Category Archives: Uncategorized

What to Expect From Here

September 10, 2015Uncategorizedadmin

If you have been in the markets for any length of time, then you have seen this movie before:

*The market is moving along swimmingly. A few brave souls shout “The End is Near” as the Dow catapults a couple thousand points higher and then starts to level off.

*Suddenly [the financial press agrees on] one or more “causes” (circa 2015, think “China”), um, “cause” the market to plummet.

*We see the obligatory BOLD HEADLINES reading “Dow Down [-xxx] Points” accompanied by the also obligatory pictures of “worried traders” (who are these guys anymore anyway, hired actors? I thought everyone traded electronically now? Seems like they should show a picture of a guy sitting at his computer with his mouth wide open, palm to forehead, with that WTF look on his face) standing and staring up at some distant screen, dumbfounded.

*Soon comes the (I am thinking about trademarking this phrase)“Obligatory Technical Bounce”, accompanied by the equally obligatory “Dow [+xxx] Points – Is the Worst Over?” headline.

*Shortly thereafter we see the resounding answer – “No, the worst is not over”!

*And over a period of months the stock market becomes an endless roller-coaster, alternating with extreme volatility between “swooning and soaring”.

*Each “soar” is accompanied by more “Is The Worst is Over?” headlines and a lot of “Brace for more trouble” articles.

*Each “swoon” is accompanied by more “Dow Down [-point value here]” headlines and more “forlorn trader” photos.

And so it goes and so it goes. To wit:

Figure 1 – 2002 (Courtesy: AIQ TradingExpert)

Figure 2 – 2006 (Courtesy: AIQ TradingExpert)

Figure 3 – 2007 (Courtesy: AIQ TradingExpert)

Figure 4 – 2008 (Courtesy: AIQ TradingExpert)

Figure 5 – 2010 (Courtesy: AIQ TradingExpert)

Figure 6 – 2011 (Courtesy: AIQ TradingExpert)

As you can see in Figure 7, the 2015 decline is “off to a good start” (“off to a good start” being defined as “big drop” followed by “soar” followed by “swoon”).

Figure 7 – 2015 (Courtesy: AIQ TradingExpert)

Summary

Expect big prices swings by the major stock market averages. Also expect to have the financial press raise your hopes that “The Worst is Over” each time the averages “soar” and to attempt to scare the crud out of you each time the averages “swoon.”

In the meantime:

*If you are an excellent short-term trader then there is the opportunity to make a lot of money.

*If you are a poor short-term trader then there is the opportunity to lose shocking sums of money in an incredibly short period of time (so assess your skills carefully before attempting to ride each “swoon” and/or “soar”).

*If you are a more traditional investor then the reality is that you should continue to follow your investment plan (you do have one, right? Right?) and not “react” every time you see a picture of a dumbfounded trader juxtaposed to be staring at the latest “Dow Down [xxxx] Points” headline. Remember:

Jay’s Trading Maxim #29: If you had a trading plan that you were following yesterday, you should continue following it today.

Jay Kaeppel

Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client

http://jayonthemarkets.com/

Could we be here – 2008 rerun of the market?

August 31, 2015Uncategorizedadmin

Now whether you believe history repeats itself or not, there are plenty of reasons to look at what happened in prior turning points in the market. Here we’ll look at the 2008 financial crisis tipping point and compare to price action through August 28th, 2015.

The first chart below uses the lock overlay feature in AIQ TradingExpert Pro that allows us to move one chart’s history back and forward in time while keeping the second chart ‘locked’ at a certain date. In the chart below the purple chart is the ‘locked’ price action of the Dow 30 index through 8-28-2015. The black chart is the Dow 30 index with the right hand date set to 1-23-2008 right is at the first major correction of the 2008 market.

Some statistics

10/11/07 to 1/23/08 Dow fell from 14279 to 11530 a 19% correction over 70 days

05/20/15 to 08/24/15 Dow fell from 18351 to 15370 a 16% correction over 65 days

Figure 1: In purple is the Dow 30 index through 8-28-2015, overlaid in black is the Dow 30 index from 1-23-2008

Chart patterns being what they are and somewhat subjective, lets take a look at some of the breadth data off the NYSE for both periods.

The Hi/Lo indicator measures the number of stocks on NYSE making a new high vs a new low.
This is averaged over 39 periods. Whats interesting is the peak in Hi/Lo indicator back in December 2006 way before the 2008 bear market in figure 2 below. The indicator never exceeded that peak, diverging from price action for the majority of the time until the market eventually came down. Compare that to the bottom chart of the current market. Hi/Lo indicator peaked in June 2015 and has also largely diverge from price action since.

Figure 2: Top chart is Dow 30 index through 1-23-2008 vs Dow 30 index through 8-28-2015 both with with Hi/Lo indicator of NYSE stocks

The AD Line is the difference between the day’s advances and the day’s declines summed to the previous day’s total. The Advance/Decline Line is a very good indicator of the overall strength of the total market. It tracks the entire market, and tends to lead the indices in market direction. A break in the A/D Line tends to indicate a future break in average prices and nonconformations and divergences with the price action of the market. In both time periods we are comparing, the AD Line has not shown any major break, divergences or nonconformations.

Figure 3: Top chart is Dow 30 index through 1-23-2008 vs Dow 30 index through 8-28-2015 both with with AD Line indicator of NYSE stocks

Finally a study of the 2008 bear market reveals an interesting retracement from the initial fall in prices. The market fell from the peak of the 2007 at around 14279 to the low on 1/22/08 around 11508. Subsequent rally was a classic Fibonacci retracement to 61.8% level before falling again in May 2008. After that failed turnaround the markets fully entered bear territory.

The Importance of Respecting the Trend

August 26, 2015Uncategorizedadmin

The trend is your friend. OK, you’ve probably heard that before. But there is a good reason that this phrase is heard so commonly among traders.

For those who were willing to hear what the market was saying, there was some advance warning that trouble was brewing. A glance at Figure 1 shows us that the major market measures – the Dow, the S&P 500 Index, the Russell 2000 small-cap index and the Vanguard Total World Stock Index ETF – were all breaking down below their respective 200-day moving averages prior to “the Plunge”.

Figure 1 – Stock Market Indexes signaling “trouble” prior to the “Plunge” (Charts by AIQ TradingExpert Pro)

See also This is Why We Trade

OK, for the record I am not an “investment advisor”, on this blog I do not make “recommendations” and I never – OK, rarely – try to make “predictions” (because quite frankly, who needs the humiliation).

I do know something about following a trend, however, and for the record I did issue something of a warning (OK, more like a veiled threat) in this article on July 28th.

Also, on 8/11 the Dow Industrials experienced what is widely known as the “Death Cross” – which occurs when the 50-day moving average drops below the 200-day moving average. Now I also (mostly) try to avoid casting stones at other financial writers (glass houses and what not). So as a result, I did not write the article about how it concerned me a great deal that within 48 hours of the Dow “Death Cross” I came across roughly 352 articles telling me that the “Death Cross” doesn’t mean a thing because “sometimes it works and sometimes it doesn’t”.

Now here is the important point:

All roughly 352 authors were technically correct that sometimes the Death Cross “works” (i.e., prices head significantly lower) and sometimes it does not. But the fact of the matter is – at least in my opinion – that the trend must be respected at all times. No one likes to get whipsawed, and no you do not have to “sell everything”, every time a stock index drops below its 200-day moving average. BUT, when lots of indexes start breaking down at the same time the one thing you cannot do is simply DISMISS IT!!

As I mentioned, a Death Cross or a drop below a particular moving average does not have to mean “sell everything.” But it should mean “protect yourself just in case.” That might mean raising some cash or hedging with options, etc.

What Should I Do Now?

That seems to be the question everyone asks after a market plunge. That and “Where does the market go from here”. Now as a “financial analyst type” I know that people or sort of trained to expect that the next thing I will do is discuss where I think the market is headed from here and what you should do now. But, like I said, I don’t “do predictions”. So for the moment I won’t bother telling you where I think the market is headed next. But I think I can answer the “What Should I Do Now” question.

Jay’s Trading Maxim #29: If you had a trading plan that you were following yesterday, you should continue following it today.

Now I admit that may sound a bit snarky but it is not intended to. For if your approach to trading is to do one thing, and then when trouble arises you start to do something else, then – let’s face it – you don’t really have much of a plan.

For what it is worth, I will say that I am OK with “buy and hold” with a portion of a portfolio. I have some mutual funds that I think I have held for what could be close to 30 years. I’ll sell those when I need the money. But not before.

But I am not a fan of “only buy-and-hold”. An investor who puts all of his or her money in the stock market and leaves it there is (in my opinion) like a ship at sea without a rudder. When the winds are favorable things will go really well. When a storm arises some very, very bad things can happen and you have absolutely no control (except to hold on tight and hope the storm passes while you are still afloat).

So for what it is worth, ponder the “approach” listed below:

*40% in the stock and/or bond markets on a buy-and-hold basis

*30% in objective trading or investment strategies that can outperform over time (see some other articles on this site for some ideas. Another site to peruse for examples of objective strategies is wwwQuantocracy.com)

*20% in short-term trading strategies (can go cash and ply the short side, and may include options trading)

*10% in cash or hedging positions

Nothing magic about this formula. But this type of diversified approach allows an investor to attack the financial markets from a variety of angles.

Which looks like a pretty good idea right about now.

Jay Kaeppel

Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client

http://jayonthemarkets.com/

The Slow Volume Strength Index

August 10, 2015Uncategorizedadmin

The AIQ code based on Vitali Apirine’s article in S&C, “The Slow Volume Strength Index,” is provided for download from the following website:

www.TradersEdgeSystems.com/traderstips.htm

!THE SLOW VOLUME STRENGTH INDEX
!Author: Vitali Aiprine, TASC April 2015
!Coded by: Richard Denning 6/10/2015
!www.TradersEdgeSystems.com

!INPUTS FOR INDICATOR:
emaLen is 6.
wilderLen is 14.

!INDICATOR FORMULAS:
ema is expavg([close],emaLen).
pDif is iff([close] - ema > 0,[volume],0).
nDif is iff([close] - ema < 0,[volume],0).

rsiLen is 2 * wilderLen - 1.
AvgU  is expavg(pDif,rsiLen).
AvgD  is expavg(nDif,rsiLen).
svsi is 100-(100/(1+(AvgU/AvgD))). !PLOT

The code provided for the slow volume strength index (SVSI) may be plotted as an indicator, as shown in Figure 6.

FIGURE 6: AIQ. Here is the SVSI (6,14) indicator compared to the classic RSI (14).

—Richard Denning
info@TradersEdgeSystems.com
for AIQ Systems

The Slow Relative Strength Index

August 10, 2015Uncategorizedadmin

The AIQ code based on Vitali Apirine’s article in STOCKS & COMMODITIES, “The Slow Relative Strength Index,” is shown here. This code for the slow RSI (SRSI) is for use as an indicator. A sample chart illustrating the SRSI is shown in Figure 7.

FIGURE 7: AIQ. This example chart shows the slow RSI (6,14) compared to the classic RSI (14).

!THE SLOW RELATIVE STRENGTH INDEX
!Author: Vitali Aprine, TASC April 2015
!Coded by: Richard Denning 5/3/2015
!www.TradersEdgeSystems.com

!INPUTS FOR INDICATOR:
emaLen is 6.
wilderLen is 14.

!INDICATOR FORMULAS:
ema is expavg([close],emaLen).
pDif is iff([close] - ema > 0,[close] - ema,0).
nDif is iff([close] - ema < 0,ema - [close],0).

rsiLen is 2 * wilderLen - 1.
AvgU  is expavg(pDif,rsiLen).
AvgD  is expavg(nDif,rsiLen).
srsi is 100-(100/(1+(AvgU/AvgD))). !PLOT

The code and EDS file can be downloaded from www.TradersEdgeSystems.com/traderstips.htm.

—Richard Denning
info@TradersEdgeSystems.com
for AIQ Systems