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The ‘Professor’ commentary July 11, 2013

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by Hank Swiencinski, AIQ TradingExpert Pro client for over 20 years, founder of ‘The Professor’s One Minute Guide to Stock Management’
Join Hank at a special one hour webinar entitled ‘The Professor’s Rifle Trade’, August 22, 2013. hank will reveal his most powerful position trading technique. Limited audience and early bird pricing. LEARN MORE
 
The Dow fell 8 points, closing at 15,291. Volume on the NYSE was extremely light on the decline, coming in at only 71 percent of its 10 day average.  There were 194 new highs and 36 new lows.
The markets spent most of the day waiting to see what the Fed minutes said about their plans for stimulating the economy.  When the minutes came out at 2pm, there was a small rally, but it died quickly  leaving the Dow flat into the cloise.  However after the close, Bernanke, speaking at a conference sponsored by the National Bureau of Economic Research, stated that the  U.S. economy continues to need an accommodative monetary policy.  This caused US futures to shoot higher in after market trading, with the Dow futures gaining over 140 points..
There was another small change in the A-D oscillator yesterday, so you could say that the oscillator was predicting the Bernanke move.  The Big Move should be enough to push the Dow above the point where the odds favor the scenario that wave ‘c’ up has started.  But over the past few months, we have seen several times where a ‘talked up’ markets has come back down to earth, so today’s trading should be very interesting to watch. 
Bernanke’s statement also caused several of the world markets to rally overnight, including China’s Hang Seng which gained over 2 percent.  So it appears that FXP will make that second low in the Blade that I talked about yesterday.  Same for EEV as the Bovespa is currently trading up almost one percent.  BTW, the 60s remained negative yesterday on both FXP and EEV, so my Rifle Trade on the ETFs was never triggered.
I spent a few hours last night looking at the volume data on several of the indexes, and what I saw was not pretty picture.  The P-Volume, Volume Accumulation Percent and On Balance Volume on the Dow (DIA) remain very negative, despite the past week’s advance.  And while two of the three same indicators on the Nasdaq (QQQ) are positive, they are showing significant divergences with price.  This problem with volume could all change if the overnight spike rally continues to be supported in the next few days.  But right now, it’s very hard for me to believe that the rally will stick on such negative and diverging volume.
Also, the pattern is somewhat troubling to me as well if wave ‘c’ up is starting.  Up until last night, the pattern on the Dow looked more like an a-b-c move coming off the 24 June low of 14, 551.  But after last night’s spike rally, the c wave of that a-b-c move will start to look impulsive, meaning that it’s starting to appear more like a wave 3 up than a wave c.  This too would strongly argue that wave 1 up of wave ’c’ is underway.
The Dow high of 15,542 made on 22 May should provide significant resistance to any rally built on Bernanke’s words.  So even if we do pop, I would expect the markets to pull back to form a better pattern before they have enough strength to support a further advance.  If the volume starts to improve, and the market pulls back, that’s where I’ll look to go long.  Not now. 
Remember, wave ‘c’ up should be the final wave in the three wave sequence for Major Wave E up that started back in November 2012.  And once this wave completes, there will not be any more up major waves in the Ending Diagonal Pattern for a long time.  So please, pay attention to the Dean’s List during the next few months.  As long as the Dean remains positive, odds are that the markets will continue to push higher as final wave ‘c’ of Major Wave E starts to unfold. 
If this starts to happen, I will be trading this final wave up the same way that I traded the ‘a’ wave that occurred from January into late May with Rifle Trades.  As we prepare for this, you might want to take a look at a stock like GILD on the Daily’s.  I’m not saying that GILD is the stock I will be looking to trade.  It’s only an example of what you should be looking for.  Note how GILD has been in a steady Uptrend since April 2012.  Notice too how the PT indicators remained positive for most of that time.  Then after you have done this, remove all of the PT indicators so your chart just contains the price and a 2-period RSI Wilder.  What I want you to see is how many opportunities you had to go ‘hunting’ on GILD.  And how many of those trades resulted in profits of 5-6 points.
So don’t worry about today’s spike rally.  If it’s part of wave 1 up of ‘c’ up there will be plenty of opportunities to go hunting…at a much lower risk.  Right now, all I’m doing is polishing my Rifle.
That’s what I’m doing,
h

Market meets resistance at the 50% retracement

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One of my favorite chart tools is Fibonacci Retracements. I find it really useful on retracements both from a high and from a low point.

Here’s what I mean on the SPY July 2, 2013 chart below.

I’ve run the retracement from the high of May 20, 2013 to the recent low on June 24, 2013. The levels generated provide possible resistance levels to the rally from the low. I find the 50% and 61.8% levels most useful. In this example the market is struggling to break through the 50% retracement of this down move at around $162.5. If it does break out, the next level of resistance is at 61.8% or when SPY is around $164. if the rally fails at the 50% retracement then I consider the retracement pattern completed.

Incidentally, I drew this retracement 2 days after the low on June 24, 2013.

 
This was not the first Fibonacci Retracement I’ve drawn since the high of May 20, 2013. On June 6, 2013 when prices reached a low of $160.25 and rallied up from there. I drew the Fibonacci Retracements from the high of May 20, 2013 to the low of June 6, 2013. In this instance, as you can see in the chart below, the SPY struggled with the 61.8% retracement, before falling away. Again once the prices fall away from the retracement level, I consider that pattern over. 
 
 

Balancing Your Indicators

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Original article by Marsha Stokes

AIQ Code by Richard Denning
 
For this month’s Stocks and Commodities issue, I did not do the selected article on the step candle pattern, but instead I provide code for an indicator discussed in the Bonus Issue 2013 article, “Balancing Your Indicators”, by Martha Stokes.

In the article, the author discusses several indicators but focuses on the price versus volume rate of change. She suggests that we use these two to find divergences in price versus volume changes. She does not give specific formulas or describe how the indicators should be constructed nor how the diverge could be mechanized. She only shows examples of the indicators and gives interpretations on one stock.

To code the indicators, I used linear regression (LR) of the price compared to linear regression of the volume. We need to get the rate of change of each in order to normalize so that we can compare and get the divergence. I get the LR rate of change of each indicator by using the end points of the LR line (end point divided by beginning point -1). I use the slope to be sure the sign is correct. In other words if the linear regression slope is positive, then the rate of change must be positive. If negative then it must be negative. Next I get the standard deviation (STD) of the difference (DIFF) between the LR percent rate of change of volume minus the LR percent rate of change of price. By then dividing the current DIFF by the STD, I get a measure of how much divergence is currently happening. When the divergence exceeds the input value, buy and sell signals can be generated.

Chart of ADSK on date of positive divergence signal (7/9/09) with LR lines on price and volume.

The chart of ADSK with the linear regression lines drawn in on the price and the volume. We see that price has a negative rate of change and volume has a positive rate of change. The divergence indicator exceeded the 2 STD positive level on 7/9/09 for a buy signal. Holding for 10 trading days the trade generated a profit of 23.69%.

Chart of ADSK on date of trade exit (7/24/09) with divergence indicator and the 2 STD signal lines. When the indicator crossed above the upper signal line on 7/9/09, a buy signal is indicated. This trade was entered on 7/10/09 at the open and exited on 7/24/09 at the open.

In this chart I show the divergence indicator on ADSK with the date shifted to the exit date. I picked this trade because it was a clear example of how the indicator can work, however there were many other trades that did not work as well as this one. The code provided is not meant to be a complete trading system as it lacks exits rules and position sizing. More testing should be done to determine the appropriate inputs, etc.

The AIQ EDS code is below

!APPLYING QUANTITY AND TIME INDICATORS
!Substituted for the July 2013 Traders’ Tips Article
!Author: Martha Stokes, TASC Bonus Issue 2013
!Coded by: Richard Denning 5/12/13
!INPUTS:
  ROCLEN is 24.
  MYINDICATOR1 is [volume].
  MYINDICATOR2 is [close].
  STDLEN is 200.
  DEVIATION_STD_MULT is 2.
!LINEAR REGRESSION RATE OF CHANGE INDICATOR1 (VOLUME):
 !GET SLOPE AND INTERCEPT OF LINEAR REGRESSION LINE 1:
   b is slope2(MYINDICATOR1,ROCLEN).
   intercept is sum(MYINDICATOR1,ROCLEN)/
 ROCLEN – (b * (ROCLEN + 1) / 2).
 !END POINT OF LINEAR REGRESSION LINE 1:
   LRV is intercept + (ROCLEN*b).
 !BEGINNING POINT OF LINEAR REGRESSION LINE 1: 
   LRVrocLen is intercept + ((ROCLEN-ROCLEN)*b).
 !LINEAR REGRESSION RATE OF CHANGE IN INDICATOR1:
   rocLRind1 is iff(b>0,abs((LRV / LRVrocLen – 1)),
 -abs((LRV / LRVrocLen – 1))) * 100.
!LINEAR REGRESSION RATE OF CHANGE INDICATOR2 (PRICE):
 !GET SLOPE AND INTERCEPT OF LINEAR REGRESSION LINE 2:
   b2 is slope2(MYINDICATOR2,ROCLEN).
   intercept2 is sum(MYINDICATOR2,ROCLEN)/
 ROCLEN – (b2 * (ROCLEN + 1) / 2).
 !GET END POINT OF LINEAR REGRESSION LINE 2:
   LRV2 is intercept2 + (ROCLEN*b2).
 !GET BEGINNING POINT OF LINEAR REGRESSION LINE 2: 
   LRVrocLen2 is intercept2 + ((ROCLEN-ROCLEN)*b2).
 !GET LINEAR REGRESSION RATE OF CHANGE IN INDICATOR2:
    rocLRind2 is iff(b2>0,abs((LRV2 / LRVrocLen2 – 1)),
 -abs((LRV2 / LRVrocLen2 – 1))) * 100.
!GET DIVERGENCE BETWEEN ROC OF INDICATOR1 VS INDICATOR2:
  DIFF is rocLRind1 – rocLRind2.
  stdDIFF is sqrt(variance(DIFF,STDLEN)).  
  numSTD is DIFF/stdDIFF.                    !PLOT
!START DATE FOR LINEAR REGRESSION LINE:
  startDate is setdate(ROCLEN).
!REPORTS:
  ShowValues if [volume] > 3000 and [close] > 5
    and hasdatafor(max(ROCLEN,STDLEN)+10)>=max(ROCLEN,STDLEN).
  PosDiverg if DIFF > 0
    and numSTD >= DEVIATION_STD_MULT and ShowValues.
  NegDiverg if DIFF < 0
    and numSTD <= -DEVIATION_STD_MULT and ShowValues.           

Tuesday May 21, 2013 Market Log – any signs the move may be over?

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AIQ TradingExpert Pro’s Market Log provides traders with a daily snapshot of market conditions and how the market segments are performing. I’ll explain some of the elements here;

Days since the first Expert Rating to the up or down side – currently 20 days into an up rating of 100 – 0. The current rating is 33 – 33 and only ratings of 95 – 0 or 0 – 95 are significant.

Group Score is trending up vs trending down groups in S & P 500 – currently 93 % up.

WAL 13 – 87 and US 31 – 69 are a percentage measure of any stocks in the S & P 500 receiving expert ratings to the upside vs downside. Definitely more down than up ratings.

Market Plot measures the bullish and bearish readings of a basket of indicators for the Dow 30 Index.

Access Plot measures the bullish and bearish readings of a basket of indicators for each of the S & P 500 stocks. It’s the average reading for all 500 stocks for each indicator. This area I highlighted for it’s bearish technical look.

The Dow 30 Index is technically more bullish than the S & P 500 stocks. Next day Wednesday May 22nd, 2013 the Dow fell 80 some points, but the S & P 500 Index fell nearly 14 points. The market Log for 5/22/2013 shows the continued technical weakness in the stocks but less so in the Dow 30 Index.