Category Archives: jay kaeppel

The VixRSI14 Indicator – Part 2

January 19, 2018EDS, educational newsletters, jay kaeppel, trading strategyadmin

In this article I detailed an indicator I refer to as VixRSI14 using monthly charts. Today let’s apply the same method to weekly bar charts. Before we do that a quick look at how this indicator functions.

VixRSI combines two indicators – Larry William’s VixFix and Welles Wilder’s Relative Strength Index (RSI). In Figure 1 you see a weekly bar chart for YHOO. Notice that as price declines the VixFix indicator rises and RSI falls. VixRSI14 essentially measures the difference between the two and looks for extremes as a sign of a potential reversal. See Figure 5 for YHOO with VixRSI14.

Figure 1 – YHOO with Williams VixFix (with 3-day exponential smoothing) and Wilder’s 14-period RSI (Courtesy AIQ TradingExpert)

The Weekly Version of VixRSI14

We will use the same method I described in the previous article, i.e.:

*We will calculate the VixRSI14 indicator (see code at end of article) on a weekly basis

*A “buy alert” occurs when VixRSI14 drops below 3.00 after first rising to 3.50 or higher

Once again, please note that:

*There is nothing magic about 3.50 or 3.00

*Not every “buy alert” is followed by an immediate rally (or even any rally at all for that matter)

*Any actually trading”results” will depend heavily on what you trade, how much of it you trade, when you actually get in, when you get out with a profit and/or when you get out with a loss.

*This VixRSI14 alert signal is simply serving notice that a given security may be overdone on the downside and may be ready soon to reverse to the upside. Nothing more, nothing less.

Figure 2 – AAPL(Courtesy AIQ TradingExpert)

Figure 3 – AXP (Courtesy AIQ TradingExpert)

Figure 4 – IP (Courtesy AIQ TradingExpert)

Figure 5 – YHOO (Courtesy AIQ TradingExpert)

Summary

In 2018 I intend to try to share a few more trading “ideas” that maybe are not quite “finished products”. VixRSI14 fits neatly into the “Idea” category. Sometimes the alerts are early. Sometimes the alerts are late. Sometime the alerts don’t really pan out at all. Sometimes alerts are followed by one more sharp decline which is then followed by a major rally. So maybe some sort of trend reversal confirmation would be helpful. I don’t know.

Hey, that gives me an idea….

Code:

William’s VixFix is simply the 22-period high price minus today’s low price divided by the 22-day period price (I then multiply by 100 and then add 50). That may sound complicated but it is not.

The code for AIQ TradingExpert appears below.

########## VixFix Code #############

hivalclose is hival([close],22).

vixfix is (((hivalclose-[low])/hivalclose)*100)+50.

###############################

####### 14-period RSI Code ###########

Define periods14 27.

U14 is [close]-val([close],1).

D14 is val([close],1)-[close].

AvgU14 is ExpAvg(iff(U14>0,U14,0),periods14).

AvgD14 is ExpAvg(iff(D14>=0,D14,0),periods14).

RSI14 is 100-(100/(1+(AvgU14/AvgD14))).

###############################

VixRSI14 is then calculated by dividing the 3-period exponential average of VixFix by the 3-period exponential average of RSI14

####### VixRSI14 Code ###########

VixRSI14 is expavg(vixfix,3)/expavg(RSI14,3).

###############################

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 VixRSI14 Indicator – Part 1

January 17, 2018EDS, educational newsletters, jay kaeppel, technical indicatoradmin

While the bulk of the financial world focuses most of its attention on whether or not Bitcoin will turn to sh, er, something that rhymes with Bitcoin, a lot of “old timers” continue on with trying to look at markets in a more traditional way. Unfortunately, some people who try to look at markets in a more traditional way also spend an inordinate amount of time “dividing one number by another” thinking there is some purpose to it (“Hi. My name is Jay”)

The only good news is that every once in awhile something useful – or at least potentially useful (since no single calculation guarantees profitability which also involves other “minor” issues such as which securities to trade, allocation size, entry method, profit taking criteria, stop loss triggers and so on and so forth). A number of years ago I stumbled upon a calculation that I ultimately refer to as VixRSI (for reasons that will become fairly obvious soon). More specifically I have a few different versions but one I like is call used VixRSI14.

First the Good News: In this and some future articles I will detail how I apply VixRSI14 to monthly, weekly and daily price charts.

Now the Bad News: Nothing that I will write in any of those articles will detail a “simple automated system that generates you can’t lose trading signals guaranteed to make you rich beyond the dreams of avarice.” Sorry about that. But I thought you should know.

The truth is that the indicator generates signals – and yes, a certain percentage of the time those signals aren’t that great. And even on occasions when the signals are decent all of the factors I mentioned above (securities traded, capital allocation, etc.) still hold the key to turning a “signal” into a “profit”.

VixRSI14

VixRSI14 is calculated by combining Larry William’s “VixFix” indicator with the standard old 14-day RSI from Welles Wilder. I’ve decided to put the calculations at the end of the article in order to avoid scaring anyone off.

For now let’s look at what to look for on a monthly price chart.

VixRSI14 on a Monthly Chart

OK, true confession time: there is (at least as far as I can tell) no “one best way” to use VixRSI14 on a monthly chart. So I will simply show you “One way.”

*A “buy alert” is triggered when the monthly value for VixRSI14 first rises to 3.5 or higher and then drops back to 3.0 or below

*Before going on please note that there is nothing “magic” about 3.5 or 3. Different values can be used and will generate varying results.

*Also, some may prefer to simply look for a drop from above 3 to below 3 without requiring a move above 3.5

*Finally please note the use of the phrase “buy alert” and the lack of the phrase “BUY AS MUCH AS YOU CAN RIGHT THIS VERY MINUTE!!!!”

Figures 1 through 4 show several different Dow30 stocks “through the years.

Figure 1 – Ticker AXP (Courtesy AIQ TradingExpert)

Figure 2 – Ticker BA (Courtesy AIQ TradingExpert)

Figure 3 – Ticker HPQ (Courtesy AIQ TradingExpert)

Figure 4 – Ticker IBM (Courtesy AIQ TradingExpert)

Summary

Buy alerts on monthly charts using the criteria I described are obviously very rare. In fact many securities never see the VixRSI14 rise high enough to trigger an alert. Likewise, not every 3.5 then 3 event for every stock will work out as well as those depicted in Figures 1 through 4.

Still, remember that I am just presenting an “idea” and not a finished product.

Code:

William’s VixFix is simply the 22-day high price minus today’s low price divided by the 22-day high price (I then multiply by 100 and then add 50). That may sound complicated but it is not.

The code for AIQ TradingExpert appears below.

########## VixFix Code #############

hivalclose is hival([close],22).

vixfix is (((hivalclose-[low])/hivalclose)*100)+50.

###############################

####### 14-period RSI Code ###########

Define periods14 27.

U14 is [close]-val([close],1).

D14 is val([close],1)-[close].

AvgU14 is ExpAvg(iff(U14>0,U14,0),periods14).

AvgD14 is ExpAvg(iff(D14>=0,D14,0),periods14).

RSI14 is 100-(100/(1+(AvgU14/AvgD14))).

###############################

VixRSI14 is then calculated by dividing the 3-period exponential average of VixFix by the 3-period exponential average of RSI14

####### VixRSI14 Code ###########

VixRSI14 is expavg(vixfix,3)/expavg(RSI14,3).

###############################

Jay Kaeppel

Trend or Countertrend? Why Not Both?

January 12, 2018EDS, educational newsletters, jay kaeppel, trading strategyadmin

First the brutal disclaimers: What follows is NOT a trading “system.” It is merely an “idea.” Even more brutally, I can’t even claim that it “works”. All the testing I have done so far is more anecdotal. Also to an extremely huge degree, the actual entry trigger and exit trigger that trader might choose to use will have – as always – at least as much if not more impact on overall trading results as the actual “alert” signal detailed below.

Got that? OK, then let’s proceed.

The Debate

The ongoing debate in trading is always – trend-following or countertrend? Which is the way to go? There are (conservatively) at least a bazillion and one ways to argue one way or the other. Figure 1 displays ticker TXN with upper and lower “Acceleration Bands” (code for AIQ TradingExpert appears after disclaimer at end of article) drawn.

Figure 1 – Ticker TXN with Acceleration Bands (Courtesy AIQ TradingExpert)

Want to start a debate? Ask this question: Is it better to buy when price hits the upper band or the lower band? Sometimes price hits the upper band and just keeps going. Sometimes it hits the upper band and the move peters out and reverses fairly quickly.

Going with the trend can lead to some big winning trades along the way, but typically involves a lot of whipsaws as well. Trading countertrend can lead to some great, quick profits – expect of course for when the initial trend never quite reverses and quick losses accrue instead.

What to do, what to do?

So the “idea” I mentioned at the outset generally goes like this:

*In an uptrend (which we will define in a moment)

*Wait for price to hit the Upper Band

*Then wait for a pullback

*Then wait for the uptrend to reassert itself

Got that? OK, me neither exactly. So let’s try to define things a little more clearly.

1. As long as the closing price remains above the 200-day moving average, we will call that an “uptrend”

2. Within an uptrend wait for the high of a trading day to reach or exceed the Upper Acceleration Band.

3. Following #2, wait for the 4-day RSI to drop to 32 or lower with the following caveats:

*If price touches the Lower Acceleration Band OR closes below the 200-day moving average

*Then the setup is invalidated

This is the “Setup”. For sake of example I will add an entry trigger as follows:

4. Following a valid #3 Alert Signal, buy when price exceeds the previous day’s high

I am going to purposely NOT add an exit trigger – just so that no one decides to “try it out” without at least giving it some thought on their own.

So Figure 2 shows the “Alerts” and “Entry Triggers” for the chart in Figure 1.

Figure 2 – Ticker TXN with Example “Entry Triggers” (Courtesy AIQ TradingExpert)

So Figure 3 shows the “Alerts” and “Entry Triggers” for ticker EBAY

Figure 3 – Ticker EBAY with Example “Entry Triggers” (Courtesy AIQ TradingExpert)

So Figure 4 shows the “Alerts” and “Entry Triggers” for ticker CSCO

Figure 4 – Ticker CSCO with Example “Entry Triggers” (Courtesy AIQ TradingExpert)

So are these signals any good? Well, like a lot of trading methods, some look pretty good and others do not. As I also mentioned earlier, a lot depends on the method or methods you use to exit each trade.

Summary

The reality is that there is a chance that the “idea” contained herein is just no darn good.

But also remember that there are other “trend filters” (besides the 200-day moving average), there are other “bands” (besides Acceleration Bands”), there are other oversold indicators (besides 4-day RSI) and there are other entry and exit triggers.

As such, this piece is essentially for people who are willing to do a little digging on their own and, a) become comfortable (or not) with the idea, and b) develop some position sizing, stop-loss and profit-taking criteria.

Jay Kaeppel

Acceleration Bands Code for AIQ Expert Design Studio EDS

a is ([high]-[low]).

b is ([high]+[low])/2.

c is (a / b).

d is (c*2).

e is (1+d).

f is (1-d).

g is ([high]*e).

h is ([low]*f).

AccelUB is Simpleavg(g, 20).

AccelLB is Simpleavg(h, 20).

The Biotech-Gold Stock Connection

January 3, 2018educational newsletters, jay kaeppel, Mutual fundsadmin

At first blush there might not seem to be much to connect biotech stocks and gold stocks.

One type of company hires people to engage in high tech biomedical engineering in order to develop potentially life-saving – or at least, life altering – medical breakthroughs…

…while the other hires people to (essentially) dig holes in the ground and mine stuff (granted, valuable stuff, but stuff mined out of the ground nevertheless).

But there is one other connection – stocks of both categories are quite volatile. And that alone may be enough to create a potential opportunity.

The BioGold Index

I created an “index” (such as it is) that combines Fidelity Select Biotech (FBIOX) and Fidelity Select Gold (FSAGX). The index appears in Figure 1. Like every other index in the world this index fluctuates up and down.

Figure 1 – Jay’s BioGold Index (Courtesy AIQ TradingExpert)

The RSI32 Index

The RSI32 Index is simply a 2-day average of the standard 3-day RSI Index. The code for AIQ TradingExpert EDS is below:

Define days3 5.

U3 is [close]-val([close],1).

D3 is val([close],1)-[close].

AvgU3 is ExpAvg(iff(U3>0,U3,0),days3).

AvgD3 is ExpAvg(iff(D3>=0,D3,0),days3).

RSI3 is 100-(100/(1+(AvgU3/AvgD3))).

RSI32 is simpleavg(RSI3,2).

The RSI32 Index for the BioGold Index appears on the monthly bar chart in Figure 2.

Figure 2 – The BioGold Index with RSI32 (drop to 33 or below = BUY) (Courtesy AIQ TradingExpert)

The BioGold “System”

The BioGold System works as follows:

*When the monthly RSI32 Index drops to 33 or lower, buy BOTH FBIOX and FSAGX

*After a “Buy Signal” then when the monthly RSI32 rises to 64 or higher, sell BOTH FBIOX and FSAGX

For testing purposes we will use monthly total return data for both FBIOX and FSAGX from the PEP Database from Callan Associates.

The Results

Figure 3 displays the results of the buy signals generated using the rules above (assumes that both FBIOX and FSAGX are bought after monthly RSI32 drops to 33 or lower and are held until monthly RSI32 rises to 64 or higher.

Buy Signal	Sell Signal	FBIOX+FSAGX % +(-)
4/30/1992	12/31/1992	+14.4%
2/26/1993	4/30/1993	+14.7%
4/29/1994	9/30/1994	+7.2%
12/30/1994	4/28/1995	+9.8%
4/30/1997	9/30/1997	+18.4%
11/28/1997	4/30/1998	+10.4%
6/30/1998	12/31/1998	+16.1%
3/30/2001	6/29/2001	+22.7%
7/31/2002	12/31/2002	+18.1%
7/30/2004	10/29/2004	+11.2%
3/31/2005	7/29/2005	+10.2%
4/30/2008	7/31/2008	+9.4%
9/30/2008	6/30/2009	+3.8%
5/31/2012	9/28/2012	+20.0%
2/28/2013	2/28/2014	+28.6%
8/31/2015	4/29/2016	+22.2%
12/30/2016	2/28/2017	+13.2%
	Average %	+14.7%
	Median %	+14.4%
	Std. Deviation %	6.4%
	Max % +(-)	+28.6%
	Min % +(-)	+3.8%

Figure 3 – Trade-by-Trade Results

For the record, the “System” has been in FBIOX and FSAGX only 28% of the time (88 months) and out of the market 72% of the time (223 months).

Figure 4 displays the trades in recent years.

Figure 4 – BioGold System trades; 2012-2017 (Courtesy AIQ TradingExpert)

*The Good News is that all 17 signals since 1992 showed a profit, with an average gain if +14.7%.

*The Bad News is that, a) 17 trades in 25 years is a pretty small number of trades and, b) there are some not insignificant drawdowns along the way (-22.8% in 1998 and -22.4% in 2008, -14.1% in 2013 and -13.6% in 2016).

Still, for what it is worth the monthly equity curve appears in Figure 5.

Figure 5 – Growth of $1,000 invested using the “BioGold System”; 12/31/1991-12/29/2017

For the record, the “System” has been in FBIOX and FSAGX only 28% of the time (88 months) and out of the market 72% of the time (223 months).

For the record, the “System” has been in FBIOX and FSAGX only 28% of the time (88 months) and out of the market 72% of the time (223 months). No interest is assumed to be earned while out of the market in the test above.

If we invest in short-term treasuries (1-3 yr.) while not in the stock market we get the results shown in Figure 6.

In Figure 6:

*The blue line represents the growth of $1,000 achieved by holding FBIOX and FSAGX when the BioGold System is on a “buy signal” and 1-3 yr. treasuries the rest of the time.

*The red line represents the growth of $1,000 achieved by buying and holding both FBIOX and FSAGX and then rebalancing at the end of each year.

The “System” grew to $19,863 and the “split” grew to $12,844.

Figure 6 – Growth of $1,000 using BioGold System plus 1-3 yr. treasuries when out of stocks (blue) versus buying and holding FBIOX and FSAGX and rebalancing each year (red);12/31/1991-12/29/2017

Summary

So is the “BioGold System” really a viable investment idea? That’s not for me to say. The per trade returns are pretty good but there aren’t a whole lot of trades and if history is a guide an investor would likely have to ride some significant drawdowns in order to reap the gains.

Still, market-beating performance is market-beating performance, so who knows?

Jay Kaeppel Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro client.

Bitcoin May Rise Another 20-fold, But First….

December 13, 2017educational newsletters, jay kaeppeladmin

First off, for the record I am an “Old Dog” and Bitcoin is a “New Trick”. That creates a problem right there. The truth is also that can’t honestly say that I fully understand what Bitcoin actually is or how it actually works (which technically means I am in pretty good company with a lot of people who are actually trading it, but I digress). And as a “grizzled veteran” (of the markets) there is a part of me that instinctively wants to dismissively shout “bubble” and sneeringly walk away. It’s not like it hasn’t been seen before – tulip bulbs, the Nifty 50, silver, technology/dot.com stocks, interest only mortgages and so on.

Most of you know the drill:

*Some form of “investment” catches lightning in a bottle

*The investment world (for lack of a more professional phrase) “wet’s itself”

*Price soars beyond all rational levels

You know, sort of like what you see in Figure 1…

Figure 1 – Bitcoin price (Bitcoin.com)

…And then it all ultimately plummets painfully to earth.

Well, at least temporarily. I mean sure tulip bubbles never ascended the heights again, but a lot of the Nifty 50 went on to still be major companies even after their stock cratered. The same for a lot of the major dot.com era companies. Silver is still trading as a serious commodity and real estate seems to have rebounded.

In sum: Is Bitcoin forming a price “bubble”? It’s hard to look at Figure 1 and not think so. Of course, even if it is the questions no one can answer for sure are “When” and “from what level”?

The other question is “if it is a bubble and the bubble bursts, will crypto currencies go the way of tulip bulbs (as an investment) or is there a future for them in the long run?”

A Recent Bubble History Lesson

In the late 90’s into 2000 a bubble formed in tech stocks. And the bubble burst and it was ugly. And many “hot” companies folded and vanished. But not all of them and certainly not the major players. And certainly not the industry as a whole. Like I said before I don’t truly understand Bitcoin and crypto currencies. So I can’t say for sure if they are a “craze” – like tulip bulbs in the 1600’s during “Tulipmania” or something more viable and sustainable – like technology stocks. To understand why this distinction matters, consider the stocks listed in Figure 2.

Figure 2 – Dot.com bubble stocks that survived and thrived

As you can see in Figure 2 through 7 each of these stocks experienced a “bubble” and a “crash”. Interestingly, the companies themselves ultimately rebounded and thrived.

The average “crash” was -87% and the average post-crash advance (so far) is about 16,000%.

Figure 3 – Apple (Courtesy AIQ TradingExpert)

Figure 4 – Amazon (CourtesyAIQ TradingExpert)

Figure 5 – Microsoft (Courtesy AIQ TradingExpert)

Figure 6 – Nvidia (Courtesy AIQ TradingExpert)

Figure 7 – Priceline (Courtesy AIQ TradingExpert)

Summary

The only thing we can say for sure is that some people will make a great deal of money from Bitcoin/crypto currencies and others will likely get wiped out. The danger is obvious: whenever you have a lot of investors “chasing” something – especially something that many of them don’t even understand – it is a recipe for trouble.

That being said, in my (market addled) mind the real “long-term” question is, will crypto currencies still be “a thing” after the bottom falls out? If Bitcoin is a bubble, then if history is a guide we can look or a decline in price somewhere in the 80% to 99% range after the top is ultimately made.

From there, if history is also a guide then depending on whether or not crypto currencies prove to be a viable thing, we can expect them to either:

a) Vanish altogether

b) Rise 15-20 fold from the bottom

So here is my Bitcoin/crypto currency investing guide:

*It is OK to pile in and buy Bitcoin in hopes of getting rich (as long as you do not “bet the ranch”, invest only a small portion of your capital and acknowledge that a 100% loss is absolutely a possibility and that you are willing and able to accept that risk).

*It is also OK to sneer and shout “bubble” and not invest. But if and when the bottom drops out and prices crater remember to peruse the wreckage. There just might be an opportunity there (remember, Priceline lost -99% when the dot.com bubble burst, then gained 32,000%).

In any event, hold on tight people, this is NOT going to be a smooth ride.

Jay Kaeppel Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro client.