During course of the week the underlying trend changed to UP on VectorVest. The latter joined both the Primary Wave and the DEW Market Timing system, which if you remember, called the turn UP, last week.
As frequently occurs the underlying trend turned UP and we printed a Confirmed Call on the same day. The rules for the Confirmed Call are summarized below.
A Confirmed Up (C/Up) signal is given when both of the following occur:
1. Price
· The price of the VectorVest Composite UK (VVC/UK) has increased five-trading-day-period over five-trading-day-period, for two consecutive five-trading-day-periods.
· The price of the VVC/UK has increased from the prior day.
2. MTI
· The Market Timing Indicator (MTI) is greater than 1.00.
I have bought into the market using the Big Hitters watchlist and although I try and isolate myself from the negative comments in the papers and from my trading colleagues, the trades were not easy to take. It’s always the same at the turnaround. The airwaves are full of cast iron reasons why you should not get onboard.
The negatives are easy to find. A Chinese hard landing, banks broken because of low and negative interest rates and the aging of the US populace. The latter is significant and many feel that the US is in the same position now as Japan was, 20 years ago. This would mean a long period of low inflation and low growth as the “baby Boomers” consolidate their wealth and reduce spending in their golden years.
However, I have a signal and I must take the signal without fear or hesitation. This is what I have tried to do. I should have started to accumulate earlier than midweek as the DEW fired a signal last week but I was travelling and unfocused. The signal last week on the DEW was preceded by MTI bullish divergence, from an oversold level and was a high probability event. I have bought into undervalued stocks that are growing their earnings both aggressively and safely. That can’t be a surprise to anyone who reads this column regularly. Among the largest holdings are JD Sports, Dart and Persimmons.
Those reading who like more excitement in their lives should have a long look at Victoria. Last year it moved from 2 pounds to 14 pounds. The share stopped for breath and consolidated in a “flag” pattern which is considered by technical analysts as a bullish event. The share has broken from the “flag” and the technical target is 23 pounds. VectorVest values the share at 21 pounds. The downside is the safety of the earnings stream over the last few years. The RS (Relative Safety) on VectorVest of Victoria is less than 1 and that means there have been surprises in the past. Victoria is suitable for those that understand and have experience of risk management under fire.
McBride is a share that I spoke about at the Monday afternoon webcasts. The share doubled last year and like Victoria has consolidated and in the last few days broken out. A few weeks ago I spoke of my first trading technique. Look for shares that break out after a selloff, prior to the index breaking out. MCB certainly fits that bill. Those who know my work will have seen the text book “Lost Motion” trade from support. I like the share from a technical perspective but I note that VectorVest calculates that MCB is significantly over valued. I prefer undervalued shares but there is probably more upside here as long as the Composite keeps moving north.
FW Thorpe (TWF) is another share that’s threatening to breakout well before the index after rising some 65% in the last year. The share is trading at the VectorVest valuation with good fundamentals and very high CI of 1.65. The CI is a measure of the long term trend on a scale between 0 and 2. Again Composite permitting a breakout will lead to a very tradeable move.
Safestyle (SFE) is trading well below the VectorVest valuation and has excellent earnings potential with good earnings safety. The CI is strong and the share looks likely to break a new high soon. A good market can get the share from 2.70 pounds to 3.50 pounds fairly quickly.
I was taught early in my trading career about taking signals without worrying about the angst in the newspapers and on the TV channels. In 1982 I had just started in markets and the financial world came to a standstill when Mexico defaulted. The financial world was broken was the daily message. Japan was tanking. The event preempted the largest bull market in history.
I remember telling this story to a very senior banker and fund manager in the City after the Global Financial crisis in 2008. He looked at me and just shook his head and retorted “it’s different this time”. I remember getting my feet wet in 2009 in the stock market around June of that year. It was just like Tuesday this week.
Since the Primary Wave turned upward (the most aggressive signal on VectorVest) I have been holding a long position in the FT100 via a spread bet. I have found that taking Primary Wave signals from the VectorVest Composite and applying them to the Ft100 via a spread bet is highly profitable. The Primary Wave is calculated from the price, momentum and breadth of the Composite and provides excellent signals for swings over 2-10 days. When the Composite prints a Primary Wave BUY signal and also closes above an 8 ema then a strong move invariably occurs. Exits are always key to any trading plan and I am trying to hang in the position until I see a close, from the Composite, below the 8ema, in a long position. The Composite with the Primary Wave signals marked is shown below.
I have added to the current position once and as I write the position is open, with 300 points of open profits. I will hold the position over weekend and have locked in 50% of the profits. There will be drawdown and losing trades with this approach but I am very excited about the potential of the Primary wave to pinpoint high reward to risk trades with little screen watching. I am indebted to a member of the Bristol User Group for researching and back testing the method.
My cycle’s analysis reckons that this UP move in stocks that should last into April or May. That’s the theory and I shall be trading the market and NOT the forecast. I have accepted the risk and will be leaving the building in each position if the share falls to the VectorVest stop loss.
David Paul
Friday 26th February 2016
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