Wednesday, February 27, 2013

No reason to panic (yet)

Once again I find it frustrating to make money on the short side. This is the third time in a row when market gives a "sell" signal just to rally immediately afterwards. Despite the two days rally little has changed at the technical level. We still have a bearish EMAs crossing and market is making lower highs and lower lows. Granted SPX moved above rising SMA 120 today.

Let's look now at the previous two plunges.

As you can see from the two charts above SPX moved strongly up after a "sell" signal, strong enough to generate a false "buy" signal that was also short lived. Notice that SPX could not make a higher high during the short lived rally. It looks like this scenario is repeating itself. For market to resume a long sustained rally it needs a higher high, at least 10 points above the curent high at 1,530. Anything bellow 1,540 is not going to do the trick for bulls. Since March 2009 only one time we had a major whip-saw, in november 2011 when market gave a "sell" signal followed a couple of weeks later by a real "buy" signal. At that time SPX rapidly established a higher high. 

So, for now, I would say not to panic if you already switched to the short side (like I did) since most likely the rally we are seing now is nothing but a bull trap. I went short a little bit two days ago, a little more consistent yesterday and a little bit today. On the way up I usually go "all in" the first day I get the "buy" signal but on the short side I tend to be a little more cautious. I warned you a few days ago that a rally towards SMA 120 may happen and unfortunately, it did really happen. That means we need to suffer a few more days until the market is going to go down for good. 

All the best!


Tuesday, February 26, 2013

Does EMAs crossing really work?

I've been challenged by a reader from Market Watch to demonstrate that my system works. I have demonstrated this almost three years ago when another sceptic said that the system doesn't actually work. Have a look at this article that goes back to the stock market in the 70's. Both sceptics said they back-tested my system and it was actually producing loses, not gains. I was puzzled since I was using this system every day and I knew, from practice, that was working and was producing money. So I said "let's have another look at the charts to see if I am wrong or not". I was going to test EMA25 crossing EMA 50 on weekly (5 days) chart which I knew from previous years that signaled a bull or a bear market (it's just a coincidence that I am using the same pair of EMAs for two hours chart). The software I am using allows me to go back only to 2000. At the same time I can use the chart on 9 days (which is almost two weeks) that allows me to go back to 1996. Since I was using 9 days chart instead of 5 days chart I had to adjust the EMAs, 5/9 = 0.5555, and 50 multiplied with 0.5555 is almost 28. So I had to use EMA 14 crossing EMA 28 on 9 days chart. You know that I am also using a SMA for confirmation but I left it out this time for clarity. 

Here it is the 1996-2000 period. For the sake of simplicity I assumed that both "buy and hold" and "EMAs crossing" entered the market at the same time, at 650 on SPX in 1996. Again, for simplicity I assumed that no new money came into market between 1996 and 2013. How did they perform?

Everything was beautiful (don't you miss the 90's?) both B&H and EMAs guys made the same amount of money. Let's say they started with 10,000. For every period I am going to calculate a multiplication factor by dividing the highest level to the lowest, in this case, 1320/650 = 2.03, so in 2000 both portfolios were showing $20,300.

Next come the first big plunge, 2000-2003. B&H lost his shirt, EMAs guy made money. The EMAs guy portfolio shows now 26,796. I don't need to calculate for B&H since he didn't close the position. I am going to calculate it at the end.

2003-2007, another bull market. B&H recovers everything lost, his portfolio is back to $20,000. EMAs guy portfolio shows $35,370.

Here comes the bear market again, a nasty one. B&H guy loses his shirt, EMAs guy makes money on the short side. His portfolio shows now $44, 567. Notice that EMAs crossing did not capitalize a good chunk of the plunge and also the entry on the long side was quite late. This was due to the fact that it was a very sharp "V" recovery. Still the EMAs guy made money.

Good times are here again, another bull market from 2009 to present day. B&H guy is happy that his portfolio shows $20,000 once again. He didn't made a dime from 2000 to 2013. EMAs guy portfolio shows now $63, 730. So in the end the B&H guy made 10,000 profit and EMAs guy made 53,000, this is a 5x difference. Do I need to be clearer than this?

The question is why does the system work when looking at charts and doesn't work when is  backtested? I had the curiosity to ask what exactly he did when he backtested my system.  In short, the guy calculated EMA 25 and EMA 50 from 1950 to 2013 then asked the computer to give a "1" if EMA25 was higher than EMA 50 (profit) and a "0" if EMA25 was lower than EMA50 (out of the market). Then he compared the results with "buy and hold" and reached the conclusion that "buy and hold" has better performed than EMAs crossing over the last 60 years!  It took me exactly 5 seconds to realize why his backtesting showed a loss. He considered me out of the market when the sell signal was generated instead of being short and making money, he pretty much cut my profit in half. His answer was "if the system produced losses by being invested during the bull market and out of the market during the bear market is going to be even worse if I considere you invested during the bear market". 
How can it be worse? Is not like I am going to go short during the bull market. If you really want to find the equation that describe my system you need to consider me invested during the bull market, invested on the short side during the bear market and subtract from this gain the whip-saws, the only moments when the system is actually losing money. 

Anyway, I showed him the mistake but he continues to argue that my system is losing money. I am not a proud man, or not proud enough to be unable to accept an inconvenient truth. I am used to be wrong, I am a scientist (I have a PhD in biochemistry) and you have no idea how many times per day I am banging my head on the wall and ask myself "what the hell this result means?" Science humbled me and stock market humbled me as well. As a newbie in stock market I made the common mistake to believe that trading it's easy, "buy low and sell high, what's the big deal, even a monkey can do it". After losing almost everything I realized that things are not as simple as they seem. I started studying every indicator and oscillator out there (RSI, MACD, Bollinger Bands, Ichimodu cloud, OBV, DMI... you name it) and I reached the conclusion that the best system for my style of trading is EMAs crossing on 1-2 hours chart plus SMA 120 and a non-price indicator called DMI which is actually a momentum indicator. I am also fond of uptrend and downtrend lines as support/resistance levels.

He also pointed out that the system did not work in the last 3-4 years. Fair enough! Let's assume the best case scenario for buy and hold, that he invested exactly at the bottom, at 700 on SPX. EMAs crossing brought me into the market at 1050. This is a big 350 points advantage for buy and hold. If we are going to have a perpetual bull market, buy and hold will retain the 350 points gain. However, one single bear market will make the gain disappear in a matter a months since the buy and hold is going to lose money and EMAs crossing is going to make money. 

So, what do you think, am I wrong or am I right? Even if you never left a message on my board please do it this time. For my Market Watch friend it doesn't matter if I am wrong or right, he is not going to use my system anyway but for me is important since I am using it all the time. So, am I right or am I deluding myself into thinking my system really works? Did any of you enter on the long or short side based on the signals I posted on this board? Did you make money or did you lose money? Please let me know. 

Monday, February 25, 2013

Sell signal

A very nasty reversal day for bulls, SPX went up 10 points in the morning to 1,526 just to slip bellow 1,500 by afternoon. EMAs are touching but are not crossing yet. However, SPX moved bellow SMA 120 (1,502) and I am pretty sure that this is the "sell" signal on intermediate time frame. I am going a little bit short today and continue the process tomorrow, after EMAs are most likely to give a bearish crossing.

After hours update

SPX lost another 7 points since my last update. Still no EMAs crossing but I am pretty sure the correction has started today. Reversal days of this magnitude after extended rallies or plunges are pretty good indicators that the trend has changed. 

Bears are happy today, of course, but they need to take into account that we are still in a bull market and corrections are short lived. I won't be surprised to see bulls trying to push SPX above SMA 120 in the next few days. If this happens they are going to be good entries for bears who hesitated today. 

On daily chart DMI has turned negative but remains positive on weekly chart.

It seems that today's plunge found support at SMA 50. Both SMA 50 and SMA 200 are still pointing up.

How deep this correction is going to be? As usually, this is a hard question to answer. What we need to do is to look at obvious support levels and assume one of them is going to hold. I think the best support level this market has is in the 1,400 area where we can find the bull market uptrend line. 

I hope you are going to enjoy the move on the downside as much as you enjoyed the rally from 1,340 until today, or according to EMAs crossing from 1,400 to 1,500. Never be a perma-bull or a perma-bear. Be flexible and you will have a happier investing time.

All the best!


Friday, February 22, 2013

Exciting week

A lot of drama this week with SPX hitting a new high on Monday just to lose every gain and change in two violent days on the downside. However, after hitting SMA 120, SPX bounced up and managed today to advance 13 points and to climb above both EMAs. It is possible to see SPX trying to claim 1,530 level once again like it did in previous occasions just before suffered some decent corrections. Even if correction started I don't expect to last too long or to go too deep (no lower than 1,400). 

Overall market lost 5 points this week, not a big deal except that it has interrupted the 7 weeks in a row on the upside performance. 

Daily chart looks interesting, pay attention to DMI that is very close to turning red. SPX remains comfortable above both SMA50 and SMA200. I made a mistake on the chart, I wrote SMA 50 at 1,575 instead of 1,475. 

Gold had another bad week but managed to stay above the support around 152 on GLD.

The dollar is doing good lately. Look at the weekly DMI that just turned green. We may see a rally here with big consequences on both stocks and gold prices.

Overall market remains bullish long term but some damage had beed done on intermediate time frame. Another week on the downside will probably give a "sell" signal. 

Take care!

Thursday, February 21, 2013

Getting closer

SPX is moving down again and is probably going to give a "sell" signal by tomorrow. Right now it's challenging SMA 120 for the first time YTD. 

I will continue to give you updates by the end of the day or tomorrow. It is important that you are entering the short side at the right moment. Talk to you later.

When I started this blog, a few years ago,  I used the EMAs crossing on hourly chart. Unfortunately, it gave me too many whipsaws in the last one and a half years so I changed it to two hours chart. The difference, of couse is that the two hours chart gives me less whipsaws but at the same time allows me to enter the market on the long and short sides at less better prices that the 60 minutes chart. I hope market will get less volatile in the future so I can go back to hourly chart. 

On hourly chart I already have a "sell" signal, but I will wait for the two hours chart to give the "sell" signal for reasons I mentioned above. 

Keep in touch!

After hours update:

SPX jumped up after touching SMA 120, a move that I saw before. Even if we are going to get a "sell" signal tomorrow or next week don't forget that we are in a bull market, therefore the plunges are short lived and you need to move fast to seize the gains. Also keep in mind that during the most recent corrections market gave a sell signal then moved up but it didn't establish a new high before plunging again.

Wednesday, February 20, 2013

Big drop, no "sell" signal yet

Market went down 19 points today, a significative drop but not enough to onset the "sell" signal on intermediate time frame. Price moved bellow both EMAs on two hours chart but is still above SMA 120. Not to mention that EMAs are not even touching. 

This is the most serious threat the bears have caused to the rally so far this year but I need to see a continuation in the next few days before going short. 

Daily and weekly DMI are still bullish and SPX is above both SMA 50 and SMA 200.

Gold and silver got hammered once again. Silver went bellow well established 4 years uptrend line. There is some support around 26. If this fails next stop will be 18. Gold is also bellow the 152 support area.

Has the correction started? It's too early to answer this question. Let's patiently wait for a clear "sell" signal.

Saturday, February 16, 2013

Flat week

Not a very interesting trading week, SPX gained 1-2 points leaving technicals pretty much at the same level as last week. However, the action was a little bit bullish with SPX going down almost every day of the week but bulls buying every single dip and pushing the index either back in positive territory or above the day's low.

The two hours chart still gives the impression that market is overbought on short and intermediate time frames. SPX is at a safe distance, about 27 points above rising SMA 120. 

Daily and weekly charts show a positive DMI which in itself is bullish but also notice that their value is pretty high meaning that stocks are overbought. The problem with "overbought" during a rally is that stocks could stay at this level for a long time. That's why I prefer to wait for a "sell" signal than going short then get frustrated that market either goes sideways or even worse continues to advance. I know that in previous posts I mentioned an upper target (somewhere in the 1,520-1,540 area) and there is a good chance stocks won't go above this area before a decent correction but I need to remind you that guessing tops and bottoms is a bad practice. It's good to have roughly an idea how much market goes up or down but is a bad idea to act on this presumption. 

Weekly chart shows SPX above both rising SMA 50 and SMA 200, again a bullish sign overall but weekly DMI seems also at a high level.

Gold suffered a pretty bad decline this week (3%) that is not surprising keeping in mind that the dollar went up this week. 

Overall I remain neutral at this point since I expect market to move sideways for a while. It's very tempting to go short at this level but I know I need to refrain acting on guts feeling. 

Friday, February 8, 2013

Sixth week on the upside

Slightly up this week, just 4 points on SPX but a win it's a win so let's give it to bulls again. The first two days of the week have witnessed  a pretty dramatic drop and a rally afterwards, then a couple more failed attempts to either establish a new high or bring market down. Only today bulls managed to push SPX higher enough to establish a fresh higher high. 

As I mentioned many times is better to wait for a sell signal (whatever that signal is for you, for me is a bearish EMAs crossing on two hours chart) than trying to guess the top and go short just to be frustrated that the market either continues to move up or goes in a lateral consolidation phase. There is a very good chance that market will suffer a correction here or a few more points above (1,420-1,440) but I prefer to wait for the sell signal even if this signal will come in the 1,490-1,500 area and losing a few good points this way. Patience it's a virtue in stock market!

There signs that market is close to a temporary top, the volatility we saw this week and especially the cheerleading I notice on a few stock market sites. I saw many people bragging about buying now! Why should I be impress by somebody who is buying now, at 1,500 when the buying time was around 1,390-1,400 when the trend changed. I don't understand these people. I advice you many times, buy when the trend changes then relax for a few good weeks if not months. If you want to take the profit now or wait for a sell signal it's up to you but you are already staying on a nice profit, 100 points on SPX it's a pretty good performance keeping in mind that you didn't fight the trend. 

Like it or not bulls are still in control according to EMAs crossing on two hours chart. The price crossed the moving averages on a couple of occasions which is good, that's how they are supposed to do. Market may suffer a correction here (most likely) but there is a small probability to see market advancing for a few more months before a correction. That's why I am saying, do not go short yet! Take some profit if you are getting nervous but do not go short yet. You will sleep better at night.

I realize that there are people who are getting more out of rally or a plunge (I know somebody who called the last bottom in November exactly the day it happened) but I am not that good and I need to be satisfied with only 70% of each rally or plunge. I sleep better at night knowing that I never fight the trend. 

I promised I am not going to talk about AAPL anymore but here I am again. It looks like AAPL is going to fill the gap down but does that mean that it's safe to buy it yet? Well, that's a big question. Remember the well-established multi-year uptrend line that I was expecting to function as an important support level? Well it didn't do the trick. However, on the way up the same uptrend line may be an important resistance level. If I see AAPL above 495, then I could say the trend has become bullish again. 

Friday, February 1, 2013

Round numbers

After SPX reaching 1,500 it was Dow's time to climb above 14,000. These numbers don't have any special meaning from TA point of view, they are just round numbers but people like to make a big deal about them. What is important is that market is very close to the all time highs, 1,550 for SPX and 14,250 for Dow. 

Market continues to be overbought on short and intermediate time frames but bulls don't seem to care. It was actually overbought the whole month of January but SPX advanced at a very high pace without any hesitation. 

What will happen next is hard to tell. Most likely this bullishness is going to be enough to push SPX further up but I am not sure for how long. In truth, I hardly remember any other time in the last 5 years when SPX remained overbought for so many days. What is even scarier is that the market does not react to news anymore. We had a pretty bad piece of data this week, the Q4 GDP that came at -0.1%, but market refused to go down despite the overbought condition. Today we had mixed data, an unimpressive job creation number, a small rise in unemployment rate but a revised job creation number, 300,000 for the whole 2012 which doesn't seem too much but  nevertheless market rallied today.

If you are eager to get short I suggest you to wait a little bit more since this irrational bullishness most likely will continue. I say that better lose a few points than shorting too soon and get frustrated that market doesn't go down. Wait for the trend to change. It is probably going closer and closer. If market is going to behave like it did in the past 4 years the trend will probably change somewhere in the 1,520-1,550 area. 

All the best!