Stock fundamentals, the magic 89 and the trigger line

david paul 150 wideThis post is for swing traders and those who want to make some money in 3-13 day moves in stocks. It takes focus and it’s not for everyone.

The process of swing trading needs to be approached systematically akin to any other business. I have been swing trading for most of my trading career, and over the last 4 years adding VectorVest to my arsenal of tools has had a profound effect on the results and more importantly, on the ease of the journey.

The technique has been particularly useful in this rag tale market that’s been in hold on the LSE for most of 2014. Although I could write a few books on all the technical tools available, I will do my best to distill a few places to start here.

Let’s make a start. I will do my best to make the process mechanical and remove my subjective input.

  1. I only swing trade in shares that are growing earnings aggressively and safely. VectorVest does that for me in a few mouse clicks. I also can do this by looking at the stock viewer and highlighting those shares from the top that are undervalued with an RV>1.3 and an RS>1.2 that are on a BUY recommendation. UniSearch can automate this and also do many more complicated scans. Searches such as Ruler Stocks in the prudent folder will find shares that have the best combination of growth and safety. If you are struggling with Unisearch, please come to a User Group or just pick up the phone get a quick lesson. Remember the strong silent type only ever worked for Clint Eastwood. No one in history has ever become successful on their own.
  2. I only wish to swing trade in the shares from 1 that are trending above an 89 day moving average. I have written about the “magic 89” before. It’s truly a sacred number, and I have no doubt that if your trades are with the 89, the results will improve. I have a trader in Cape Town who calls the line the “Green snake”. I always (if I can) use the color green for the 89 as it signifies GO. Protrader allows the process to be included in a search which can combine points 1 and 2. Don’t stress if you haven’t got Protrader, as pulling up the charts from 1 and eyeballing them takes seconds.
  3. Knowledge of candle patterns is essential for short term traders. There is plenty of information on these on the net and lots of fairly cheap books around on the subject. I really only use two of these, although I teach about 5 of candle/bar chart reversal patterns in my swing trading course. Concentrate on “an Outside Day” to start with. This is a day where the HIGH and Low totally engulf the high and low of the prior day. The more days this day engulfs, the better. It’s a high probability signal. Again, Protrader can scan for these patterns easily and without fuss.
  4. The stochastic indicator was assembled by an old friend of mine who is sadly not with us anymore. George Lane used a relatively simple method of measuring short term changes in momentum. When his metric is below 20, it signifies a market that’s pulled back for a while and is stretched on the downside. If the market is above the 89 with cracking fundamentals, the share is maybe ready to have another run up the chart. It’s always hard to buy a pullback as they normally exhaust on the downside via a big red bar that puts the fear of GOD into us. The good trade is ALWAYS the hard trade. If you cannot find the default stochastic on VectorVest, please phone the call centre. Again, Protrader can automate the process although I get a lot of pleasure from the charts and personally keep my hands dirty and close to the market action. I have spent years studying indicator divergences. If you are up to speed on this, the best signals are found when the stochastic is showing REVERSE divergence with price. If you don’t just focus on the metric being less than 20. I will cover divergences on the 28th June in my London seminar.
  5. I want to FADE the short term trend (the pullback) in the direction of the long term trend which is defined by the 89 and the strong fundamentals. Easy to say but not many get it right. Most will panic in the pullback and get out exactly where they should be buying in. It’s great. If it were easy, there would be no risk and thus no reward. I might have to get a real job.
  6. Pullbacks normally stop at FIBONACCI levels and should occur on falling volume. That’s a story for another day and a 2 day course at least and includes many patterns that are highly predictive but unfortunately quite subjective. I will focus on more mechanical and testable methods in this entry.
  7. After the pullback with the stochastic below 20, I then look for a candle pattern such as an outside day to confirm a turn. Outside days rarely fail, but inside day patterns also have a good percentage hit rate. In candle parlance, they are called “Harami” patterns. Try and get your mind around these and the candle reversal patterns. It will be time well spent.
  8. The Trigger Line is a moving average which adds significance to the candle pattern, in a stock with great fundamentals that’s oversold and is above the 89 day average. I use a 13 day exponentially smoothed average. Just right click on the Price on the right hand side of the VectorVest chart and pull it up. If you can’t find it, please phone the call centre. When a candle pattern also closes above an 13 day EMA which is above the 89 day average, then a move is highly probable. I BUY the next open, but in your own rules you can specify a BUY when the high of the candle pattern is exceeded.
  9. Do your best to sit in the move as long as the share price does not close below the 13 EMA. Upon a close below the 13 EMA, just exit the position and sit quietly and wait for the next. The move tends to last from 3-13 days.
  10. There are two places for the initial stop loss. The stop loss is essential. Many will use the VectorVest stop and some use the low of the candle pattern used for entry. The latter is normally closer to the price action but unfortunately is a bit obvious. It’s not uncommon for a spike which last seconds to run these obvious levels. This can be frustrating to say the least. I think you should start using the VectorVest stop found on the program. The stop is well out of the traffic and shouldn’t be hit in the noise. Remember that the maximum loss should be no more than 2% of your account size. When you are starting, make it 1%. Whats the hurry?

The process is not difficult and reasonably mechanical. I can add in lots more in relation to FIB, volume and time cycles but the above is very workable.

For those brave souls who like to sell things that you don’t own, then turn the process on its head.

David Paul
June 15 2014

www.vectorvest.co.uk

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Big Levels in the FTSE-100

Christopher Clarke, 9am
Christopher Clarke

Last week I discussed the idea of expressing some caution, taking some profits around current levels in the FTSE and possibly trying a short with a stop loss 100 points or so above the market. Whereas that trade is still open [just about], this week I wanted to draw some attention to a particularly big level in the September [the FTSE 100 future has now rolled from June to September] contract. That level is 6964 – this is the back adjusted all-time high in the FTSE-100 future. This level was hit on the 30th December 1999.

Much research shows us that buying all-time highs in the FTSE-100 with a wide stop loss [approximately 10%] is in fact a much better strategy that simply buying and holding the FTSE. Also many great traders [Jesse Livermore being one of them] tell us – rightly so- that when any market makes an all-time high that price action must be respected.

Chart 1 and Chart 2 below show us that we need to exit our current short at 6833 [September Future] as this will be a new high for this cycle in the FTSE. At that point I would urge remaining square but would absolutely look to go long if we see 6964 taken out on the upside. For those very long term investors a 10% stop loss should be used and for those short term traders amongst us I would use a stop loss of 6680.

One last point is that my comments last week about the FTSE-100 displaying some poor relative strength, relative in particular to its U.S and German friends the SP500 and the DAX, should be born in mind but again I would re-iterate that whenever a market makes an all-time high it really is a trade worth going with under any circumstances.

Chart 1 – Long Term trend to continue above 6833?

chris1

Chart 2 – Stop on current shorts above 6833chris2

Christopher Clarke,

Director, Cambridge Trading Research

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Will Euro/USD breach new highs this week?

Kevin Burton 75The Euro/USD enjoyed a decent pop last week with the aid of the non-committal Janet Yellen on FOMC. Many traders were looking for a break below 1.35 but on that occasion, they weren’t going to be granted their wishes as it followed through to the upside into Thursday.

 

Thursday saw the Euro rally towards 1.3650 but was rejected which created a reversal candle on the charts. Friday saw more selling so where does Euro go from here?

charlieeuro

To keep it simple, Below 1.3510 and I would argue it should then eventually see 1.34 which is the area of the 200 week moving average. However, should it breach last week’s highs, we should at least see a run for 1.3675 plus a potential run to the daily 50 thereafter which is currently at 1.3710 albeit moving downwards each day.

 

Charlie Burton

EzeeTrader

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Will the Bank of England’s idea of an earlier rate hike drag the FTSE 100 lower?

Alpesh 75The FTSE 100 had an interesting reversal the previous week, just when it was looking poised to break below the 6,750 barrier and make an effort towards the 6,700 area the London index pulled back and traded above the 6,800 points. I believe it would be helpful that I explained why the FTSE is performing like that as it will offer you an insider’s perspective on the index’s outlook.

In my previous letter to you I discussed that the FTSE was bound for more losses on the back of Governor Carney’s comments that a rate hike from the Bank of England could come “sooner than the markets are expecting”. However, the release of the Bank of England’s minutes didn’t reveal a general consensus among the committee to move forward soon.

At the same time, Fed’s Yellen expressed her commitment to keep the monetary policy stable for the time being on her press conference after the FOMC meeting. Her comments drove the US stock markets to new highs and also lifted the FTSE higher so the combined effect of a steady rate policy from both the BoE and the Fed worked in favor of the bulls.

But here’s the twist: two new BoE members expressed their support to the earlier rate hike idea last Thursday, Martin Weale and Ian McCafferty both expressed the view that a hike sooner than the market expects would be a step towards the right direction. So where does this leave us?

As you can see the FTSE’s outlook is influenced by two opposing forces, on the one hand we have Fed’s intention to leave rates as they are and that definitely offers support to the major stock markets. On the other hand however, it looks like the idea of an earlier rate hike from the Bank of England is gaining traction and that could drive the London index significantly lower.

So my guidance for this week? Be careful, I am looking at the FTSE pointing lower and a re-test of the 6,750 points low seems possible but that’s not a certainty at this point. The events scheduled for release over the next days can turn the tables again so while I am inclined to short the index I would wait for a move below the 6,800 points again before I set my targets at the 6,750 area.

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alpsh

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Bo Yoder´s trading update

Bo Yoder 75 wideThe S&P 500 (ETF Proxy – AMEX:SPY) did drop down into a pullback as forecast last week, but the depth of this short correction was less than half of the predicted depth.  This shows the aggression and bullish strength in the markets since the recent Fed pump and break to new highs.  Normally, a market at this point in its trend would be struggling hard, but we must remember that the Fed is printing close to 100 Billion dollars each month and that cash is finding its way into the stock market.  These are untested waters for the U.S. as we go “all in” Keynesian and continue to print.

 SPY 6-21

As a student of history I feel certain that Brazil like inflation will come to the states at best, and hyperinflation at worst.  In either case, gold will be a focal point for many investors and that’s what I want to look at next

GLD 6-21

Gold has been stuck in a channel for some time.  After a false breakdown a few weeks back, I had been watching it carefully as it tested resistance.  Just as it looked like it was going to roll over, somebody bought nearly half a billion dollars worth of gold futures and forced this market into a shock type breakout.

We may have seen a top, in which case any shallow pullback should produce a break to new highs with a target in the white box I have drawn above.  I have drawn out my forecast for a pullback entry, and will watch this market closely in the week to come.

The stock of Abbot Labs (NYSE:ABT) ignored the reversal last week and crept up to test the extreme highs of the red zone.

ABT 6-21

There was a sharp reversal, and while it is nice to see my forecast validated in this way, I am worried about this trades chances in the face of the fed induced bullish breakout in the markets.

Bo Yoder

3d Apex Trading

Join Bo for a live webinar at Round-the-Clock-Trader this Thursday 26th June at 4pm BST.

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Pound seeing levels not seen since 2009

Kevin Burton 75The Pound is seeing levels not seen since 2009. It has hit 1.70 against the dollar with the 2009 high being at 1.7040 so that absolute high is not far away.

 

Unsurprisingly we are seeing the pound retreat slightly from 1.70 this morning and we could see some more consolidation over the coming days to work off any short term over-bought condition. However, I will be looking for any subsequent re-test to see if cable can make a run for that high at 1.7040.

 

The monthly chart as shown, gives clear air above these resistance areas so it will be interesting to see if ultimately the pound wants to make a run for 1.80 but at this stage, that’s probably getting a bit far ahead of ourselves.

cable

In the short term, I will be looking for consolidation and then a re-test of the highs and only if we see a solid close above the 2009 highs will I then be able to look more closely at the potential upside from there.

 

Charlie Burton

EzeeTrader

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Bo Yoder S&P trade updates…

Bo Yoder 75 wideThe S&P 500 (ETF Proxy – AMEX:SPY) has run out of gas after breaking out to a new high last week.

 

I would expect that we will see a pullback into areas of chart support as drawn out, but my indicators are not offering high enough odds readings to take a trade into the correction.

SPY 6-12

 

Facebook just tagged me out at the highs of the red zone, and I expect will now drop into a heart-breaker reversal along with the markets next week.

 

This is disappointing, but it is CRITICAL not to allow any feelings of loss or frustration to seduce you into re-entering as a “revenge trade”.  This is a classic trading error, as the failure of this opportunity proved that the initial power readings were not strong enough to overcome price…THIS TIME.

 

Trading is a statistical business. Even a 90% winning trade pattern will lose you money 10 times out of 100.

 

I am marking this in my trade log as a “good trade, bad outcome”, and would gladly take a similar trade the next time it is offered.

 

FB 6-12

 

The stock of Abbot Labs (NYSE:ABT) was able to maintain its relative weakness inside the red zone when Facebook could not.  This bodes well for the position if the overall market pulls in as forecast.  In fact, you can see that Abbot turned over right at an area of former resistance, and in doing so formed a “double top”!

 

This reversal pattern should attract plenty of bearish attention in the week to come.

ABT 6-12

 

Join for a live update at Round-the-Clock-Trader, 26th June, 4pm BST – sign up here

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FTSE 100 is battling to break below 6,780 points as Governor Carney confirms interest rate hike is the plan

Alpesh 75The FTSE 100 is battling to break below 6,780 points as Governor Carney confirms interest rate hike is the plan

The FTSE 100 made another effort to reach for the 6,900 highs last week but again with no success. The London main index hit 6,880 points on Friday 6th of June but after that the week was a bearish one proving that the momentum is slowing shifting lower.

At the time I am writing this analysis for you I am looking at the FTSE trading around 6,780 points having dropped 100 points in a week’s time. The index came under pressure the whole week as the recent positive developments in the UK domestic economy brought forward the discussion for an early rate hike from the Bank of England.

The encouraging labour data and the steady printing of the Industrial and Manufacturing Production reports illustrated that the UK economy is firing on all cylinders and investors rightfully believe that the BoE will be the first major central bank to raise rates after the recession.

What accelerated losses for the FTSE however and in my view marks the turning point for the medium term outlook for the index were Governor Carney’s comments on Thursday evening. The policymaker went ahead and stated clearly that an interest rate hike is possible and it could come sooner than the market is expecting.

Now we knew that analysts and market participants were discussing the possibility of an early rate hike in light of the impressive UK performance. But having the BoE Governor himself stating that it could come even sooner than the market is expecting is a totally different thing.

My view for the FTSE is that further losses should be expected, I have highlighted the 6,780 points area in my recent letters to you and as I am writing these lines the FTSE is battling to break below this level. I believe that the break is only a matter of time, the outlook is pointing to the downside and with official confirmation from Gov. Carney that a rate hike is on the way investors will have to reposition themselves ahead of this possibility.

The next stop for the FTSE will be the 6,700 points and if this sell-off accelerates it could reach them during this week. I am not excluding the possibility that the FTSE will hold above the critical 6,780 support and pull back a bit. But as I said above the momentum is to the downside and unless something spectacular changes the current outlook the FTSE will break below this area and make an effort to hit the 6,700 points base.

To receive my free daily newsletter or to subscribe to my premium NewsletterPro service please visit www.investingbetter.com .

alpesh

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‘Have some Krispy Kremes’ is my dentist’s advice!

David Horton 75I know that I am not alone in being somewhat fearful of dentists.

Any of them…yours, mine…they are all the same. I believe it is that innate   vulnerability we feel when laid back in the chair, being asked to open wide and relax…

Relax? You are kidding surely! Even the presence of an often cute assistant doesn’t ease the stress – apologies to my female readers but there are seldom male assistants in my experience – is there a reason for this?

After all, they are only there to hand over the instruments of potential torture accompanied by a masked smile. And it is so unbecoming to try and make small-talk with either the torturer or the nurse when you know you will end up in a few minutes revealing yourself to be a jibbering heap!

I have, however, occasionally been engaged in some sort of soothing discourse when they know you are a ‘money man’; doctors and dentists, being renowned for their interest in where to park their surplus cash, are always looking for a good opportunity, and, in my experience, enjoy gloating of their successes.

And so it was, reclining with mouth as wide as the channel tunnel, that I heard the sage advice ‘you should get into Krispy Kremes, you know’.

What the…? I nearly gagged at the thought of those overly sweet and appalling lumps of dough being force-fed to me while my jaw was stretched to its limit.

A dentist recommending them? What the heck was this guy on about? Surely it is not the remit of the profession to recommend such a terrible scourge to one’s teeth!

‘Oh, yes, he went on…I got in at $7.70 in 2012 and sold at $23.30 last November…’

I would have yawned but my widened jaw wouldn’t let me.

‘Now it’s back at $16.30 and I am back in…you should get on it’.

I tried to speak but the unsavoury noises between the drilling and prodding were all I could manage. I nodded in approval of his financial advice.

I left the surgery to the last mutterings about a support level and a bottom!

The day after I looked at the chart as I had a coffee and nibbled on a mars bar…

Perhaps there is something about having a sweet tooth.

After miserable results 10 days ago the price dropped 15%. Several analysts are calling this a good level to buy, as is the good Doctor.

I will let you chew on it.

 

Author: David Horton is a partner in Market Tutors Ltd in the city (markettutors.com). He has had a significant career in financial markets; he is a trader and trainer with a passion for coaching and mentoring with a good dose of humour.

davidhorton@markettutors.com

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Be Careful on the FTSE-100

Christopher Clarke, 9am
Christopher Clarke

The FTSE has already been lagging most Global equity indices for about a year. Whereas the FTSE 100 is only about 5% higher than its average price [6500] over the last year and yet to break its all-time high [looking at a properly back adjusted chart of the June future we see a high just above 7000 in 1999 [chart 1 below]], many other equity indices- such as the SP500- have seen a bubble like frenzy of buying dragging themselves into euphoric overbought territory and new all-time highs. If this wasn’t bad enough as an indicator of poor relative strength for the FTSE we now see that the Governor of the Bank of England has finally mentioned the “Interest Rates are Going Up” sentence that seriously risks derailing the FTSE-100.

Let’s face it even the most hardened bulls of the latest Global equity market rallies have admitted that Global stocks are in bubble territory based on nothing more than huge amounts of free-money sloshing around the Global system with no other home than the equity market. As Global debt reaches new all-time highs and the real economy worsens the whole foundation of Global equity markets is thin to say the least and in my book it’s a disaster waiting to happen. So called improving economic conditions in the UK are based purely on a huge build-up of personal debt, continued quantitative easing and the hope that the Global financial disaster of 2008 is finally behind us. I believe the disaster of 2008 was a mere warm up for what’s coming as Global Governments and Central Banks have learnt absolutely no lessons from the issues that caused 2008 [i.e. debt and too much cheap money sloshing around the system]. For that reason I would urge extreme caution on the FTSE 100 at current levels.

Chart 1 – No All Time High Yet for the FTSE-100 Future

chris1

Chart 2 shows a more focused look at recent price action. What I would say as someone who follows the price more than the fundamentals is that shorting the FTSE at current levels is again a dangerous game but if I were long I would certainly take profits. Shorting here with a stop at 6900 on the June future is a trade I would take however as it offer a sizeable potential gain against a close stop loss.

Chart 2 – Sell FTSE here with a Stop at 6900?

chris2

Anyway you cut it after a sustained period of “free money” in the system, the merest hint of a tightening of monetary conditions could see sizeable down moves for Global Equities. Watch this space as they say.

Christopher Clarke

Director, Cambridge Trading Research

Next event – Trading Facts and Fiction / What Works and What Does Not – 21st June 2014

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