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Four Things to Watch for Warning Signs

April 7, 2017educational newsletters, ETFS, indexes, jay kaeppel, stock market, Stock tradingadmin

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.

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”.

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”.

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.

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.

The MACD ‘Tell’ Strikes Goldman Sachs

March 23, 2017educational newsletters, jay kaeppel, technical indicatoradmin

There are many ways to use the MACD indicator developed long ago by Gerald Apel. This is one of them. Maybe. Nothing more, nothing less.

First the caveat: what follows is NOT a “trading system” or even something that you should consider on a standalone basis.

MACD

The MACD indicator uses exponential moving averages to identify the underlying trend for a given security and is also used by many traders to identify divergences which may signal an impending change of trend.

Figure 1 displays the daily MACD for ticker SPY.

Figure 1 – Ticker SPY with MACD Indicator (Courtesy AIQ TradingExpert)

The MACD ‘Tell’

While this is NOT intended to be a mechanical signal, I am going to put specific rules on it just to give it some structure. The rules:

1) If the daily MACD (12,26,9) has declined for at least 7 consecutive trading days AND

2) The 2-day RSI is at 64 or above

Then an “alert” signal is flashed. The key thing to note is that if the MACD ticks higher on the day that the 2-day RSI rises above 64, the signal is negated.

Before proceeding please note that the 12,26,9 parameter selection is simply the “standard” for MACD. Also, there is nothing magic about 7 consecutive days – so one might experiment with different values there. Finally, using the 2-day RSI and a “trigger” value of 64 are also both arbitrary. There may be better values and/or different overbought/oversold indicators to use.

Ticker GS

A “classic” example of the MACD Tell appears in Figure 2 using ticker GS.

Figure 2 – Ticker GS with the MACD Tell (Courtesy AIQ TradingExpert)

The MACD Tell is typically best used as a short-term indicator. In this case a short-term trader might have considered playing the short side of GS – or even better – using option strategies such as buying puts or selling bear call spreads.

Summary

No one should rush out and start trading put options based on this indicator (or any other indicator for that matter) without spending some time doing some homework and testing out the viability for producing profits.

In reality, this is the type of indicator that should typically be combined with “something else” and/or used as a confirmation rather than as a standalone approach.

Jay Kaeppel

Volume-Weighted Moving Average Breakouts

March 20, 2017EDS, portfolio management, Stock trading, technical indicatoradmin

The AIQ code based on Ken Calhoun’s article in the February 2017 issue of Technical Analysis ofSTOCKS & COMMODITIES, “Volume-Weighted Moving Average Breakouts,” can be found at http://aiqsystems.com/Volume-Weighted-Moving-Average-Breakouts.EDS

Please note that I tested the author’s system using the NASDAQ 100 list of stocks on daily bars rather than intraday bars from 12/31/2008 thru 2/10/2017. Figure 7 shows the resulting equity curve trading the author’s system with the cross-down exit. Figure 8 shows the ASA report for this test. The annualized return showed about a 17% return with a maximum drawdown of 19%.

FIGURE 7: AIQ. Here are sample test results from the AIQ Portfolio Manager taking three signals per day and 10 concurrent positions maximum run on NASDAQ 100 stocks (daily bar data) over the period 12/31/08 to 2/10/07.

FIGURE 8: AIQ. This shows the ASA report for the system, which shows the test metrics and settings.

The code and EDS file can be downloaded from http://aiqsystems.com/Volume-Weighted-Moving-Average-Breakouts.EDS , and is also shown below.

!Volume-Weighted Moving Average Breakouts
!Author: Ken Calhoun, TASC Apr 2017
!Coded by: Richard Denning 2/11/17
!www.TradersEdgeSystems.com

!INPUTS:
smaLen is 70.
vwmaLen is 50.

SMA is simpleavg([close],smaLen).
VWMA is sum([close]*[volume],vwmaLen)/sum([volume],vwmaLen).
HasData if hasdatafor(max(smaLen,vwmaLen)+10)>max(smaLen,vwmaLen).
Buy if SMA < VWMA and valrule(SMA > VWMA,1) and HasData.
Sell if SMA > VWMA.

rsVWMA is VWMA / valresult(VWMA,vwmaLen)-1.
rsSMA is SMA / valresult(SMA,smaLen)-1.

—Richard Denning
info@TradersEdgeSystems.com
for AIQ Systems

March and April (and the Train Rolls On)

February 25, 2017educational newsletters, jay kaeppel, market timing, stock market, trading strategyadmin

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.

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.

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/

Exponential Standard Deviation Bands

February 15, 2017back testing, EDS, Stocks & Commodities traders tips, technical indicator, trading strategyadmin

The AIQ code based on Vitali Apirine’s article in the 2017 issue of Stocks & Commodities magazine, “Exponential Standard Deviation Bands”

Editor note: “Author Vitali Apirine presented a method intended to help traders see volatility while a stock is trending. These bands, while similar to Bollinger Bands, are calculated using exponential moving averages rather than simple moving averages. Like Bollinger Bands, they widen when volatility increases and narrow as volatility decreases. He suggests that the indicator can be used as a confirming indication along with other indicators such as the ADX. Here’s an AIQ Chart with the Upper, Lower and Middle Exponential SD added as custom indicators.”

To compare the exponential bands to Bollinger Bands, I created a trend-following trading system that trades long only according to the following rules:

Buy when there is an uptrend and the close crosses over the upper band. An uptrend is in place when the middle band is higher than it was one bar ago.
Sell when the low is less than the lower band.

Figure 8 shows the summary test results for taking all signals from the Bollinger Band system run on NASDAQ 100 stocks over the period 12/9/2000 to 12/09/2016. Figure 9 shows the summary test results for taking all signals from the exponential band system on NASDAQ 100 stocks over the same period. The exponential band system improved the average profit per trade while reducing the total number of trades.

Sample Chart

FIGURE 8: AIQ. Here are summary test results for taking all signals from the Bollinger Band system run on NASDAQ 100 stocks over the period 12/9/2000 to 12/09/2016.

Sample Chart

FIGURE 9: AIQ. Here are summary test results for taking all signals from the exponential band system run on NASDAQ 100 stocks over the period 12/9/2000 to 12/09/2016.

The EDS file can be downloaded from http://aiqsystems.com/EDS/Exponential_Standard_Deviation_Bands.EDS
and is also shown here:

!Exponential Standard Deviation Bands
!Author: Vitali Apirine, TASC February 2017
!Coded by: Richard Denning 12/11/2016
!www.TradersEdgeSystems.com!INPUT:
xlen is 20.
numSD is 2.

!INDICATOR CODE:
ExpAvg is expavg([close],xlen).
Dev is [close] – ExpAvg.
DevSqr is Dev*Dev.
SumSqr is sum(DevSqr,xlen).
AvgSumSqr is SumSqr / xlen.
ExpSD is sqrt(AvgSumSqr).

!UPPER EXPONENTIAL SD BAND:
UpExpSD is ExpAvg + numSD*ExpSD. !PLOT ON CHART

!LOWER EXPONENTIAL SD BAND:
DnExpSD is ExpAvg – numSD*ExpSD. !PLOT ON CHART

!MIDDLE EXPONENTIAL SD BAND:
MidExpSD is ExpAvg.

!BOLLINGER BANDS FOR COMPARISON:
DnBB is [Lower BB]. !Lower Bollinger Band
UpBB is [Upper BB]. !Upper Bollinger Band
MidBB is simpleavg([close],xlen). !Middle Bollinger Band
!REPORT RULE TO DISPLAY VALUES:
ShowValures if 1.

!TRADING SYSTEM USING EXPPONENTIAL SD BANDS:
UpTrend if MidExpSD > valresult(MidExpSD,1).
BreakUp if [close] > UpExpSD.
BuyExpSD if UpTrend and BreakUp and valrule(Breakup=0,1).
ExitExpSD if [Low] < DnExpSD. ! or UpTrend=0.

!TRADING SYSTEM USING BOLLINGER BANDS:
UpTrendBB if MidBB > valresult(MidBB,1).
BreakUpBB if [close] > UpBB.
BuyBB if UpTrendBB and BreakUpBB and valrule(BreakupBB=0,1).
ExitBB if [Low] < DnBB. ! or UpTrend=0.

—Richard Denning
info@TradersEdgeSystems.com
for AIQ Systems