AIQ explore list is a powerful and very fast method to view many charts quickly. In this video Steve explores daily and weekly charts simultaneously looking for MACD divergences and double top and bottoms.
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What the Hal?
Some industries are cyclical in nature. And there is not a darned thing you – or they – can do about it. Within those industries there are individual companies that are “leaders”, i.e., well run companies that tend to out earn other companies in that given industry and whose stock tends to outperform other companies in that industry.
Unfortunately for them, even they cannot avoid the cyclical nature of the business they are in. Take Halliburton (ticker HAL) for example. Halliburton is one of the world’s largest providers of products and services to the energy industry. And they do a good job of it. Which is nice. It does not however, release them from the binds of being a leader in a cyclical industry.
A Turning Point at Hand?
A quick glance at Figure 1 clearly illustrates the boom/bust nature of the performance of HAL stock.Figure 1 – Halliburton (HAL) (Courtesy AIQ TradingExpert)
Which raises an interesting question: is there a way to time any of these massive swings? Well here is where things get a little murky. If you are talking about “picking timing tops and bottoms with uncanny accuracy”, well, while there are plenty of ads out there claiming to be able to do just that, in reality that is not really “a thing”. Still, there may be a way to highlight a point in time where:
*Things are really over done to the downside, and
*For a person who is not going to get crazy and “bet the ranch”, and who understands how a stop-loss order works and is willing to use one…
..there is at least one interesting possibility.
It’s involves a little-known indicator that is based on a more well-known another indicator that was developed by legendary trader Larry Williams roughly 15 or more years ago. William’s indicator is referred to as “VixFix” and attempts to replicate a VIX-like indicator for any market. The formula is pretty simple, as follows (the code is from AIQ Expert Design Studio):
*hivalclose is hival([close],22).
*vixfix is (((hivalclose-[low])/hivalclose)*100)+50.
In English, it is the highest close in the last 22-periods minus the current period low, which is then divided by the highest close in the last 22-periods. The result then gets multiplied by 100 and 50 is added.
Figure 2 displays a monthly chart of HAL with William’s VixFix in the lower clip. In a nutshell, when price declines VixFix rises and vice versa.
Figure 2 – HAL Monthly with William’s VixFix (Courtesy AIQ TradingExpert)
Now let’s go one more step as follows by creating an exponentially smoothed version as follows (the code is from AIQ Expert Design Studio):
*hivalclose is hival([close],22).
*vixfix is (((hivalclose-[low])/hivalclose)*100)+50. <<<Vixfix from above
*vixfixaverage is Expavg(vixfix,3). <<<3-period exponential MA of Vixfix
*Vixfixaverageave is Expavg(vixfixaverage,7). <<<7-period exp. MA
I refer to this as Vixfixaverageave (Note to myself: get a better name) because it essentially takes an average of an average. In English (OK, sort of), first Vixfix is calculated, then a 3-period exponential average of Vixfix is calculated (vixfixaverage) and then a 7-period exponential average of vixfixaverage is calculated to arrive at Vixfixaverageave (got that?)
Anyway, this indicator appears on the monthly chart for HAL that appears in Figure 3.Figure 3 – HAL with Vixaverageave (Courtesy AIQ TradingExpert)
So here is the idea:
*When Vixfixaverageave for HAL exceeds 96 it is time to start looking for a buying opportunity.
OK, that last sentence is not nearly as satisfying as one that reads “the instant the indicator reaches 96 it is an automatic buy signal and you can’t lose”. But it is more accurate. Previous instances of a 96+ reading for Vixfixaverageave for HAL appear in Figure 4.
Figure 4 – HAL with previous “buy zone” readings from Vixfixaverageave (Courtesy AIQ TradingExpert)
Note that in previous instances, the actual bottom in price action occurred somewhere between the time the indicator first broke above 96 and the time the indicator topped out. So, to reiterate, Vixfixaverageave is NOT a “precision timing tool”, per se. But it may be useful in highlighting extremes.
This is potentially relevant because with one week left in May, the monthly Vixfixaverageave value is presently above 96. This is NOT a “call to action”. If price rallies in the next week Vixfixaverageave may still drop back below 96 by month-end. Likewise, even if it is above 96 at the end of May – as discussed above and as highlighted in Figure 4, when the actual bottom might occur is impossible to know.
Let me be clear: this article is NOT purporting to say that now is the time to buy HAL. Figure 5 displays the largest gain, the largest drawdown and the 12-month gain or loss following months when Vixfixaverageave for HAL first topped 96. As you can see there is alot of variation and volatility.
Figure 5 – Previous 1st reading above 96 for HAL Vixfixaverageave
So HAL may be months and/or many % points away from an actual bottom. But the main point is that the current action of Vixfixaverageave suggests that now is the time to start paying attention.
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 Different Kind of Bond Barbell
The “barbell” approach to bond investing typically involves buying a long-term bond fund or ETF and a short-term bond fund or ETF. The idea is that the long-term component provides the upside potential while the short-term component dampens overall volatility and “smooths” the equity curve. This article is not intended to examine the relative pros and cons of this approach. The purpose is to consider an alternative for the years ahead.
The Current Situation
Interest rates bottomed out several years ago and rose significantly from mid-2016 into late 2018. Just when everyone (OK, roughly defined as “at least myself”) assumed that “rates were about to establish an uptrend” – rates topped in late 2018 and have fallen off since. Figure 1 displays ticker TYX (the 30-year treasury yield x 10) so you can see for yourself.
Figure 1 – 30-year treasury yields (TNX) (Courtesy AIQ TradingExpert)
In terms of the bigger picture, rates have showed a historical tendency to move in 30-year waves. If that tendency persists then rates should begin to rise off the lows in recent years in a more meaningful way. See Figure 2.Figure 2 – 60-year wave in interest rates (Courtesy: www.mcoscillator.com)
Will this happen? No one can say for sure. Here is what we do know: If rates decline, long-term treasuries will perform well (as long-term bonds react inversely to the trend in yields) and if rates rise then long-term bond holders stand to get hurt.
So here is an alternative idea for consideration – a bond “barbell” that includes:
*Long-term treasuries (example: ticker VUSTX)
*Floating rate bonds (example: ticker FFRAX)
Just as treasuries rise when rates fall and vice versa, floating rate bonds tend to rise when rates rise and to fall when rates fall, i.e., (and please excuse the use of the following technical terms) when one “zigs” the other “zags”. For the record, VUSTX and FFRAX have a monthly correlation of -0.29, meaning they have an inverse correlation.
Figure 3 displays the growth of $1,000 invested separately in VUSTX and FFRAX since FFRAX started trading in 2000. As you can see the two funds have “unique” equity curves.
Figure 3 – Growth of $1,00 invested in VUSTX and FFRAX separately
Now let’s assume that every year on December 31st we split the money 50/50 between long-term treasuries and floating rate bonds. This combined equity curve appears in Figure 4.
Figure 4 – Growth of $1,000 50/50 VUSTX/FFRAX; rebalanced annually
Since 2000, long-treasuries have made the most money. This is because interest rates declined significantly for most of that period. If interest rise in the future, long-term treasuries will be expected to perform much more poorly. However, floating rate bonds should prosper in such an environment.
Figure 5 displays some relevant facts and figures.
Figure 5 – Relevant performance Figures
The key things to note in Figure 5 are:
*The worst 12-month period for VUSTX was -13.5% and the worst 12-month period for FFRAX was -17.1%. However, when the two funds are traded together the worst 12-month period was just -5.0%.
*The maximum drawdown for VUSTX was -16.7% and the maximum drawdown for FFRAX was -18.2%. However, when the two funds are traded together the worst 12-month period was just -8.6%.
Summary
The “portfolio” discussed herein is NOT a recommendation, it is merely “food for thought”. If nothing else, combining two sectors of the “bond world” that are very different (one reacts well to falling rates and the other reacts well to rising rates) certainly appears to reduce the overall volatility.
My opinion is that interest rates will rise in the years ahead and that long-term bonds are a dangerous place to be. While my default belief is that investors should avoid long-term bonds during a rising rate environment, the test conducted here suggests that there might be ways for holders of long-term bonds to mitigate some of their interest rate risk without selling their long-term bonds.
Like I said, food for thought.
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.
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 Techniques, Advanced 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 1. Bullish 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 2. Bearish 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.
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 7. CDW 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.
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.
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)
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).
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.
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.