The financial world seemed to on hold during Fridays trading. The US is on holiday and the rest of the world was awaiting the decision by the Greek electorate. The reults are in and the people have said “No” to further austerity. We can only wait to see how the markets react.
Both short term and long term trends on the VectorVest UK Composite are pointing down with a Confirmed Down being in place since the 19th June.
The Chinese market is in free fall after a period of madness. That has caused large commodity based shares to test the lows not seen since 2009 at the height of the financial crisis. The trend on mining shares is strongly down but many contrarian traders are excited by double bottom on Anglo and point to this being a high reward to risk trade. My mentor MR Gann would be buying Anglos at the moment at the low with a tight stop. If the trade works the upside is enormous and if it does not, the loss is small. Asymmetrical risk to reward is the key to making money in the trading world and in any other business.
Fund manager Paul Tudor Jones suggests that a 5 to 1 ratio is required prior to him risking a dollar. Several Candlestick trading experts would advise to wait for a confirmation candle at the low. Another advises a conformation candle that closes above an 8 week exponential moving average. I am using a weekly chart to chart the double bottom since 2009. The latter technique adds greatly to the hit rate of the setup although MR Gann would have frowned about the dilution of the risk to reward. Anglo is a trade ONLY for those that can manage risk and I advise waiting for the 8ema confirmation spoke about above. The trader who has proposed the technique calls the 8ema the T line. The chart of Anglo is shown below with the potential double bottom highlighted with the blue horizontal line.
The support level that I have discussed here many times is still in place on the VectorVest Composite UK. This level acted as resistance in September and December last year and subsequently has acted as support on 5 occasions during 2015. The last being a few days ago. The chart of the VectorVest Composite UK is shown below. It’s an equally weighted index of all the shares followed by VectorVest on the LSE and AIM. At present VectorVest follows 2141 shares each day and rates each for value, safety of earnings and trend.
The broader technical picture is still quite positive in my opinion. It looks to me that the market expects some form of compromise in Greece or that the market feels that Greece just doesn’t matter in the greater scheme of things. Certainly the Gold market (normally benefits from chaos) is showing no signs of a flight in that direction. Gold is on lows and has sold off by 50$ during the confusion of the last few weeks. The yellow metal is sitting on a weekly support level, which if breached, would mean a high probability of free fall in the gold price.
The Composite UK has fallen from the high in April to support in a “Three Drives pattern”. The three thrusts down are quite easy to see. This pattern has been spoken about by many technical traders and given many names along the way. It’s frequently called a falling wedge and in “Streetsmarts” by Connors and Raschke the pattern is known as “3 little Indians”. Another worker has named the pattern after himself as Wolfe Waves. The latter is also a chapter in Streetsmarts which is an excellent book for those interested in short term swing trading. It’s rarely off my trading desk and a book that I refuse to lend out.
The “3 drives pattern to a low” is a bullish event. In the case of the Composite at present I find it hard to name the pattern a falling wedge or a flag. Both patterns are bullish events. If I saw the same pattern on a 30 minute candle chart of an index or forex I would have without hesitation bought it at the support level. My rules in the stock market prevent such an action.
My rules are quite simple.
1. Select undervalued shares that are growing earnings both aggressively and safely. The Big Hitters search on VectorVest finds these shares with a few clicks. Use the VectorVest simple layout to cherry pick the best shares using the techniques presented in the Quick Start Course which is within the VectorVest program. Click on the training tab to access the course. It’s concise and contains excellent material.
2. Buy into those shares when the Composite prints signals that the trend has turned UP.
3. Risk 1% capital on each position and limit the number of positions to 10-12. Also I will try not to have more than 2 shares from the same sector of the economy.
4. Sit until the underlying trend turns down assuming the share trades above the VectorVest stop. Remember those who can be right and sit are uncommon.
There are many signals on VectorVest to indicate that the Composite has turned upwards. These signals tend to fire in approximately the same way at each turn and it’s common for two signals to fire on the same day. They are
1. Primary Wave turns UP. This will be seen on the home page of VectorVest and the trend situation will be reported as Up/Down. This is a very aggressive signal and I don’t use it.
2. Green Light BUY. This is a very good signal and is a good spot for aggressive traders to buy into their first shares after a down turn. It’s shown by a green light on the price column of the Color Guard. A green light means that the Composite has risen day over day and week over week. If you scan back within the Strategy of the Week archives there is some great videos of how to apply the Green Light Buy.
3. Green Light Buy which is confirmed by the RT Kicker Timing system. This is shown by a black asterisk within the green light in the price column of the Color Guard. In the background the program applies two moving averages to the VectorVest RT metric. If the short average is above the longer average that indicates that the RT is rising and that the price momentum is rising. Any signal from price (the green light) in an environment where momentum is rising has a much higher hit rate. That’s what makes the RT Kicker with the Green Light a really great entry point. At the point the trend situation is still Up/Down. This is where I will take my first positions within the new trend. Once again there are some excellent videos on the RT Kicker Timing System within the SOTW archives.
4. The MTI indicator turns above 1. This metric measures the underlying trend and at this point the trend situation is now Up/Up. The MTI combines the momentum of the price of the Composite with the momentum of the BUY/SELL ratio into a single indicator running between o and 2. A rising market where the number of shares on a BUY recommendation is gaining shows that the advance is across the board and not just from a few counters.
5. The underlying trend is confirmed by price action. The signal is known as a Confirmed Call and it is shown on the home page of VectorVest. The signal can be plotted on the Market Timing Graph. At that point even the most conservative investor should be on board.
Please consider which of these signals suits you. In the last wave upward which started in January I used the Confirmed Call to get into the market as the more aggressive signals occurred over the holiday period. I would hope to into the market much sooner on this occasion.
The trends are negative and I will sit and wait. There is a red light in the price column of the Color Guard and that red light is confirmed by the RT Kicker Timing system. The home page advice that “VectorVest does not advocate buying any stocks at this time” is good advice. Not having a position is a position.
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July 3rd 2015.
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