Sunday, June 10, 2007

Cross Overs Are The Key

If your chart doesn't show the 4, 8 and 21 EMA then go fix it - I'll wait. We'll get to the reason why in a little while.

I have spent an inordinate amount of time over the past several weeks looking for something that I've already found - the best method to swing trade stocks when you are working is the cross over pattern. Put your stop (mental or actual) below the candle that crossed and let them run.

Some examples -


We'll start with Kraft Foods (KFT) - two crosses in two months - both profitable. Note that I have the MA 200 drawn on some of these charts - I'll use that later to show you something that might be important.

I don't particularly care for the first KFT cross over (which is actually the second in 4 days) simply because it has too much thrust. I prefer the kind like that on 5/16 because it is a more gentle ascent. Although both were profitable the second one is actually a lot better and may not be done yet.

Exiting a cross over is up to you - I expect 3% to 5% and after that everything is golden. My stop is always just below the crossing bar because the beauty of the cross over is - it works or it doesn't. I use a close as a trigger to sell the stock. In other words an intra-day move below the candle will not cause me to sell but a end of day close below the candle definitely will. While some folks have studied it and think that a pull back is OK I prefer the ones that go straight up.

Note that a cross over must open below the EMA 4, 8 and 21 and close above them. I do permit a composite (across two days) cross but to be honest I prefer those that happen all in one day. No hesitation normally means that the stock is going to go up.

Here is Natural Gas Services Group - NGS.


Another stock with two cross overs showing - the one on 4/25 was almost a failure but no candle closed below the cross over. However, if you missed the first one the second one had to ring a bell somewhere. You can see this one takes a normal trajectory - up, sideways, up, sideways - and that is the mark of a healthy advance. The last several days are almost saying - sell me - I'm done. I wouldn't be surprised to see a pull back next week. Which is just fine since we are well over the 5% gain at this time.

For the cultists - here is Microvision - (MVIS)


Another stock with two cross overs in two months - the first one being a composite. You can see by the price action after the composite that the traders weren't too sure about this one and let it slide to the 4 before taking it up again. Then it hit a patch of 4 days down. Any stock that goes red for 4 days in a row becomes suspect in my book and you can see that after the next three days it posted a cathedral of dead money on 4/05 and that would have been a good time to dump it.

MVIS put another cross over in play on 5/17 and has done pretty well since then although that "cross on the hill" that it printed on Friday suggests that it is going to back out some more.

The question of the hour is - why would anyone play any of these stocks without a cross over? - Most likely the answer is - impatience. And impatience is the reason why many traders go broke instead of rich.

Here's another - Nutrisystems - NTRI


NTRI was obviously a great buy on 3/15 when it crossed over. That was a nifty 42% ago. And that's the power of the cross over. Will they all come up that high that fast? Not necessarily but enough of them will that you can make some nice money just for being patient.

Here's another one that I bought - Live Nation - LYV


The cross over on 5/30 was followed up by a nice jump in price. And I sold it on Thursday at end of the day.

Now here's one more - I told you the 200-period moving average would show up again -


Two cross overs and the first one closed over the MA 200 and it came back down. It didn't close below the crossing bar however so the trade could have remained in place. But after a couple of false starts it crossed over below the 200 and took off - coincidence - probably - but who knows. I'll play cross overs either side of the 200.

Now here's why you need to have the EMA 4, 8 and 21 - while I have tried just about every other combination and method of moving average known to man these three averages test the best for cross overs. I haven't tried MA 50 or 20 or 200 and for all I know those averages are perfectly fine for this purpose and if they are - great. But I like the fact that these three averages vary in their relation to one another in a manner that suggests - volatility. When the averages converge it suggests that volatility is damping out and when they diverge it suggests that the volatility is excessive and needs to come back.

So instead of looking at the three averages as just three more lines on a chart - start looking at them as a function of volatility and they might start making more sense to you.

They have to be EMA you know because only EMA has the sensitivity to the price that is necessary to become a proxy for volatility.

I'm working on a filter that measures the variance of the three averages and then uses the ATR as a base to determine if I can find a better measure of volatility than Bollinger's amazing Bands. The variance of the average for those of you who want a real challenge is the averages difference with itself day to day and then comparing the three differences with each other to see if a rationale statement of fact can be made in regard to the discrete events. I have a feeling that that should be the subject of yet another post (if it pans out).

I'm now using several different cross over filters - but they are all just riff on the main one which is
show stocks where close is between 15 and 35
and average volume(90) > 500000
and open < ema(21)
and open < ema(8)
and open < ema(4)
and close > ema(21)
and close > ema(4)
and close > ema(8)
and close > open
and close 3 days ago < ema(21)
and close 5 days ago < close 3 days ago
and close 5 days ago < ema(90)
and add column atr(10)
and sort on column 5 ascending

Now here's a little secret although how it could be a secret I haven't a clue but here goes anyway - pick any 100 stocks, put up a 3 month daily chart for each of them and most, if not all will show at least one cross over in that time period. For proof I offer the A's and B's of the NASDAQ tech 100.


You can do the rest.

The asterisk on BBBY says that there were many failed cross overs for this stock - fortunately I'm not a big fan of BBBY either as a business or a stock so no matter. The double asterisk on BIIB says that there was a cross over on 5/17 that failed 2 days later. On 5/21 BIIB crossed again profitably.

You might also note that AKAM and APOL both crossed on Friday. Not a recommendation - just an observation.

That's all for this week end - I've got to get back to my research - so much to do so little time to do it.

15 comments:

Bullish Jim said...

I've been spending some time this weekend on backtests of a bunch of filters over the past two years. Your EMA 4, 8, 21 crossover is the only one worth beans over the two year period. Incidentally I'm starting to think the past six months is too low a hurdle for testing. It seems like everything I come up with tests well over that period.

Nice post, MT.

Marlyn Trades said...

Thank you Jim.

It seems to defy all logic that given the myriad of technical analysis approaches that this one is so pervasive and so profitable. Whoever came up with the admonition - "keep it simple stupid" - certainly had this approach in mind. I know I could complicate it by insisting on a certain EMA configuration and the like but it just doesn't seem to need it.

Have a good trading week.

Woodshedder said...

Marlyn, I know you've posted it somewhere, but I can't find it. What are the rest of your parameters to get the above results?

Thanks!

Marlyn Trades said...

Try here

http://filteringwallstreet.blogspot.com/2007/05/stockfetcher-setup.html

Woodshedder said...

Thank you!

Bubs said...

Great post MT. I currently only daytrade but am interested in swing trading in the future and for my IRA account. You are looking for the 4,8, and 21 period EMA to cross and buy on the close of candle that crosses? Thanks

jrswanson said...

MT: Great post. I really enjoy your web site. Thanks. I was wondering if you could clarify the following questions in regards to this filter?

Do the three EMA’s have to cross within the candle?

Or, is it more important that for a given bar that; 1) the opening price is below the three EMAs and 2) The close is above the three EMAs?

Furthermore, given the three EMAs do you expect ema(4) > ema(8) > ema(21) before you buy?

Thanks for you help. It’s truly appreciated.

Marlyn Trades said...

Bubs - thanks and yes I want to buy on the close of that candle or at the open the next day - I've tried a number of approaches and the only thing that matters is putting the stop below the cross over candle then waiting.

This will also work and work well on 15 minute, 30 minute, 4 minute and just about any minute you care to claim charts too. I've successfully day traded it often when I was trading for a living.

Marlyn Trades said...

JR - the EMA's can be in any configuration and they don't have to cross at all - the only thing that matters is that the stock opens below all three of them and closes above all three of them and in the near past 3 - 5 days the stock was below them. I want a stock that turned and went up.

Again the averages are a proxy for volatility - the closer they are together the lower the volatility in the stock - I consider that to be an energy buildup and the price should rise on it.

Similar to Bollinger bands but without the bands or the bollinger.

jrswanson said...

Thanks!

jrswanson said...

MT: Lots of people seem to use Stockfetcher. How does this compare to wealth-lab.com?

Thanks again.

Marlyn Trades said...

The only person I know with solid experience in both is Dogwood - see my BLog listings and go over there and ask.

Anonymous said...
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Anonymous said...

Wow.......so simple and yet so powerful. Putting up a bunch of stocks and looking at them in a 3 month chart I was simply amazed at how many times the crossovers that ocurred. I could have saved years of stress...LOL...
Once again thanks for your valuble insights and sharing them. You Da man !!!

Quentin

Marlyn Trades said...

Thanks