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All Eyes on Key Bellwether Support Levels

January 14, 2019chart patterns, educational newsletters, jay kaeppel, Stock tradingadmin

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

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

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

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

SMH – Semiconductors

TRAN – Dow Transportation Average

ZIV – Velocity Shares Inverse VIX Index

BID – Sotheby Holdings

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

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

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

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

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

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

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

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

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

SMH – the key support level at 80.92

TRAN – the key level for the Dow Transports is 8744.36

ZIV – the key support level is 60.60

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

Summary

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

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

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

At the same time:

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

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

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

In a nutshell:

*Up January + Bellwethers holding above support = GOOD

*Down January + Bellwether breaking down below support = BAD

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

Jay Kaeppel

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

The 2018 updated SP500 Group and Sector

January 7, 2019group and sectoradmin

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

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

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

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

Weekly & Daily Stochastics

January 6, 2019back testing, Stocks & Commodities traders tips, technical indicatoradmin

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

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

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

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

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

Sample Chart

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

Sample Chart

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

Sample Chart

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

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

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

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

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

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

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

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

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

—Richard Denning

info@TradersEdgeSystems.com

for AIQ Systems

When to Buy Energy Stocks

January 6, 2019back testing, educational newsletters, ETFS, jay kaeppel, Mutual fundsadmin

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

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

Seasonality and Energy

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

The Test

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

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

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

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

Figure 3 – Ticker XLE (Courtesy AIQ TradingExpert)

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

Summary

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

Jay Kaeppel

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

December 19, 2018educational newsletters, ETFS, jay kaeppel, portfolio managementadmin

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

The Big Picture

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

Macro Suggestion

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

*30% invested using trend-following methods

*30% invested using tactical strategies

*10% whatever

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

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

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

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

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

Think about it.

The Current State of Affairs

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

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

(click any Figure to enlarge)

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

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

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

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

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

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

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

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

Summary

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

Jay Kaeppel

AIQ TradingExpert Pro

World Leader in Intelligent Trading Software

All posts by admin

All Eyes on Key Bellwether Support Levels

The 2018 updated SP500 Group and Sector

Weekly & Daily Stochastics

When to Buy Energy Stocks

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