more Econ charts
People continue to insist that what is really going on is somehow not happening. but it is
We continue to see the economy is pulling out of recession with Empire Manufaturing and Phili Fed survey turning positive. this hasnt happened since the bear market started in the first month of 2008.
“New orders nearly rose 6-1/2 points to 19.84 pointing to increasing activity in the months ahead. Delivery times slowed in the month, at 1.19 vs. a long run of negative readings. The gain in delivery time indicates congestion in the supply chain — confirmation of greater economic activity”
In addition to this, retail sales making their biggest month on month jump since 2006.
The yearly trend is making higher highs and higher lows. People dont want to see it, but the economy is improving and the recession, as Fed Chairman Bernanke said today, is possibly over.
Housing Trends
The end of something or the start of something? many housing markets are starting to break their bear market trendlines or bumping up against them. So either we are due for another big dip, or we are going to start to see a slowing and eventually ending of the housing bear market. Cleveland is a fantastic example with the potential for a double bottom and trendline break. Dallas also has a similar look to it. Los Angeles is the furthest away from looking healthy.
I think this tells us about the state of the country and how the middle will fair better in the next economic advance. the Coastal areas will have to do some more languishing.
sources: Bespoke
Unemployment
Back from a much needed break, i felt looking at some economic, or ‘fundamental’ numbers in chart form would be fun.
looking first at new jobless claims, more of a leading indicator, we can see how trend in jobless claims moves the markets not on announcement days, but on a larger scale.
Now, lets take a look at our trendlines. typical technical analysis would point out that once you have 3 rising trendlines which get steeper each time, when the steepest breaks, the trend is breaking. this break happened in March/April 2009
As we can see, stocks started to rebound in this same time period.
Whats even more fascinating is it looks as though initial claims is forming a head and shoulders top, while the stock market looks to have broken out of an inverse head and shoulders bottom.
Unemployment claims just broke its steeper trendline just as the stock market broke out of its inverse head and shoulders bottom.
Nonfarm payrolls stopped making lower lows in January. meanwhile, the stock market declined till March.
This is important because as folks, like myself, make claims that the bear market is over, the economy will recover etc. etc. there will be an onslaught of people claiming that the stock market is not reflecting the economy, its just the separation of Wall St. and main St.
However, what we can actually see from these charts is that stocks are reflecting an actual oncoming recovery in the economy and that the decline after President Obama’s inauguration was a failed move lower. The market, aside from that failed move lower (confirmed by momentum divergences), has been in the range that it was in during the month of November for eight months. It has now broken out of that range. Finally, to get more big picture,
This looks a tad familiar doesnt it? for those interested in Elliott Wave, there was a wave 3 move higher in unemployment during the 1974 crash and it peaked out during the 1975 rally. are we doing this again? Check the Charts on Yahoo Finance. The first leg down in the early 70’s, just as in 2000’s. then a rise back up to new highs–barely–then a crash down below the low, then a straight shot back up for about a year and a half, then stagnation for the next 6 years.
Will other markets, including unemployment, look the same? does that mean the dollar will not make a new low but gold will make new highs? as did in the late 70’s? have bonds topped out? is inflation (and the politics that come with it) on their way once again?
Stay tuned
Trend Following and an Identity Crisis
What are we doing?
It dawned on me, seemingly out of no where. I, and most technical analysts, are looking at it all wrong. it should be so simple, so obvious, yet is disregarded every single day.
In a rising market, everyone–and i mean everyone–is looking for resistance levels. In a declining market, everyone is looking for support levels. if one were a range bound trader, this is probably the mindset needed. however, day in and day out i see trend followers doing the same thing. its pure insanity.
We preach that ‘the trend is your friend’, ‘for a rising trend to change to a declining one you need lower highs and lower lows’. Yet, a mindset of looking for resistance in an advance is the exact thought process that denies us the ability to follow trends. we have a self identity as trend followers, yet think with the mindset of a range bound trader.
This undoubtedly is a problem, if not an identity crisis.
No wonder so many people cant make money in the markets. ill often bring up that most people when looking at fundamentals miss the boat. that they have the mindset that they should just be able to look at a stock, and if its ‘cheap’ based on what they see, then the stock ’shouldnt’ go lower. Yet this is often the case (and Warren Buffett would say thats a silly assumption). Yet, we trend followers, chartists, technical analysis, we look at support and resistance levels in disregard for trend. if there is an upcoming resistance level in a rising market, that becomes the focus. even though we do not have evidence of lower highs and lower lows.
A New Motto
Support and Resistance is a derivative of trend. In an uptrend, we want to buy dips. Correct? This means resistance levels need not be of importance in a rising market. Instead, when the market rises we should be looking for the next support levels and not resistance levels. When a market is declining, we must stop obsessing with “when will it stop?” We should be looking at potential resistance levels as places to potentially initiate new short positions.
Fear and ego drives this identity crisis.
It sounds easy, but there is an internal drive that causes us to focus on levels and limits to the market as opposed to trend. We fear to death that we’ll be the fool who bought the top of the market, the hand ringing loser who sold at the bottom. So we “protect” ourselves by looking for evidence that the market is turning, that we should be exiting because of a level that the market shouldnt breach. we create fibonacci retracements and extensions, look at days of the month, momentum indicators, oscillators, prior levels the market turned at. we attach bollinger bands, keltner channels, resistance lines–we do whatever we can to constrain trends and put them in a neat little box.
Just doesnt work that way is all. doesnt help us make money. Im aware some, many…most, are actually not in the market to make money and there are deeper seated desires being sought out. I’m just attempting to not be one of them.
Failed Breakouts – A Working Theory
Ive spoke a lot on what to look for when trading breakouts. I now begin with what seems to be what indicates failed breakouts.
Something ive seen in a few failed breakout days is that there is a gap into the next trading session, this gap is filled and bull dosed through. Then the next day moves with the breakout, and then that day is reversed on the following day.
two examples:
With DSX i was put off from the start. ADX kept me out of the trade as this “breakout” was with the ADX above 25. they can happen with an ADX that high, i just dont like them nor am i interested in what will probably be a short move. in addition, a fellow trader had pointed out the real breakout was much lower around 13.5 with a triangle and an ADX around 10. i missed that.
With OXY however, just wasnt right. it broke out of a long channel. closed properly on that day. then gapped up, took out the gap, then moved higher but 66 was still resistance. i took profits and rolled stop up to break even. sure enough, next day i was stopped out.
DSX can also be explained on the weekly chart.
Here we see the low ADX, the channel, it breaks out, but doesnt close in the top 77%. hell, it doesnt even close above the open. thats a failed breakout.
OXY from a weekly chart shows us perhaps it was a breakout on the weekly chart, showing the initial stop should have been placed at the low of the week, around $58ish
The hunt is on for further examples of what happens in the following days of a potential breakout day that turns into a failed breakout move.
Volatility Cycle Trading – The Complete Roadmap
In the past few months i have taken on a vastly new trading style and system. This involves a major market cycle. not one of timing, but of magnitude. it searches for narrow ranges, price patterns, and then seeks a structured way to exploit the breakout from this. Here are the follow blog posts on this system.
Its my opinion that within these posts, one could easily learn to set up and trade markets on all timeframes, using all market instruments. it further only requires setting buy stops and being presant for the first and last hours of the trading session.
Of all the work ive put on this blog, as well as others that have yet to be posted on here, i believe this is my most complete and thorough strategy to date. Hopefully there are more to come and that it helps other traders find what they are searching for in the market.
Alternative Option
Using the screening process of a low ADX and a bollinger band within the keltner channel, we can screen for fantastic daytrading strategies through options.
Often times markets will move, then consolidate towards the close, leaving a bollinger band squeeze on intraday timeframes. this allows us to place a straddle or strangle on the underlying and take advantage of the upcoming move. enter at the close, exit on the following open.
The markets ive chosen to trade this are simple and basic. others may want more action in their lives.
Trading vehicles: For myself, I’m trading specifically the DIA, SPY, and GLD for this strategy. all of which have fantastic liquidity. volume almost always over 100, open interest almost always over 1000. markets that could potentially be on this list in the future include USO, SSO, QQQQ, IWM. as a side note, i really enjoy selling option spreads on $RUT which has great liquidity and priced highly.
This not only is a nice way to make some quick trades, but it also only requires that you be at your screen for the first and final hour of the trading session. No scanning for stocks, just check a few quick indexes and option pricing to see if a trade is set up or not. perfect for those that cant or wish not to be in from of their screen for an eternity (i fall into the latter camp).
BB/Kelt Set up
Larry Williams talks about how there are three main components to a trade and a trading system.
1) Selection
2) Timing
3) Management of the trade
In keeping with this i am outlining the three main components for the BB/Kelt Trade
1) Selection: Start by scanning a basket of major ETFs (the spiders are a great example). Then look for a sector or industry with a low ADX line, Bollinger Bands have contracted within the Keltner Channel, BB width has been cut in half from its previous peak. Then go about looking with these sectors for stocks that show the same characteristics
2) Timing: In oder to time this there should be a price formation (i.e. rectangle, triangle etc.). in addition, there should be a price channel that has held up within the formation. when price breaks the formations trendline and the price channel, that is the entry into the trade.
3) Management:
- Initial protective stop. When you enter on a wide range up day, you take the 10 min bollinger bands, and use the bottom bands lowest point as your inital protective stop. However, if you get a pullback, make sure it doesnt have a 3 min bar close below the 38.2% retracement. this is cause for an early exit and signs of a potential reversal.
- Taking 1/4 of the position off and rolling the 3/4ths stop up to break even after a 2x ATR profit. This doesnt always keep you in the move, but it can often lock in gains and protect you from failed breakouts.
- once the trend has extended, and 10 day %R has pulled back to -80, then risen back to -50, place your stop under that low.
- Channel stop. take the channel that held the original consolidation, say 30 days, and divide it by 3. thus we would–in this instance–use a 10 day price channel as our stop.
- Finally, on large range breakouts that do not retrace 38.2% of the intraday move, sell options at the price formations target. this not only minimizes the risk of a failed breakout, it also helps you take advantage of the explosive move which should cause the options in that direction to become overpriced, and well worth selling as insurance.
Large Range Days, again
Adding more to our discussion on large range days. ive observed the ADX to be a good indicator for this. Using either 5 min 14 period ADX, or 3 min 23 period ADX.
+DI and -DI do not cross in the first 2 hours for sure, and almost always the first 3 hours of trading. many times they do not cross at all, or just once for a noon swoon or a small dip into the final hour.
Large range up days close in the upper 77% of the days range, and above VWAP. for down days, this is just reversed.
A/D is favoring one side by a large margin. certainly 60% of stocks are advancing in an up move, but more clarity is provided if it is 70% or greater. 80% and you definitely have a wide range day set up.
When the noon swoon or late day shake out happens, it should not retrace more than 38.2% of the days move on a 3 or 5 min bar closing basis. if it does, often an event happened mid day to drastically change traders minds. this is a sign to exit the position.
Thus entries are best between the 10:00-11:30 time period. after that the trade is either lost or waiting for the pullback that starts to show signs of recovery above a 38% retracement.
Failure: breakouts that break out of a channel on the open, if the 3 min bar closes more than one ATR within the channel, after breakout out for opening price, thats a failed breakout.
Breakout bars should exceed one ATR. it should stand to reason that a large range day cant be very large range if its within the average range.
