about past it is possible that the energy sector may at least pause for a while.

The second concern is that a lot of “things” in the energy sector are presently “bumping their head” against resistance.  Here is the point:

*This does not preclude a breakout and further run to higher ground.

*But until the breakout is confirmed a little bit of caution is in order.

I created an index comprised of a variety of energy related ETFs. As you can see in Figures 2 through 4 that index recently was turned away at a significant resistance level.

Figure 3 shows the same information on a weekly chart.

2a

Figure 3  – Jay’s Energy ETF Index – Weekly (Courtesy AIQ TradingExpert)

Figure 4 zooms in to view the action on a daily basis.

3

Figure 4  – Jay’s Energy ETF Index – Daily (Courtesy AIQ TradingExpert)

As you can see in Figure 4, the index made an effort to break out above the January high then reversed and closed lower before declining a little bit more the next day.

The action displayed in the charts above may prove to be nothing more that “the pause that refreshes.” If price breaks out to the upside another bull leg may well ensue.  But note also in Figure 5 that ticker XLE – the broad-based SPDR Energy ETF – demonstrated the same type of hesitation as the ETF Index in the previous charts.

It too faces it’s own significant resistance levels as seen in Figure 5.

5

Figure 5 – Ticker XLE faces resistance  (Courtesy AIQ TradingExpert)

Summary

Energies have showed great relative strength of late even in the context of a choppy stock market overall.   So there is no reason to believe that the rally can’t continue. But two things to watch for:

1. If energy related assets clear their recent resistance levels a powerful new upleg may ensue.

2. Until those resistance levels are pierced, a bit of caution is in order.  Energy has been the leading sector of late.  Any time the leading sector runs into trouble it pays to “keep an eye out” for trouble in the broader market.

No predictions one way or the other – just some encouragement to pay close attention at a potentially critical juncture.

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.

One of the things …….. is that the U.K. is not in great financial shape right now – comments June 21, 2016

The Dow shot up over 270 points at the open, then spent the rest of the day giving back about half of those points to close up 130 at 17,805.  Volume was moderate, coming in at 96 percent of its 10-day average.  There were 178 new highs and only 9 new lows.

Yesterday’s rally was the Big Move predicted by last Thursday’s small change in the A-D oscillator.  It also came on the heels of last Wednesday’s VIX Buy Signal.
The rally was fueled by two polls released in the U.K. over the weekend that showed the ‘Stay’ vote taking a small lead. Prior polls had been showing the ‘Leave’ vote with a small lead, so the markets took the change in polling as a positive sign.  I wouldn’t get too excited about the polls, because the result of Thursday’s vote is still way too close to call, especially in view of the impact that a ‘Leave’ vote could have on financial markets.
One of the things that students should realize is that the U.K. is not in great financial shape right now.  The country is running significant account deficits and a lower pound won’t be that much help to British consumers and exporters.
In September 1992, when the UK last devalued its currency by 15 percent, the country was able to recover because interest rates had been running over 10 percent, so consumers and businesses benefited by the devalued pound which lowered interest rates.  But now with interest rates running near zero, a 10-15+ percent devaluation of the pound could have entirely different consequences.  It could severely impact the UK’s economy and put the country into a deep recession that could take years to recover.
So we need to be on our toes going into Thursday’s vote.  If the ‘Leave’ voters win, Friday could be a very bad day for world markets.  On the other hand, IF the ‘Stay’ voters get the upper hand, world markets should react positively with the Dow likely to re-test the 20 April high of 18,168.
Please be careful going into Thursday.  In my opinion, the vote on Brexit is too close to call and could go either way.  This means that the risk to your portfolio is very high.
So because of the high risk, I am mostly focused on short-term scalps.  With a positive Dean’s List, a neutral Tide, and negative DMIs and Money Flow indicators, the cockpit indicators are about as mixed as they can be.  They’re telling me to be on the sidelines or scalp trade only.

Try our Cum Laude service for 2 weeks and receive 8 nightly updates (just like this one)

and 2 weekend strategy reviews
PLUS the Dean’s List of favored stocks
ONLY $9.99 
However, my custom VTI turned positive after yesterday’s trading, so I’m going to look for scalp trades to the long side today.  One of the things I’ve found is that whenever the VTI changes direction, stocks highlighted for the Honor Roll tend to do well over the short term.  We’ll see if this holds true today with BP and Continental Resources (CLR), the two energy stocks that were highlighted last night.
My other focus will be on gold.  Yesterday’s early rally in the equity markets caused most gold stocks to pull back.  It also caused UUP to drop off the Dean’s List and the UDN, inverse Dollar ETF, to re-appear. So for the very short term, the Dean is telling is us the Dollar is weakening, which means the environment for gold could be getting stronger.
Also, the 2-period RSI Wilder on ABX closed with an oversold reading of 22.17. So with ABX in an Uptrend (50>200) and an oversold RSI on the Daily chart, its telling me that it might be a good time to go hunting. I spent several hours last night polishing my Rifle)
That’s what I’m doing,
The Professor
Market Signals for
06-21-2016
DMI (DIA) NEG
DMI (QQQ) NEG
COACH (DIA) NEG
COACH (QQQ) NEG
A/D OSC
DEANs LIST POS
THE TIDE NEU
SUM IND NEG

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AIQ monthly FREE scan – get yours now

For years the fundamental module in TradingExpert Pro has provided
a unique trading strategy tool for filtering stocks. These include
·        
Advanced weighting the impact of different fundamentals
·        
Quick build of reports and lists
·        
Chart list from fundamental reports
·        
Rank and tag tickers so you’ll always know where they
stand fundamentally  
Each month we’ll be providing one or two insightful scans for FREE with
accompanying list files where appropriate that you can download and use in your
TradingExpert Pro.
March 2016 screen identifies stocks with EPS momentum.
Stocks which will likely see earnings per share growth over the next two
quarters. 
We’ll need your name and
e-mail address to get you access to the AIQ list files and scan
results. There are several other scans also available for you after you
register, including
·       
Under Valued High Yielding Stocks, best used when there has been a market
correct of 8-10%.
·       
Stocks with a Price to Sales ratio below the median for its Industry show
greater returns.
Visit the AIQ home page
at 
http://aiqsystems.com and fill out the form 
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Packs FREE scans or list each month

The most popular use of the fundamental data is in
combination with technical strategies in the Expert Design Studio. What better
way to hone in on candidates than to combine both approaches in one strategy
that you can run every night.
Now with the launch of the AIQ Data Power Pack FATI®, you can get updated fundamentals each
month directly into your TradingExpert Pro again. 
Over 4400 Charts with instant click to 60 fundamentals fields

Unleash the power of fundamental
ranking with any number of strategies
Suppose
I want a list of stocks to short that are fundamentally weak what would I look
for?
How about a
High Risk, High Debt strategy?
This
strategy finds stocks that are having a hard time meeting their day-to-day
obligations. It finds stocks with the lowest quick and current ratio. The
lower, the more debt and liabilities and the less able a company is to pay
current debt. Add in a high debt to equity ratio and rank them all equally.
You’ll have a list of stocks that are worth keeping an eye on for a technical
entry to the short side. 
Here’s
Charter Communications, the top high risk high debt ticker on 2/18/16
Build a technical and fundamental strategy in Expert Design
Studio and run it every night
EDS
allows you to design, test, and automate virtually any trading idea with the
point-and-click interactive trading library and pre-built strategies that have
been fine-tuned by our analysts to produce outstanding results. 
With the FATI® fundamentals fields, you can add in another layer of screening
to your technical screening and uncover hidden gems in your database.

Included
with your fundamentals FATI® Sector and Group Structure and Extra bonus
FATI® Market Capitalization

AIQ announces the return of fundamental screening to TradingExpert Pro

Dear Trader,
For years the
fundamental module in TradingExpert Pro has provided a unique trading
strategy tool for filtering stocks. These include
·        
Advanced weighting
the impact of different fundamentals
·        
Quick build of
reports and lists
·        
Chart list
from fundamental reports
·        
Rank and
tag tickers so you’ll always know where they stand
fundamentally  
The most popular
use of the fundamental data is in combination with technical strategies
in the Expert Design Studio. What better way to hone in on candidates
than to combine both approaches in one strategy that you can run every
night.
Now with the
launch of the AIQ Data Power Pack FATI®,
you can get updated fundamentals each month directly into your
TradingExpert Pro again. 
Over 4400 Charts with
instant click to
60 fundamentals fields
Image
Here’s the
entire list of fields available on 4400 stocks, updated each month and available in
AIQ Charts, Fundamentals and Expert Design Studio. 
·        
Options
·        
Shares Outstanding (mil)
·        
Sales ($mil)
·        
% Held by Institutions
·        
% Held by Insiders Net
·        
% Chg Holdings 12 Wks Market Cap ($mil)
·        
Current Ratio
·        
Avg Daily Vol 20 days
·        
Beta
·        
Avg Broker Rating
·        
No. in Rating
·        
% Change Completed Qtr Est – 4 wks
·        
% Change Curr Qtr Est – 4 wks
·        
% Change Next Qtr Est – 4 wks
·        
% Change Curr Fiscal Yr Est – 4 wks
·        
% Change Next Fiscal Yr Est – 4 wks
·        
Est EPS Growth Current Year
·        
Est EPS Growth Curr & Next Yr
·        
Qtr EPS this Qtr/ prior qtr
·        
Qtr EPS last Qtr/ prior qtr
·        
Qtr EPS 2Qtrs ago/ prior qtr
·        
Anl Sales this Yr/ Sales last Yr
·        
2 Years Ahead Sales Growth
·        
Cash Flow 5 Yr Avg
·        
Div Yield
·        
Indicated Anl Div
·        
Payout Ratio
·        
P/E using Curr FY Est
·        
P/E using Next FY Est
·        
Return on Equity
·        
Return on Assets
·        
Return on Investment
·        
Inventory Turnover
·        
Receivables Turnover
·        
Asset Utilization
·        
Debt/ Tot Cap
·        
Debt/Equity Current Ratio
·        
Market Capitalization
·        
Quick Ratio
·        
Cash Ratio
·        
Interest Coverage
·        
Cash Flow ($/sh)
·        
Price/ Book
·        
EV/EBITDA 12 Mo
·        
P/E F1/ LT EPS Gr
·        
Pretax Mgn 12 Mo
·        
Net Mgn 12 Mo
·        
Oper Mgn 12 Mo
·        
Current Fiscal Yr Cons Est
·        
# Anlst in Cons Current Fiscal Yr
·        
Next Fiscal Yr Cons Est
·        
# Anlst in Cons Next Fiscal Yr
·        
Completed Quarter Cons Est
·        
# Anlst in Cons Completed Qtr
·        
Current Quarter Cons Est
·        
# Anlst in Cons Current Qtr
·        
Next Quarter Cons Est
·        
# Anlst in Cons Next Qtr
·        
12 Mo EPS before NRI
·        
Piotroski Score
Unleash the power of
fundamental
ranking with any
number of strategies
Suppose I want a
list of stocks to short that are fundamentally weak what would I look
for?
How about a High Risk, High Debt
strategy?
This strategy
finds stocks that having  hard time meeting their day-to-day
obligations.It finds stocks with the lowest quick and current ratio.
The lower, the more debt and liabilities and the less able a company is
to pay current debt. Add in a high debt to equity ratio and rank them
all equally. You’ll have a list of stocks that are worth keeping an eye
on for a technical entry to the short side. 
Here’s Charter
Communications, the top high risk high debt ticker on 2/18/16
Image
Build
a technical and fundamental strategy in Expert Design Studio
and run it every night
EDS allows you
to design, test, and automate virtually any trading idea with the
point-and-click interactive trading library and pre-built strategies
that have been fine-tuned by our analysts to produce outstanding
results. 

With the FATI® fundamentals fields, you can add in another layer of
screening to your technical screening and uncover hidden gems in your
database.
Image
Included
with your fundamentals
FATI® Sector and Group
Structure
Quality and Opportunity is right here. Stocks fitting the
fundamental criteria below are arranged into the FATI® Sector and Group
Structure and provided to you updated each month.

These lists contain stocks which have the following four key
characteristics.

  • Average
    Daily Trading Volume > 84,999 shares
  • Current
    Price > $4.99
  • Number
    of Analysts Ratings >= 2
  • Market
    Valuation > $99 million
FATI® Sector and
Group Structure
 – There
are approximately 2500-3000 stocks on average. They are broken down
into 17 sectors and over 60 industry groups. 
Extra bonus
FATI® Market
Capitalization
The same list of
stocks as in the FATI® Sector & Group list broken down by market
capitalization into separate lists.  Make your analysis
segment focused with ease.
  • Mega Cap > $50bn
  • Large Cap > $10bn < $50bn
  • Mid Cap > $2bn < $10bn
  • Small > $1bn < $2bn
  • Micro > $500mn < $1bn
  • Nano >$99mn < $500mn
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month for one price

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Investment Grade Quality with High Yielding Income

Fixed income investors are
continually looking for high yielding investments with stability of principal.
It has been that way for decades. Today is no different either. For years, the
high yield bond market provided more than ample income for investors and in
some cases capital appreciation of their investment. That has all changed over
the past year.
Share prices of high yield
bond ETF’s have declined on average -15.33% over the past year while yields
have remained stable or increased in some cases due to price declines. Some
investors face another problem, where can they re-invest surplus income. Both
situations are very troubling for fixed income investors today.
Since the beginning of the
year investors have seen extremely high market volatility for a plethora of
reasons which we will not go into here. Despite all the hoopla in the news and
talk by pundits, fixed income investors questions have not changed. They remain
the same and they need answers.
Today, I am going to share an
idea which may address the fixed income investors questions. This is a little
known area to many investors. It is called Exchange Traded Debt (ETD’s or Baby
Bonds). They trade on the stock exchange like a stock, but they are actually
debt of corporations.
ETD’s or Baby Bonds are debt
issued by a corporation in denominations less than the normal bond denomination
of $1,000. In fact, most ETD’s are issued in $25.00 denominations.  They all pay interest, usually quarterly,
unlike most bonds which pay semi-annually. There is no preferential tax
treatment on the interest paid.

Now, let’s look at
what happened over the past year (2/13/15- 2/12/16). Below are a few
interesting data points which support why investors may want to consider ETD’s
as an income alternative. Before we look at that data, keep in mind the ETD’s
selected are all investment grade securities vs. high yield bonds which are non-investment grade.

                                                                
               High Yield ETF’s *   IG – ETD’s **                                 
Average
Change in Principal/ Price Only                         -15.33%             -2.83%                             
Average
Current Yield                                                      
 6.91%               6.38%                             
Standard
Deviation                                                            
5.71                   2.15                             
Ok, this all sounds great, but
what is the down side? The downsides are the spreads are a little wider than
one would expect. So, you do not want to use market orders when buying or
selling. Limit orders only. Next, you are investing in individual issues, so
you do not have the diversification of a ETF.
The key to investing in ETD’s
is to focus on investment grade issues. Investment Grade ETD’s carry a lower
default risk, yet they provide yields equal to high yield bonds. Below is a
sample of investment grade ETD’s. You see issuers like Prudential Financial,
U.S. Cellular, Tennessee Valley Authority and even Raymond James Financial.
Some ETD issues are even secured with real estate.

One last point here. In the
event of a corporate bankruptcy, bond holders (ETD’s) are in line ahead of
preferred and common stock investors. A small nuance, but something to consider.
I say this because some investors confuse ETD’s with preferred stocks. ETD’s
are not stocks, they are debt and pay interest. They just trade on the stock
exchange like a preferred stock or high yield ETF.
Notes:
* Data
compiled from a Composite of the 10 Largest High Yield ETF’s.
** Data
compiled from a Composite of 40 Investment Grade ETD’s.

Markos Katsanos’s “Trading The Loonie”

Here is some code for use in AIQ based on Markos Katsanos’s article in Stocks and Commodities, “Trading The Loonie.” 
The code I am providing contains both the divergence indicator and a long-only trading system for the NASDAQ 100 list of stocks. Rather than trading forex, I wanted to try the divergence idea and the author’s entry rules on the NASDAQ 100 stocks. 
The stocks are traded long using the author’s entry rules with two of the parameters adjusted as shown at the top of the code file. The exit has been changed completely to use a profit protect (protect 50% of profits once a 20% profit is reached), a stop-loss (protect 75% of capital), and a time-stop exit (exit after 21 days). 
I used the NASDAQ 100 index (NDX) in place of the crude oil futures. The assumption is that since the stocks on the list are all in the NDX, they would generally be correlated to the index. The author’s entry rule filters out those with a negative correlation to the index. Note that I changed the minimum correlation from a -0.4 to 0.0. In addition, I found that increasing the minimum divergence from 20 to 2,000 increased the Sharpe ratio and decreased the maximum drawdown without affecting the annualized return.
Figure 6 shows the equity curve versus the NASDAQ 100 index for the period 1/5/2000 to 10/14/2015. Figure 7 shows the metrics for this same test period. The system clearly outperformed the index.
Sample Chart

FIGURE 6: AIQ. Here is a sample equity curve for the modified divergence system versus the NASDAQ 100 index for the period 1/5/2000 to 10/14/2015.
Sample Chart

FIGURE 7: AIQ. Here are the metrics for the modified system and the test settings.
!TRADING THE LOONIE
!Author: Markos Katsanos, TASC December 2015
!coded by: Richard Denning 10/17/15
!www.TradersEdgeSystems.com

!Set parameters:
 Define Len        20. !Default is 20
 Define F1          2. !Default is 2
 Define F2          4. !Default is 4
 IDX is         "NDX". !NASDAQ 100 index 
 IDXsLen is        40. !Default is 40
 minDIVERG is    2000. !Default is 20
 minROC is          0. !Default is 0
 minCorrel is     0.0. !Default is -0.4

!Close percent relative to BB band width for stock:
Variance is Variance([close],Len).
StdDev is Sqrt(Variance).
SMA is simpleavg([close],Len).
stkBB is 1+([close]-SMA+F1*StdDev)/(F2*StdDev).

!Close percent relative to BB band width for index:
IDXc is tickerUDF(IDX,[close]).
VarianceIdx is Variance(IDXc,Len).
StdDevIDX is Sqrt(Variance).
SMAidx is simpleavg(IDXc,Len).
idxBB is 1+(IDXc-SMAidx+F1*StdDevIDX)/(F2*StdDevIDX).

DIVERG is (idxBB-stkBB)/stkBB*100.     !PLOT AS CUSTOM INDICATOR
DIVERG1 is valresult(DIVERG,1).
ROC2 is ([close]/val([close],2)-1)*100.
ROC3 is ([close]/val([close],3)-1)*100.
ROC3idx is tickerUDF(IDX,ROC3).
IDXsma is simpleavg(IDXc,IDXsLen).
IDXsma2 is valresult(IDXsma,2).
HHVdiverg is highresult(DIVERG,3).

Setup1 if highresult(DIVERG,3) > minDIVERG.
Setup2 if DIVERG < valresult(DIVERG,1).
Setup3 if ([close]/val([close],2)-1)*100 > minROC.
Setup4 if IDXsma > valresult(IDXsma,2).
Setup5 if pCorrel > minCorrel.

Buy if  Setup1 and
 Setup2 and 
 Setup3 and
 Setup4 and 
 Setup5.

BuyAlt if Buy.

LongExit1 if MACDsigMACD,1) and
      Stoch > 85.
LongExit2 if lowresult(DIVERG,3)=21 or [close] <= (1-0.25)*{position entry price}.

!Code to Calculate Pearson's R [for entry]:
! PeriodtoTest is the number of lookback days.
! IndexTkr is the Instrument that you which to compare your list to.
PeriodToTest is Len.
IndexTkr is IDX.
ChgTkr is ([open] / val([open],PeriodToTest)-1)*100.
ChgIdx is TickerUDF(IndexTkr,ChgTkr).
Alpha is ChgTkr - ChgIdx.

ValUDF is (([close]-[open])/[open]) * 100.
ValIndex is TickerUDF(IndexTkr, ValUDF).
ValTkr is ValUDF.
SumXSquared is Sum(Power(ValIndex,2), PeriodToTest).
SumX is Sum(ValIndex, PeriodToTest).
SumYSquared is Sum(Power(ValTkr,2), PeriodToTest).
SumY is Sum(ValTkr, PeriodToTest).
SumXY is Sum(ValTkr*ValIndex, PeriodToTest).
SP is SumXY - ( (SumX * SumY) / PeriodToTest ).
SSx is SumXSquared - ( (SumX * SumX) / PeriodToTest ).
SSy is SumYSquared - ( (SumY * SumY) / PeriodToTest ).

!Pearson's R and Pearson's Coefficient of Determination:
pCorrel is SP/SQRT(SSX*SSY).

!Code to Calculate Pearson's R [for exit]:
! PeriodtoTest is the number of lookback days.
! IndexTkr is the Instrument that you which to compare your list to.
PeriodToTestX is 3*Len.
IndexTkrX is IDX.
ChgTkrX is ([open] / val([open],PeriodToTestX)-1)*100.
ChgIdxX is TickerUDF(IndexTkrX,ChgTkrX).
AlphaX is ChgTkrX - ChgIdxX.

ValUDFX is (([close]-[open])/[open]) * 100.
ValIndexX is TickerUDF(IndexTkrX, ValUDFX).
ValTkrX is ValUDFX.
SumXSquaredX is Sum(Power(ValIndexX,2), PeriodToTestX).
SumXX is Sum(ValIndexX, PeriodToTestX).
SumYSquaredX is Sum(Power(ValTkrX,2), PeriodToTestX).
SumYX is Sum(ValTkrX, PeriodToTestX).
SumXYX is Sum(ValTkrX*ValIndexX, PeriodToTestX).
SPX is SumXYX - ( (SumXX * SumYX) / PeriodToTestX).
SSxX is SumXSquaredX - ( (SumXX * SumXX) / PeriodToTestX ).
SSyX is SumYSquaredX - ( (SumYX * SumYX) / PeriodToTestX ).

!Pearson's R and Pearson's Coefficient of Determination:
pCorrelX is SPX/SQRT(SSXX*SSYX).

!MACD code:
S is 12.
L is 25.
X is 9.

ShortMACDMA is expavg([Close],S).
LongMACDMA is expavg([Close],L).

MACD is ShortMACDMA-LongMACDMA.
SigMACD is expavg(MACD,X).

!Stochastic
StochLen is 30.
Stoch is 100 * (([Close]-LoVal([Low],StochLen)) /
 (HiVal([High],StochLen) - LoVal([Low],StochLen))).

List if 1.
—Richard Denning
info@TradersEdgeSystems.com
for AIQ Systems

One Way to Play a Spike in SPY Volatility

We live in interesting times.  At the moment things are “so interesting” that the traditional long-term investing approach to, well, investing is not faring so well.  Fortunately – and seemingly unbeknownst to far too many individuals – there are alternatives to simply sitting there and “taking it.”
This is a tale of one of those ways.  Not necessarily the “best” way mind you.  And certainly not the only way.  But, hey, its “one way.”
Bull Put Spread in SPY
A “bull put spread” is an option trading strategy that essentially makes money as long as the security in question remains above a certain price.  In other words, it does not necessarily require a bullish move in the underlying security for the trade to profit.  Anything besides the underlying security falling apart will typically suffice.
There are a few key ingredients that a trader should look for before utilizing this strategy:
*Some reason to believe that the underlying security will remain above the breakeven price long enough for the trade to make money (this typically involves either an obvious support level, a particular chart pattern and/or some confirmation from one or more technical indicators that price will stabilize or move higher).
*High implied option volatility (because a bull put spread involves “selling premium” and has limited profit potential, it is important to sell as much premium as possible.  High implied volatility tells us that there is a lot of time premium built into the price of the options).
The Setup in SPY
In Figure 1 we see a bar chart for ticker SPY – the ETF that tracks the price of the S&P 500 Index.1
Figure 1 – SPY with Support level and Oversold reading (Courtesy AIQ TradingExpert Pro)
As you can see:
*There is a clear “line in the sand” support level not too far below the recent price level. Does this guarantee that the recent decline will end there?  Not at all.  But it does provide us with a price level which – if pierced – can serve as a natural stop-loss point.  And prices do have a way of bouncing off of major support levels (sometimes?).
*Also, SPY is oversold according to the custom indicator that I created that is highlighted (and which I wrote about here; see Measure #2).  Does this guarantee a bounce?  Again, not at all.  But the indicator in question does show a decent propensity to identify at least short-term turning points for SPY.
In Figure 2 we see that implied volatility for SPY options has “spiked” back up to a relatively high level.  Again, this implies that there is an above average level of time premium built into the price of SPY options.2
Figure 2 – SPY with high IV (Courtesy www.OptionsAnalysis.com)
Bull Put Spread
As always, what follows is an “example” and not a “recommendation”. But the example trade highlighted involves:
*Selling 6 Feb Week 4 SPY 178 puts @ 1.62
*Buying 6 Feb Week 4 SPY 173 puts @ 0.86
The particulars appear in Figure 3 and the risk curves appear in Figure 4.
3Figure 3 – SPY Bull put spread (Courtesy www.OptionsAnalysis.com)4
Figure 4 – SPY Bull put spread risk curves (Courtesy www.OptionsAnalysis.com)
A few things to note:
*SPY is trading at 85.43
*The breakeven price for this position is 77.78
*There are only 17 days left until option expiration (so if SPY can stabilize at all these options will start to lose time premium quickly)
*The maximum profit potential is $456 and will be realized if SPY is at 78 or higher as of Feb 26.
*The maximum loss is $2,544 but would only be realized if we still held the position at option expiration and SPY was at 73 or below
*A natural stop-loss level might be just below the breakeven price of 77.78.  If hit a loss of almost $0 to as much as -$800 depending on whether that level is hit later or sooner.
Summary
Again, I am not telling you that this is a great trade and that I am recommending it.  What I am telling you is that it is a great example of “things to look for” that might make a bull put spread a good choice of strategy:
*An oversold market (or one that appears like it might move sideways to higher)
*High implied volatility
*A “line in the sand” support level that can serve to tell us when we are wrong (price above support = “right”; price below support = “wrong”).
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client

Bonds Rally…Not Everyone is Surprised

In 2015 there was a great deal of “fear and loathing” related to the bond market.  With speculation rampant that the Fed would “finally” raise interest rates, there seemed to be a growing sense of inevitability that the 30-year bull market in bonds was about to end.
And perhaps it will.  But as it turns out, it looks like bonds may not go down without a fight.
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Figure 1 – Bonds breaking out of a narrowing channel (Courtesy ProfitSource by HUBB)
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Figure 2 – Weekly Elliott Wave count still suggesting a potential bull move for bonds (Courtesy ProfitSource by HUBB)
Likewise in this article I discussed the fact that the U.S. treasury bond market typically trades inversely to the Japanese stock market.  Figure 3 displays the performance of t-bond futures (a 1-point move in t-bond futures = $1,000) since 12/31/97 when ticker EWJ (an ETF that tracks the Japanese stock market) is:
*In a downtrend (i.e., the 5-week moving average is below the 30-week moving average), which is bullish for t-bonds (red line)
*In an uptrend (i.e., the 5-week moving average is above the 30-week moving average), which is bearish for t-bonds (blue line)
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Figure 3 – T-bond performance when EWJ indicator is bullish for bonds (red line) versus bearish for bonds (blue line) 12/31/1997-Present
Although the bull and bear track record is far from perfect, the point is that there is clearly a difference in performance between the two.  As you can see in Figure 4, EWJ remains in a firm downtrend (note at far right of bottom clip that 5-week MA is well below 30-week MA), which i.e., is theoretically bullish for bonds.
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Figure 4 – Ticker TLT with buy signals from ticker EWJ (Courtesy AIQ TradingExpert Pro)
Will bonds continue to rally?  It beats me.  Still the “Risk a few bucks on the chance that bonds surprise the heck out of everyone and rally like crazy” trade that I highlighted in the article is now showing a profit of 55% and is poised for huge gains if by chance this rally somehow continues. 5
Figure 5 – OTM Directional Butterfly Spread using options on TLT  (Courtesy www.OptionsAnalysis.com)
Which is entirely the point of the “Risk a few bucks on the chance that [chosen market/stock/ETF/index here] surprise the heck out of everyone and rally like crazy” trade.
One caveat: As is always the case in the markets, you can see whatever you wan to see in any situation.  While most of what I have showed so far is “bullish” for bonds, still TLT is a bit “overextended” at the moment and is in a key resistance range as you can see in Figure 6.6 Figure 6 – TLT up against resistance? (Courtesy AIQ TradingExpert Pro)
Summary
I am not telling you to be bullish on t-bonds.  Nor am I telling you that the recent rally in bonds is about to peter out.
I am telling you that when “Everybody Knows” that bonds [or whatever] can’t possibly advance in the face of the Fed raising rates [or whatever]……there is a good chance that “Everybody Knows Nothing.”
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client

Simplify it. Applying a simple, logical system is all you need to reap profits from the markets

The AIQ code based on James and John Rich’s article in the November 2015 issue of Technical Analysis of STOCKS & COMMODITIES, “Simplify It,” is provided at www.TradersEdgeSystems.com/traderstips.htm.
The code I am providing matches the description of the authors’ trend-following system with additional exit rules. The long exit has an additional profit-protect exit that is not coded, but when I ran tests, I used the built-in profit-protect exit set to 80% protection once the profit level reaches 5% or greater.
Sample Chart
FIGURE 9: AIQ. Here is a sample equity curve of the trend-following system versus the NASDAQ 100 index for the period 1/2/2000 to 11/06/2015.
Figure 9 shows the equity curve for the system versus the NASDAQ 100 index for the period 1/2/2000 to 11/06/2015. Figure 10 shows the metrics for this same test period. The system clearly outperformed the index.
Sample Chart
FIGURE 10: AIQ. Here are the metrics for the trend-following system and the test settings.
The code and EDS file can be downloaded from www.TradersEdgeSystems.com/traderstips.htm, and is also shown below.
!SIMPLIFY IT
!Author: James E. Rich with John B. Rich, TASC Nov 2015 (for Jan 2016)
!Coded by: Richard Denning 11/1/2015
!www.TradersEdgeSystems.com

!INPUTS
mktTrendLen is 50.
IDX is "SPY".
stkLen1 is 20.
stkLen2 is 50.
stkLen3 is 200.
trdBandLen is 8.
pctStp is 0.07.
minBarsSinceBandCross is 10.
maxBarsHold is 10.

!MARKET DIRECTION:
mktClose is TickerUDF(IDX,[close]).
mktSMA is simpleavg(mktClose,mktTrendLen).
mktTrendUp if mktClose > mktSMA and mktSMA > valresult(mktSMA,10).
mtkTrendDn if mktClose < mktSMA and mktSMA < valresult(mktSMA,10).
!mktTrendUp if tickerRule(IDX,stkTrendUp).
!mtkTrendDn if tickerRule(IDX,stkTrendDn).

!STOCK SCREEN FOR UP TRENDING STOCKS:
stkSMA1 is simpleavg([close],stkLen1).
stkSMA2 is simpleavg([close],stkLen2).
stkSMA3 is simpleavg([close],stkLen3).
stkTrendUp if [close] > stkSMA2 
 and stkSMA1 > stkSMA2 
 and stkSMA2 > stkSMA3
 and [close] > 5
 and simpleavg([volume],50) > 10000. !volume in hundreds

!STOCK SCREEN FOR DOWN TRENDING STOCKS:
stkTrendDn if [close] < stkSMA2 
 and stkSMA1 < stkSMA2 
 and stkSMA2 < stkSMA3
 and simpleavg([volume],50) > 10000. !volume in hundreds

!TRADING BANDS:
stkSMAhi is simpleavg([high],trdBandLen).
stkSMAlo is simpleavg([low],trdBandLen).

Buy if mktTrendUp and stkTrendUp 
 and [close] > stkSMAhi 
 and countof([close] > stkSMAhi,minBarsSinceBandCross)=1.
Short if mtkTrendDn and stkTrendDn 
 and [close] < stkSMAlo 
 and countof([close] < stkSMAlo,minBarsSinceBandCross)=1.

PD is {position days}.
PEP is {position entry price}.
ExitBuy if [close] < stkSMAlo * (1-pctStp).
 
ExitShort if [close] > stkSMAhi * (1+pctStp)
 or (PD > maxBarsHold and [close] > PEP).
—Richard Denning

Is it “ByeOtech” or “BuyOTech”?

I am not sure I know the answer to the question posed in the headline.  But I do know one thing – biotech stocks are getting killed.  If only somebody had warned us that something like this might happen…..Oh, wait, somebody did.
In case you were not aware, biotech stocks (using Fidelity Select Biotech, ticker FBIOX as a proxy) are now 43% off of the high made on July 17th, 2015.  On July 17, 2015 I posted an article that included the ominous chart that appears in Figure 1.
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Figure 1 – Chart from July 17, 2015 article
Now here’s the interesting paradox. Technically I could argue that I did in fact “call the top”.  But if you reread that article you will note that I never actually said “Sell.”  It pains me to say it but the fact that FBIOX topped on the very day I wrote the above article is coincidence not prescience.  The point of that article was not to “call the top” but simply to warn that danger appeared to be imminent.  Imminent indeed.
The other point is that if you are in this business long enough (for example, from say the “Hair Era” in your life to the “Not So Much Hair Era”, but I digress) you will see that various patterns repeat, um, repeatedly (See here and here).  If you are paying attention and not afraid to act you can actually do yourself some good (regardless of whether the S&P 500 is rising or falling).
The Difference Between Theory and Reality
There is an important distinction to be made between “theory” and “reality” when it comes to investing and trading.  In theory, picking a top sounds like a great idea.  In reality, attempting to “call the top” is typically foolish.  However, in reality, recognizing danger when it exists is one of the most valuable skills you can develop.
So speaking of reality, consider this example. The chart that appears in Figure 1 provides a warning of danger.  Now just suppose you applied something as simple, basic and mundane as a 9-month moving average to FBIOX and decided to sell if and when price drops below said moving average.  As you can see in Figure 2, you might have sold FBIOX at the end of August 2015 and avoided a further -32% decline in price from that point.
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Figure 2 – FBIOX with a 9-month moving average (Courtesy AIQ TradingExpert)
The bottom line: It really doesn’t have to be rocket science.
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client