Four Days Low

I was working with an older filter last night and I came up with a new twist - 4 sequential days with a lower low each day with the last day's low of the sequence making a new 20-day low. The other days can also be making new 20 day lows but it doesn't matter. This changes the emphasis from the close to the low which actually makes more sense than using the close.

The output of this filter looks like this -



And yes I did test 5, 6, and 7 sequential lower low days with mixed results - mixed because the more stress you put on the filter the fewer hits it gets.

I tested this against three periods - the one I've been using lately, a more up to date period and that period last March through June when the market was going down. The results for that test were poor as was expected so this is another filter that can't find solid plays in a down market. But since the market is always up - no matter.

Anyway my two positive test periods yielded the following results:

9/01-12/22 - 71% win rate,169.53% ROI, 8% net change over 30 days
10/06-02/07 - 63% win rate, 113.51% ROI, 5% net change over 30 days

These are not bad results and as you can see we are entering a weaker time in the stock market. But for what it is worth the three top selections from the filter for last week were: KBR, DBRN, and PDLI whose chart is above.

I said last week that I would be looking at the possibility of using a filter or two to attempt to predict the market and I have also obtained mixed results. Mixed in the fact that yes you can use a filter in this way but you already know the answer before the filter answers the question. I.E. there is no real forecasting ability. At least none that I've been able to discern. I'll keep looking and if I find a filter that seems to have some ability in this regard I will share it with you.

You Pay For That?

Investors Business Daily wants you to subscribe to their service. Here's the headline from one of their infomercials in today's Yahoo Finance:

"Looking For Winners? Look At 52-Week Highs"

Then they present an article which uses rhetorical flourishes to "prove" their point - which is - a subscription to our service is very expensive ... Well that must be the point they are making because they offer no proof to support their headlined suppostion. (And I choose my words carefully - "supposition" is the correct word in this instance. Because what they are saying is something they "suppose" to be true - because, by cracky, everybody just knows that it's true).

(Ah, except me).

OK - I'm not the sharpest tool in the shed but I can say this and, as usual, I can prove it - you make more money off 52-week lows than 52-week highs in just about any period you would care to select.

I wrote a filter - here it is:

Show stocks where high reached a new 1 year high
and close is between 25 and 100

And then I tested it. Then I changed both instances of "high" in the first line to "low". Get the idea? And I tested that filter. Both filters were tested against a 4-day hold period i.e. what were the results 4-days after the buy.

The period selected was a very fertile period and both filters should have produced a lot of net value. Did they? Let's see.

New High 58% winners - 21% ROI
New Low 67% winners - 87% ROI

Now how can that be - a costly selection service's most original idea is beaten by something you can get for free? Yes - that's exactly right - new 52-week lows are published just about everywhere, every day - for free, as in - no money. But let me get to the best part -

New High 30-day net change = 1.03%
New Low 30-day net change = 6.81%

Oh you are kidding me - over 4 days maybe it's just luck - but 30 days - give me a break.

And now, because some of my readers like to see it - here are the results over a period beginning March 1,2006 and lasting 90 days. That period was selected because it represents the only real down period in the market last year.

New High 44% winners, -24.41% ROI
New Low 48% winners, -27.91% ROI

But even here the longer term is pleasantly surprising

New High 30-day net change -4.96%
New Low 30-day net change -1.19%

So my question now is - if people pay IBD for that kind of great advice - how much more would they make if they didn't?

Crossing Over II

No it isn't the EMA 8 that is the problem. Here is ATHR and you can see that the EMA 8 is just fine - I happen to love this chart - I'm printing it out and putting it on my wall.



This is a dipster's holiday. If you see a chart that looks like this again and you don't buy the stock at the Doji-like candle you are probably just pretending. In this instance the crossover just reinforces the deal.

Something's Askew

I was fooling around with the Proshares ETFs QID and QLD which readers of this BLOG know are the double inverse Q fund and the double long Q fund and I noticed something strange.

Let me begin at the beginning. I've long been a fan and a subscriber to the Rydex family of dynamic and inverse funds and in fact it was those funds that drove me to create Marlyn's Curve. That's a picture of the 6 Rydex funds over there in the corner of the BLOG rendered in the amazing curve. Now here are the dynamic and the inverse OTC funds offset to about 60 days ago.


You can see the absolute perfect symetry. Here are the same two for the last 60 days.


You can see that they are no longer symetrical but are at odds with one another. Here are the Rydex funds in their normalized non-averaged view.



In this view you can see the discrepancies as one of the fund's returns become longer than the other's. I've circled a few of them but there are quite a few.

I got the same effect when I did the comparison of QLD and QID except a whole lot worse due to the doubling nature of the products.



I don't know where these variances come from but they seem to be too severe for my money. It wouldn't bother me if they were both going up at the same time but it sure would bother me if they were both going down at the same time. And it looks like they can.

Of course the whole thing could just be a reflection of the lack of volatility in the market as a whole. And that's what's hurting everyone these days.

Crossing Over

No we aren't channelling John Edward (TV psychic) but a set-up I wrote about the other day.

Here is the last 30 days of the Q's - there are several crossovers on here including one that failed and a failed BOB too.



You can see from 1/22 - 1/24 the Q's were setting up a blow-off bottom but it failed. Along with that there was a failed crossover on 1/24. As I've said before this is a high probability but not 100% perfect indicator (are there any?).

While I haven't done a lot of analysis with the EMA 8 in this particular set-up I do notice that the crossover on 1/24 has the EMA 8 in a peculiar position relative to the 4 and 21. You would almost always expect it to be between them but because of the chop chop nature of the markets during the past couple of weeks that EMA was out of what might be considered its more normal position. It is something I'm going to be investigating - time permitting.

But observe that there are 5 crossovers on the chart. Three have been successful, one failed and one??? That one, of course, is from Friday. And unfortunately the EMA 8 is in a normal location relative to the 4 and the 21.

So although I called for an up day on Monday - it is possible that tech might lag.

What A Difference A Day Makes

I've been reporting on CRVL's misfortunes lately - not to be picking on the "best of breed of 2006" or anything like that but, yes, I am picking on the best of something ... Sum it up - whatapieceacrap.

But that, of course, sums up my feelings regarding nearly every company on the face of the earth. Example, I was in Wally World yesterday taking advantage of their rock bottom, low prices and I actually found myself commiserating with the checkout lady who was bemoaning the fact that they would only give her 5 hours a day. That, of course, is to prevent having to provide her full-time benefits and a stock option plan. Now here's the punchline - I was buying bird seed to scatter in the back to feed the birds and other beasts who are reeling around in shock because of the sudden onset of winter. So here I am taking advantage of low prices supported by predatory corporate practices so I can do good for critters. In other words I scatter the bird seed to attain good karma.

That's --- freakin' --- ironic.

Meanwhile back to CRVL - in four days last week they managed to take a 148 million dollar haircut. And that was on top of a great earnings report. Talk about reeling around because of the sudden onset of the cold - I don't think I'd want to be around that boardroom anytime soon. I mean this company only has 14 million shares in the free world and they puked 10 bucks a share in four days - for no apparent reason.

On the other side of the coin, LQDT, a company that does some mysterious thing or other in the "intertube" world, with about 28 million shares available for a price gained 89 million bucks in the same time period. And that was on just OK earnings.

I made some on both these companies this week and am still holding a small amount of LQDT in the hope that next week brings more. I'll be watching CRVL but I think this one is just dead money now. I could be wrong but I think that unless they announce yet another stock buy back they are probably just going to drift around in the cold for a long, long time.

Friday Wrap Up

It's happy hour - time to kick back, tip back, and swap lies down at the old watering hole. It was a cold, cold week in the mid-West and the stock market reacted like an icicle on a Minnesota ice fishing hut - it went down.

The INDU 10 period ATR went under 80 yesterday, which resulted in the decline today. I spoke about that here.

Now since the market dropped through the 21 EMA it is probably done with this dip. But I do wish the dipsters had left it alone and waited till Monday to start buying back. No matter - the damage was done and it looks like enough stress is out of the market now for a good week next week - or at least a couple of days.

The Four for Friday experiment blew out with the market - but if you were following along you couldn't help but notice all four of them starting to hit the offer after 2 P.M. Nothing to write home about but at least they didn't finish on their lows for what that's worth.

Needless to say I didn't participate in any of them and I took my normal two trades and made some serious money. I bought LQDT on the second candle today just because I thought it was going to continue up and it did. I made a buck 30 before I let it go. I also took NSM but lost that to an 11 cent stop loss. That means I net 1.10 after commissions give or take a nickle or so.

Then this afternoon I reacquired LQDT on the idea that it will go up with the market on Monday and I am currently holding another 12 cents profit. So I'm happy. And for being deathly ill this week I did alright for my trading account. I only made two mistakes - I should have sold both CRVL and DHI sooner. Sometimes ego is your worst enemy.

For Monday the up/down ratio is .28% - the last time this ratio was that low the market went down for the next two days and then exploded skyward. The new 20-day high/low ratio is 52% and that is neutral. The VIX remains neutral and I think the way that the majors and the IWM were recovering towards the end of the day suggests that the dip buyers are ready to go on Monday. Only the Q's were red in the last hour of trading and that is probably a good thing.

I'm calling for an up day on Monday.

The coin is calling for heads - also an up day on Monday. We'll see.

Having both called today correctly the score is now Marlyn 10 - 7 and 4 and the coin is 7 - 10 and 4.

Crossover For Profit

I've talked about crossovers before but I'd like to do a new post on them and show you how they worked once again. By doing this I am able to ensure that my tools are still sharp and that they are capable of making money.

The crossover is a single candle set-up and it is simply when the candle in the period you are observing opens below the EMA 21 and closes above the EMA 4. Here is PNTR as an example.



You can see in this example using the 30-minute candles how the second candle opened below the EMA 21 and closed above the EMA 4. This is a high probability indicator that the stock is going to go up. This can also work with a stock that has gapped down to where the EMA 4 is below the EMA 21. In this instance the open is below the EMA 4 and the close is above the EMA 21. Here is CMRG as an example -



But it doesn't end there - the crossover set-up works both ways - short as well as long. Here is IMOS on a short Holiday -



And CVTX also on a short ride -



I never tried this with simple moving averages so I really don't know if it would work with say a 5 and 20 but it probably would. As you know - I like to stay up to date with technology. Also any candle can be used in the crossover set-up, it doesn't have to be the first or the second.

With crossovers you have to set a close stop because a switch back is possible. Using the longer period set-ups is helpful in this regard. Note too that volume really doesn't get involved. I've used crossovers to identify swing trades too.

Remember - NO GUARANTEES - this is not an invitation to speculate in the stock market.

Good trading today.

Buy Me - Please Buy Me

My buddy, Bullish Jim, and how can you not like a guy with a handle like that, brought up LQDT and the fact that he sold it the other day ahead of earnings but the stock, after a drop at the open yesterday morning, went up anyway. Jim made the right decision in the circumstances but I wish I had seen this stock yesterday morning (I'm still fighting this blankety blank cold so I'm doing more thinking than trading these past few days).

It did a very nice fly-by of the S1-S2 mid-point (19.35) and that would have keyed a buy but that was way too complicated. When I switched to the 30's (my other favorite trading frequency) it had a drop-dead gorgeous "buy me" set-up.

I described this set-up way back last year and I'm too lazy to go find the post so here it is again. This time using LQDT.



First there is a gap down which is one of my favorite starts and, from experience I know that a gap down on good earnings usually means the stock has a high probability to recover some of the gap. After the gap-down there is instant remorse and capitulation which is shown in the first candle. Watch for this - it is trader talk for "we've gone too far." Then a "dummy spot" or what I call a "Buy Me" spot and what the Japanese call a DOJI formed. This is followed by a white candle with good volume which is kind of the "please" part of the set-up - not always present but nice if it happens. Then, once a clear break of the "Buy Me" spot occurs - you buy. The stop should be placed below the buy spot using an increment of the 30-minute chart ATR.

Note - the Average True Range will vary depending on your chart period - be sure you are being appropriate to the time scale.

Also - set-ups taken from 30-minute charts have stronger runs in general than those taken from the 15-minute charts.

I Can't Make This Stuff Up

Too Funny for words - the first line is the top headline on Yahoo Finance at this hour and the next 4 are the actual headlines of the next 4 stories.

Consumer Confidence Hits 2 1/2-Year High
AP - Consumer confidence climbed to a 2 1/2-year high with people feeling even better about job prospects, the current economic climate and investment opportunities.

* Alcatel-Lucent Plans to Cut 12,500 Jobs AP
* Kodak Snapping Off 3,000 More Jobs AP
* Big Windfalls From YouTube, Google Pact AP
* Oil Prices Spike on Iran, Cold Weather AP

I love the line - Kodak "snapping off" 3000 more jobs. I couldn't have thought of a better way to describe 3000 people who are going to lose their way of making a living.

I don't know when the Con-Con number came out - it is usually out early in the day and it used to make a difference in the Forex world but the stock market seems to ignore it. Unless the media needs something to blame a decline on. Note that they didn't say - Consumer confidence up - Stock market crashes. But had the number been down ... you guessed it.

Four For Friday

As much as I don't really want to do this I do want to show you how to use the 2-hour charts to set-up the next day's activities. Now before we begin I want everyone to understand - I may or may not take a position in any two of these four stocks. If I do take a position you will hear about it after the fact. If I don't take a position in any of these it will be because I found something better in a gap down or gap up scan I will run tomorrow during market hours. But these four will be on my watch list for Friday. They come from a generic 10 day low scan.

First we have Fremont General Corporation (FMT). I don't know what they do nor do I care - all I do know is that they had a BOB on the 2 hour charts today, institutions hold 66% of the float and their 10 period ATR is .53 cents.



Next we have AMD and it has the infamous Double Dummy or in the Japanese candlestick parlance - two stars in the south. The double dummy is a strong signal but I hate AMD. However, if I get a good set-up and nothing else is better I'll take the trade. The ATR is only .34 so that means it is looking to increase. And the 'toots hold 74%.



Good old ICON - a wonderful stock. They make something and sell it to someone - or something else, I think. The ATR is .59 which is OK and the institutions hold 58% of the float. The BOB coupled with a dummy is intriguing.



Last but not least and my favorite good old SVM. This one is really distressed, has an ATR of .20 and institutional ownership of 64%. What more can I say?



You must have a set-up to buy any of these stocks - no set-up = no buy - it is that simple. I'll revisit the four tomorrow evening and we will discuss the pros and cons of each one of them at that time.

Wrapping Thursday

Good evening - There are some pretty sad folks out there this evening - people who figured that they would ride their buy and holds to a wonderful new house on the ocean that they could maybe give their kids when they grew up - or perhaps that horse farm in the mountains - or maybe an old foreign car repair shop deep in the hills of Whogivesawhup. Gettin'on with the dream before they were too old to pursue ....

Wait - it wasn't that bad. It was just a down day. And the specialist who handles DHI took care of my DHI problem for me this morning - that's why I love the stop loss - it makes me sell when I don't have a reason to hold it any longer and I'm too stupid to pull the pin.

For about 45 minutes this A.M. I was flat in my trading account - cash, cash, cash and more cash - nothing wrong with that. I wrote earlier today about using the 10 day lows to find a day trade and by 10 A.M. I had the list down to 8 (from 48) and by 10:10 I was the proud owner of CIEN and PRGO. I bought CIEN off the tag of the EMA 4 line at 10:05 give or take a few minutes and dumped out around 2. PRGO actually did a little side step to the EMA 4 and I bought it at about the same time as CIEN and it went up and then rolled on me. So I made a buck and change on CIEN and a 4 cent win on PRGO - enough to cover round trip commissions on both stocks. Worst part was when it hit the R1 pivot point and I could tell from the action that it was through and I could have had at least the price of a happy meal (total profit) if I had sold it at that time. I didn't and I didn't. CIEN just kept going - a good day for whatever reason.

Speaking of pivot points - you all probably knew that the Q's pivot was 44.41 and for half the day it slid along underneath it and for the other half of the day it slid along just above it. Tech just doesn't want to give up. I think that might be because tech has been so far behind for such a long time now that there just isn't anything else out there to buy. The funds get desperate when they can't place the 401K money at the highest prices. I notice a lot of them got into DIS this morning right after the market opened and after that, as I've already pointed out in another post, DIS crashed. What do you expect, profits based on sales of assets can't be replicated next period - DIS is going to have to do some bidness now.

Let's get to the wrap - the up/down ratio dropped nicely to 44% which is good and the new 20-day high/low ratio dropped to 82% which still says - overbought. The VIX remains neutral and 3 of the 5 components of our final hour index were white and 2 were red. Mixed everywhere you look.

My forecast for tomorrow - another day like this one - down.

And the coin ... tails - bear a-comin'.

The score is Marlyn 9 - 7 and 4 and the coin is 6 - 10 and 4.

Take A Little Off The Top

CRVL doubled earnings and in the first 24 minutes after the opening bell it lost 11%+ right off the top. I guess there is more to "double earnings" than I would have thought.

DIS too announced double earnings and after the bell there was a wildly exuberant buying spree by what we fondly call "bagholders" and now the stock is down.

But as I said yesterday, CRVL has been looking sick lately so I'm not sure what is going on in the hidden dynamic of its trading community. Compare and contrast that to CI and CSCO, both up today. Let's take another look at those two charts.





The difference isn't subtle - everyone and their brother expected CSCO to improve earnings as did everyone and their sister regarding CI. Never were there two more as close as you can get to absolutes as these two. But CSCO flattened out just before its number came out and in fact dropped a little. Then once the number was out it gapped up and then came back down a bit. And that happened on a day when Tech was King. You can see that a lot of weak hands were cashing in on Tuesday ensuring that they had their profits "just in case". On Wednesday as soon as the gap-up occurred the sell-off began for real and the rest of the "earnings miners" cashed in their chips and got out of Dodge. Buying today is back in the CSCO trading community and it is pretty normal given the market.

CI on the other hand is investment grade material. You get in and sink down in plush leather seats and ride along like on a Lexus-cloud. No bumps, no bounces, no bruises. That's the difference a 100 handle makes. You have to have real money to play with the CI-ville - with CSCO any bum with fund can play along.

Earnings - you can either laugh or cry but you have to learn the game.

What Goes Up

Must come down – first a picture using the 2-hour charts of a stock entering earnings.



The point, of course, is that a Blow-Off Top or BOT is the exact opposite of The BOB. And you can see it on a lot of different time frames. And after a BOT what happens?



I’ve mentioned before that I like to use the 2-hour charts to set up trading candidates. The way I do that is by this process – I use Stockfetcher to find a list of 10-day lows tailored to my specifications. This is easy because one of the ready-mades provided by Stockfetcher gives you the basic filter and all you have to do is make some modifications. For example I want a specific price range and a specific average volume and a specific Average True Range. It takes a matter of seconds to mod the ready-made and run it and output a symbol-download to a CSV file in Excel. I dump that list into a prophet.net watch list and then use the two-hour charts to look for, well, BOB, of course, but also dummy spots in the final half-hour of trading and so on. “Final half-hour”? Yes – you see the neat thing about 2-hour charts is that in the trading day there are only three complete 2-hour blocks and the last block is only 30 minutes. I don't know if that is neat or not but that last 30 minutes can give you a world of information about the next day if you are willing to put in the time to study it.

I use the 10-day lows because they are not so beat up that they might even have a day or two of recovery and I am looking for day-trading candidates not a life-long relationship.

Using the 2-hour charts to sort out the list looking for candidates has the added advantage of providing a stronger set-up and that is always beneficial.

Average True Range and the INDU

Thought I was done for the evening but I have to look at one more chart with one more crazy idea and look what I see.



Now a set of four is not a compelling correlation but a set of every time? Every time the INDU's ATR dips below 80 the market goes down in a day or two. None of the other indices seems to have that marked a relationship to the ATR.

Anyway - you see where the ATR is presently and you also see that the INDU keeps pumping out narrow range days. I'd say between these two items we are due for a real drop. At least to the 21 EMA if not a little farther.

Wednesday Wrap

Good Evening - with the exception of a paltry few thousand shares of DHI my trading account is empty. I gave you the saga of CRVL earlier today and I wish those shareholders the best - but it really looks like a miss. I hit my target with JNPR (18.90) plus 30 cents and I rang the cash register. A nice profit for a three day trade. I sold KKD for break even at the open and I'm not looking back - it was a profitable ride but it looks to be over.

I did a day trade on HLTH which gapped down and then hit its mid-point low where I took it. Rode it up to the max of the day at 14.40. I think it could have gone higher but we'll get to that presently. I also took a trade at the same time on BRKS which was a gap-up and return to 4 where I took it (off the third bar) and it made a buck before coming back. This one probably wasn't going to go any higher. It did all of that based on an earnings statement where it beat expectations by three-100ths of a cent. What a psychotic market.

Around 10 A.M. or so a certain Charles Plosser who is a member of the Federal Reserve Board of Directors gave his now monthly recurring speech about the need to contain inflation and raise interest rates and the market stopped going up. Thank you, Charles, mission f$#@%ing accomplished. Someone please wheel Charles back to the crypt - See you next month, Chuck.

I don't know if any of you noticed but the Dow actually went red this afternoon for a matter of minutes. It was down around 20 some odd points before the dip buyers rushed in and made it better again. There is a beautiful doji spot where it hit bottom - it's worth a look and then check it out on the DIA too, the SPY and the Q's. IWM pretty much ignored it - I'm beginning to really like small cap.

Jimmy Crack Corn Pone says that you should buy stocks on good earnings - the market is only going to keep going up. Facts are pesky things though and the fact is a study done a couple of years ago regarding stocks during earnings season suggests that beating expectations is only a two or three day story, if that. A whole raft of other studies including a number I have done has suggested that stocks are best purchased cold not hot, stirred not shaken. And we are still waiting for that magical short squeeze on the almighty GOOG (had another long squeeze today). And as I have shown a number of times tech as represented by the Q's is on its way up, right now, even though Jimmy Crack CP said that it shouldn't be. My take is the only thing that really went up today for example was tech and, of course, small caps. So you can listen to JCCP if you want - I choose to listen to the market and let it tell me what to do.

Disney blew the doors off with its earnings but for all practical purposes it wasn't a continuing stream of revenue - they sold off some properties. I doubt they will get a boost from the wholesale trade on that - the retail trade just sees "double earnings" and that's enough to get them wet. DIS is up 57 cents right now in after hours but that's pocket change and just reflects the brokers trying to get some inventory to sell the chumps in the morning. And that's already almost a half a buck down from where it was. NASDAQ finally fixed their after hours volume widget - it was broken for a couple of weeks and we see that the volume is around 890K which isn't too shabby and reflects the fact of a lot of big transactions (retail trade? - I think not).

I'm almost back to full time day trading. If I find a good dip to buy with a good set-up I'll take it and hold it for awhile but otherwise I'm going to play my two stocks a day and go flat every evening. It is the best way.

Now for the part everyone waits for every day - I know I do - the up/down ratio is at 54% which is neutral - what's new with that? The new 20-day high/low ratio is at 87% which, for the deaf, is screaming OVERBOUGHT! OVERBOUGHT! OVERBOUGHT!. But - and this is the good news - I think - the last time we were this high we actually went higher and that was just 4 days ago. The VIX remains non-committal which is probably a safe thing to do and all four indices finished the last hour with strong white candles which signifies a whole lotta buyin' goin' on. (Jerry Lee - you made my childhood the envy of all these youngsters around me - imagine being one of the first to hear - goodness gracious great balls of fire!).

And all of this activity this week is expected because - yes - 401K money. Good for you.

About the only bad part of today was that GS went down and that is unheard of. GS started dropping just in front of the Dow. No explaining that.

I'm forecasting an up day tomorrow (what again? - yes again). I think there is still some 401K money that has to be placed and it is always placed at the highest possible prices.

Meanwhile the magic coin having thought and thought and thought (about dinner not about the market) says ... Heads - bull tomorrow - the coin is finally on the same page.

I'm calling it an up day regardless of the final score and that makes the score Marlyn 9 - 6 and 4 and the coin is 6 - 9 and 4. Bad coin ... very bad coin.

Blow-Off Bottom

Here's a picture anyone who wants to can save to a file and put in their trading workbook (I trust everyone has one) of a Blow-off Bottom. I've heard that the stock market is a random walk and people are often fooled by randomness yet I see this formation every day in every time frame. Most often the result is the same - the stock goes up. I have no way of measuring the long term efficiency of this signal but I'm confident in it to return at least a 65% win rate.

I'm showing only the pertinent parts and will walk you through it.



It is always a three-candle sequence.

1 - The first candle in the sequence closes down. Volume doesn't matter.
2 - The second candle in the sequence closes down. If it rebounds as is shown here that is a stronger formation than if it just goes down and closes at the bottom of the range. But it doesn't have to rebound.
3 - The volume for the second candle in the sequence must be greater than the previous candle's volume. This is a key factor - it is what you should always look for in a declining stock. The bottom is almost always signalled by a strong volume. Not necessarily but it is an excellent tell.
4 - The third candle in the sequence must close up.
5 - The low of the third candle in the sequence must be higher than the low of the second candle in the three-candle sequence.

That's all there is to it - three candles, the first two declining, the second candle's volume greater than the first, the third candle closing up with a higher low than the second candle.

The buy point is after the third candle is formed and finished. Then if a blow-off bottom occurred it is time to buy. The exit is up to the trader - I let the candles and volume inform me of when to sell but you might decide to get out at a fibonacci range, or a specific pivot point or for any number of other reasons.

Always put a stop below the third candle in the sequence. How far down is up to you but some increment of the Average True Range(10) for the period being observed is usually appropriate.

This works on every time scale from a minute to a month. The longer the time scale generally the longer the run.

And I hope it is needless to say - there are no guarantees.

Taking My Own Advice

I do not like holding stocks through earnings unless they are rising into the occasion. In other words if they look like stocks you would want to buy regardless of the situation they are probably going to come out the other end just fine. If they don't then you better beware and be wary.

I've been holding CRVL for many days now and actually had a nice piece of profit in it last week when it started collapsing. This morning it actually fell to below my basis and I said as soon as you get me some money back you're gone and it did and it was. This stock looks ill.



And yes I still made a profit in it but I think now that I should have dumped it back at that dummy spot last week or at least the next day or even the day after that - how many memos must a stock send before you get the freakin' message? Anyway it doesn't look like it's ready for prime time. It could be just a hangover from its recent M&A activity or a lot of insider selling in front of earnings but I'm taking no chances. The action on the stock has dried up so I'll take my little profit and run. Probably be sorry after earnings come out and the stock shoots to the moon - but that will be fleeting and I will be on to something else.

CSCO is an example of a stock rising into earnings and it is up 4% today. Another one is CI - take a look -



You could have bought that stock any time in the past week and a half with confidence. And that's what I mean when I talk about rising into earnings. Does it always work - no but it does often enough to make a difference. Now the other side of the coin is this - earnings are a short lived story - 2 days later the stock generally crashes. If I remember we'll revisit both CI and CSCO at the end of the week and see how they are doing.

For earnings information I like two sites - WhisperNumber and Earnings Calendar

Small Cap Rising

Once more the small caps continue to lead the market. Here is the IWM break out chart updated from several days ago.



And now we can see what is happening with the Four Amigos - notice how the Q's attempted to take the lead but they were muscled out by the DIA - then the SPY rose up to challenge - but swooping in from below for the kill - the small caps. Remember not all small caps are created equal and the growth sector is doing far better than the value.

QQQQ and QID

In our never ending search for an automated let me sit back and watch and make money method, Dogwood and I are trying a number of approaches to using the Proshares ultra-short funds along with the Q's to see if we can find a market timing system that makes sense. Dogwood is right now studying the effect of TICK on the process and I'm looking at several other methods.

Including buy both and let one fail and one succeed. The best way to do that is to buy one or the other the night before depending on your feel for the market on the next day. If you believe the market is going up the next morning buy the Q's and set a stop close below them. If you believe the market is going down buy QID and set a stop below it. Usually at 3:45 EST you shouldn't have a lot of trouble getting filled because the day traders have all gone home for the day. (Except for a few hard core who play after hours). Then the next morning at the open you buy the other automatically also with a close stop and hope that the whipsaw of the market place doesn't take them both out. It happens. I've tried it a couple of times with success each time but I don't like the suspense.

Yesterday morning provided a great opportunity to try out a pivot point based approach because the Q's opened up and QID opened down. If you want to be prepared for the next day you have to generate the pivot points before the market opens - we've discussed how pivot points are generated so I won't cover that again.

Once you have generated the pivot points for the two stocks as soon as the market opens and you can get a one day chart you should bring it up and annotate it with the pivot point, MPH, MPL, R1, S1 or as much as will fit. Some systems provide this capability built in - mine doesn't but that's OK - I would continue to annotate them by hand as I have been doing all along. I enjoy doing it and it helps me concentrate on the task at hand.

Here is what the two stocks looked like at the end of the day.





You can see how they are an exact mirror image of one another and that they hit the pivot points at the same times. Note how you could have used the pivot point (1) of both stocks to inform your purchase. Then when the QID pulled back away from R3 and the Q's pulled away from S3 you sell QID and buy the Q's.

Thus in one day you make a buck and a half on QID and another 30 cents on the Q's. Dogwood suggests that we use QLD but I don't think it has enough volume yet to make it reasonable. But if you could have got a fill in QLD around 12:15 or so you would have made about a buck on the transaction.

I'll stick with the Q's for the counter trade in this instance until QLD becomes more popular.

A little memory trick so that you won't be buying the wrong ETF - QLD - "Long Double Q's", QID - "Inverse Double Q's".

GOOG, BIDU, YHOO

Which one for me? Should I take my small trading account and wrap it up in GOOG or BIDU or buy a bit of YHOO and distribute the rest somewhere else? What if I just bought a few shares of GOOG - would that be worth anything over time?

Questions, questions, questions. Three stocks with three different price ranges and three different stories in the popular press. To read the stories one would think that YHOO was toast and BIDU didn't stand a chance because the monster GOOG is coming to assimilate them. When you look at the following chart you get a different story.



When the returns are normalized and analyzed together on Marlyn's amazing Curve we see that sometimes GOOG leads, sometimes BIDU leads and most of the time YHOO holds its own. One thing that I did notice however is this -



YHOO often leads BIDU on the turns - both up and down. I don't know if you could use that factoid to inform your investments in BIDU - i.e. to beat the crowd - but it might not be a bad idea for you to start watching YHOO in this regard.

As always this is just an idea and ideas are dime a dozen. You must do your own analysis and be comfortable with your own approach.

Return To 4

I haven't talked about a gap-up trade in quite some time - mostly because I prefer the counter trade (I like the stock to know where it's going). But I was doing some practice earlier and ran across this beauty and thought I'd take a minute and share it with you.



This is the classic gap-up return to 4 that Trader X invented and then chose to share with everyone for free quite awhile ago (actually X uses the MA 5 but I've modified it to an EMA 4 - same effect - I just prefer the EMA).

There are multiple theories as to where to take this trade and when to end it. If you go to X's site you will get his version which is extremely good and very safe. If you stay here you'll get my version which might or might not appeal to you but it will be a little different.

I have three theories of entry as shown on the chart. When given this type of set-up I will always take entry 1 at the EMA 4. The little dummy spot in the fifth candle position helps make the determination in this example. A more conservative approach will be to wait for entry point 2 and the most conservative, highest probability approach is to wait for entry point 3.

The box drawn above the entry possibilities is labeled "Echo" - that is an echo effect that you get many times. It is actually the stock pulling back in to the EMA 8 which is the reason why I keep the 8 on the chart. If the stock closes below the EMA 8 it is probably done going up (not necessarily but probably). If not I will hold it for a bit more and let the candlesticks determine the selling point. In this example that would have been at 2:15 because the large candle coupled with elevated volume generally signals an end to the run. The following two candles push me out if I didn't get the first memo.

Trader X uses Fibonacci lines to determine his exit point and you probably will want to read up on those as well. Once more a personal preference but I'm more comfortable reading the sticks.

Wrapping Tuesday

Bernake speaks - he says - don't worry - education and training will help narrow income inequality. That is - education for those who can afford it - which means parents who can afford it because you don't get through school jerking sodas anymore - not at 5.25 an hour or even 7.25 an hour. Which means - we're screwed. But you all knew that already.

But that's not what I'm here to talk about today - I'm here to talk about this amazing new stock market of the new intertube century - it slices - it dices - it cures every ailment known to man and a couple not even discovered yet - it goes up and down like a psychotic yo-yo - watch the shells boy and try to pick the walnut with pea under it - I'll give you two chances for one money ... would you like to try again?

Wow! Will this ever end? There were so many set-ups coming about mid-day I didn't know what to do. Here's several that you can look up for yourselves (all 15-minute charts) - at 11:45 JNPR printed a dummy spot followed by clear confirmation that also formed a tweezer bottom at 12:00. It took off from there. At 12:45 to 1:15 MSFT formed a classic blow-off bottom (sorry Jim) and took off from there. At 11:30 SYX formed a classic blow-off bottom with a confirmation 15 minutes later. It took off from there. SPY printed a tweezer bottom at the 11:45 - 12:15 on the 15-minute bars. In the 11:45 to 12 time period on the 1-minute bars you can see a huge 2.5-3 million share sell in SPY that was probably one transaction. After that the market reversed.

I took a bit on SYX - a stock I'd never played before. And got out at the dummy spot at 1:30.

Still holding CRVL even though it gave up a buck and a half today - probably get it back and then some tomorrow. Also holding DHI and it is only 20 cents away from where I bought it despite the best efforts of thestreet.com's loyal 10 subscribers. Still holding JNPR - it is in a nice chart formation and I think it is going to continue to go up - I'm looking at 18.90 as a target. I did sell the Q's this morning just as they jumped up at the open because I thought that they were going to go down from there hard. They did, then recovered most of it. Holding KKD too - although the next time it goes profitable I'm out because I think it is done for now. I'll wait for another set-up in the future.

I knew ahead of time that this was going to be a strange day because around noon I took a look at the up/down ratio and there were more stocks up than yesterday and the market was crashing all morning. How can stocks go up with the indices down - damifino but they do and they did.

CSCO beat - that probably means a 20 point day on the NAS tomorrow. GOOG went up today - it too had a classical blow-off bottom 11:30-12:15. Remember the BOB is characterized by a minimum of two down bars (Red) with elevated volume on the second down bar. This is followed by a Green/White bar with a higher low than the last Red bar or an absolutely equal low (tweezer bottom) with the last red bar. That is all it takes and if you see this formation you buy it and put your stop someplace below the low of the Green/White bar. You choose the spot but some multiple of the 15-minute ATR would probably be appropriate. For GOOG at that moment it was about 2 bucks which seems about right. Who in their right mind is going to day trade GOOG? Here is an example of BOB on the hour charts (yes you see it on all time scales). Of course the longer the time scale the longer the run (generally) so if MSFT goes up tomorrow too - don't say I didn't try to warn you.



Nuff of that. The up/down ratio went up today to 43% which is neutral. The new 20-day high/low ratio is 77% which still means an overbought market ahead of us. Four of the five majors finished with white candles in the final hour, only the Q's were down and the VIX remains neutral - if I were the VIX I'd probably want to stay out of it too.

I'm forecasting tomorrow as an up day. I want a downer so bad that I'm calling for an up day (although I'd take one like today but that just doesn't happen that often). It probably will be mixed again, but we'll see.

Meanwhile old magic coin says --- tails - bear market again. The coin just never learns.

Having missed today by the barest of margins, the score is now Marlyn 8 - 6 and 4 and the coin is 6 - 8 and 4. Marlyn is just barely better than lucky (which puts him head and shoulders ahead of Jimmy Crack You Know Who).

Forgot to mention - I absolutely love this stuff - every boring minute of every boring day and I hope that my absolute passion for it plays through in my writing. Have a good evening.

Rule 1 - Nobody Knows Nothing

Including me. If I were King I would make it a law that every single person who writes about the stock market wrote Rule 1 as the first line of every article they ever wrote. Of course, if they did, soon no one would read them and then the world would be a much much much much MUCH better place.

Yesterday, in the Wrap, I pointed out how Carl Icahn was dumb to sell off his holdings in GM. Now if Carl Icahn who held a major stake in GM doesn't know sh*t from shinola about investing what makes the dimbulbs on Thestreet.com think they know anything about investing? Riddle me that, sweetpea.

This morning I read in Yahoo about an article in thestreet.com that homebuilders are the most overvalued sector. I quote: "Despite Toll Brothers being up for the year, investors should remove holdings on strength." This is written by some guy who is probably a legend in his own mind.

As a result of that article the 10 or 20 actual subscribers to that pile of steaming dogblend pretending to be a market analysis magazine are selling off their homebuilder stocks as quickly as they can this morning. Every other one of my holdings is mean and green except DHI.

Why do so called stock market analysts believe that they have some magical insight into the market? By the time any one of these semi-illiterate morons manages to actually scribble a column about anything it instantly becomes the contrarian tell of all time.

I avoid the macro - the day to day is hard enough. Last night I said the market would be down today. I awaken this morning and whoop-de-do and tickle my fanny with a feather the futures are up, the pre-market is booming and I just don't get it. I look over on Yahoo and see this one reported down, that one reported down, the other one reported down - but everything is up.

Even FNF who reported absolutely awful earnings spiked almost a dollar at the open. It is coming back now and if it holds this position and continues to rise I'll buy it again. I guess the readers of thestreet.com are not smart enough to understand that if "homebuilders" are overvalued then the folks who provide mortgage insurance are probably overvalued as well.

Update 11:17 A.M. EST - sanity prevails and the entire market collapses under the weight of too much buying. If we can just get it down for a couple of days in a row then everything will be good goint into next week. But every dip will be bought so fearful are the fund managers that they might be left behind in a rally. So I don't expect this to hold even through this afternoon.

Update 3:00 P.M. EST - insanity thy name is fund managers - the Dow is greening up nicely as is the SPX and the Compq, the Q's have almost returned to profitability, life is good. Not only that but right now there are more stocks that went up today than yesterday.

More in the Wrap this evening.

Wrapping Monday

I'm not feeling too well - I guess I picked up a bug last week when I was on the road. Probably not too difficult when you observe how many people cough without covering their mouths with their hands at least. Anyway I have a miserable head cold so I'm mostly watching today and thinking.

I saw an opportunity to grab some DHI on a minor pullback so I took it. I bought it on a blow-off bottom around the noon hour that was also a tweezer bottom on the 15-minute charts. Then at 4 minutes to the close I bought a load of JNPR based on a report I read in Notable Calls and the fact that it too was forming a bottom in the final hour of trading. I will probably sell this one tomorrow.

That makes the load CRVL, KKD, still holding the Q's even though they are profitable and I swore I'd sell them, and now DHI and JNPR.

I was going to buy FNF but it just didn't look good to me. It will probably report good earnings and go to the moon tomorrow morning. But maybe not. I don't have a feel for it and I still don't like holding stocks through earnings unless I do have a feel for them. Of course at about 2:30 it started catching a bid and it went up 60 cents in the last hour and a half. I don't trust after hours so we'll see tomorrow but the earnings were down.

I did notice that GOOG had another "long squeeze" today. A "long squeeze" is when the retail traders sell all their many millions of ... wait, retail traders don't sell millions of shares ... well who's selling then? I don't know but there are a lot of 200 - 1000 lots coming across plus quite a few larger than that. I can guess that most of these are not retail traders because the time and sales window is color coded and most of the trades are in cyan - that means the trade is not at either the bid or the ask. Contrast that to a GM for instance where most of the trades are in red or green (for bid or ask). I don't know why GOOG is losing ground - I think it is possible that people are taking profits to pay for Christmas now that the bills are coming in. Yeah - sure.

Speaking of GM - back in early December Carl Icahn sold off his holdings because as he said, and I'll paraphrase - dumbass company won't listen to me so its stock is going to go down. He managed to beat it down to 28 and change in a couple of days and since then it has gained back about 5 bucks - 3 higher than where Carl sold. So much for Carl as stock picker - see just because you have barrels of money doesn't mean you're smart.

But I'd like to do another object lesson on this same theme. Let's say that on Jan 14th or so Jimmy Crack Corn Pone said that GOOG was going to 513 and from there a short squeeze would take it to 520. Let's say that you believed him and with 10K of your hard earned money you bought GOOG on 1/16 at 507 (approx the open) and you got 19 shares. Today your 19 shares are worth 8971. If you had gotten the 19 shares to 520 you would have a 247 dollar gain. If on the same day you had used the same 10K to buy 324 shares of GM it would be worth 10692 today or 692 dollars in profit or nearly 3 times the profit you might have gained with GOOG but didn't.

The point of this exercise is not to ridicule Jimmy Crack Corn Pone (although I can't help myself I really can't) but to show you that you have choices where to put your money - or as your mother used to say - if everyone was jumping off the bridge would you jump too? Sometimes it just makes good sense to buy an old sticks and bricks company like GM. From a traders perspective GM is a great day trade up or down - just watch the Dow and go with the flow.

Broker A over at Fly on Wall Street has a rant up regarding the fact that GOOG should split - and it probably should about 5 to 1 if not more. If it were anywhere near BIDU you'd be able to make direct and realistic comparisons.

Unless you have Marlyn's Curve. I'll do a post later today or tomorrow showing GOOG, BIDU, and YHOO as you've never seen them before - it's pretty neat.

MSFT and AAPL were both down today but MSFT looked to me like it might go back up again tomorrow. AAPL just looks tired and I have a feeling it will be taking a long rest. SMH looked like it put in a maximum top today - three gaps up and a DOJI star. I wouldn't be surprised to see it drop a bit tomorrow. Of course volume is drying up in just about everything. I'm not sure what everyone is waiting for but I don't like this quiet - it's too quiet.

The up/down ratio has pulled way back to 38% and the new 20-day high/low ratio also pulled back to 74% which isn't great and still reflects an overbought market but some relief is in sight. The last hour was mixed with a couple up and a couple down. And that story is getting to be real old too. The VIX has pulled back into neutral territory which is OK but I'm calling tomorrow a down day. And that is based on the tweezer top that formed on the SPY and IWM today and Friday. They weren't perfect but they were within 2 cents of one another and that's close enough for me. Between that and the absolute minimal volume across the board and I think we need a few days of downward movement just to get the pressure off.

Meanwhile in magic land the coin calls tomorrow --- tails - also down.

Let's call today what it deserves to be called and that is another mixed day or what I'm calling a tie. I lost money on my several investments today but they are all green from where I bought them.

The score is now Marlyn 8 - 5 and 4 and the coin is 6 - 7 and 4.

Choices

I have three companies in mind - all of them in the same industry - and here is what I'm going to tell you about them:

Company A - 142 Employees, 7.9 Million Revenue - 55000 Per employee
Company B - 158500 Employees, 64 Billion Revenue - 404290 per employee
Company C - 225 Employees, 25.2 Million Revenue - 1122888 per employee.

Which of these companies quadrupled in the last six months? That's right, Company C, the one that made the most money per employee - it is the most efficient company out there. Is it going to quadruple again? That's doubtful. It's name is Syntax-Brillian Corp (BRLC) and it went from 2.0 to 9.5 since July.

Company A has a great product and its on its way out. Why? Because a company that only made 55K per employee can't stay in business without a heavy cash transfusion. This company is bleeding money.

And because Company B, Sony, spends more than 7.9 million a year in paper clips they could just as easily steal the technology and put them out of business - what choice would Company A have in such a scenario - that's right - none?

Company A? MVIS - a nice little company with a nice little product with a nice little price trying to compete in a huge pond filled with sharks. I wish them and their shareholders well.

Small Changes Large Differences

Recently I modified my Blow-Off Bottom (BOB) filter to select stocks that are in the 15 to 35 dollar range. Ordinarily I would use highest volume for stock selection - but I know from years of observation that the volume that accompanies a BOB does not necessarily have to be huge - consequently there is a possibility that I will be selecting stocks that are just as likely to go down as up. And that is exactly what happened when I began back testing the new BOB filter.

Using highest volume as the selection criteria I obtained a 53% win rate (just barely better than luck), a .9 Risk/Reward ratio, and a -10% ROI. But because of what I know about blow-off bottoms I changed the selection criteria to the highest Average True Range(10). Using the highest ATR changed the results to a respectable 68% win rate, a 4.07 Risk/Reward ratio, and a 81% ROI.

So if you are back testing a filter and your main method of selecting stocks to trade using that filter seems to be failing - look for another means of selection. It is possible that there are other dynamics in play.

Here is BOB Version 1 -

/* V1*/
show stocks where close is between 15 and 35
and average volume(90) > 500000
and close 2 days ago < open 2 days ago
and close 1 day ago < open 1 day ago
/* V1*/
and low 1 day ago < low 2 days ago
and volume 1 day ago > volume 2 days ago
and close > open
and low > low 1 day ago
and low 1 day ago < low 2 days ago
and draw ema(8)
and draw ema(21)
/* V1*/
and add column average true range(10)
and sort on column 5 descending

I add "V1" remarks ahead of the lines that I changed or added from one filter to another. That helps me remember where I made the change.

Today's top three selections by ATR are CIEN, APKT, and MRVL. I do not currently have positions in any of these stocks but I might by day's end.

Moving Averages - A Picture

Is worth a thousand words. Below is the view the pro's use to keep an eye on the health of the market. It isn't publicized much because 10, 20, 50, 200 period simple moving averages are what fill the books.

Very few older books even mentioned exponential moving averages and then it was an oh-by-the-way throwaway line. In fact I didn't use them much myself until I read Martin Schwartz's book, "Pit Bull". I don't know if you know about Marty but you should - he is a champion trader - and not self-certified like Jimmy Crack Corn Pone. If you haven't read his book - what are you waiting for? Marty is a bit of an arrogant boy-o (like me) but the book is worth reading.

I can't find the exact quote right now but Marty used exponential moving averages in his trading. And he made it seem like they were the right way to do things. (He also used Landry's "T" but that might be a subject for a future post). After I read his book back in 2000 I started seeing the EMA for its value to my trading.

Here is the DIA in a 5-year weekly view with a 90-period EMA and a 200-period SMA - which moving average best reflects the support levels of the DIA? (Hint - the EMA is the "blue" one).



To drive home the lesson - here is the SPY 5-year weekly view with a 90-period EMA and a 200-period SMA - which moving average best reflects the support levels of the SPY?



Tell me which moving average would the SPY fall through first if it were going down? Which one would it go through first if it were going up? Don't you want to be first?

Of course, you say, but what about the 50-period SMA? Here is the SPY with the 50-period SMA? Which average best describes resistance?



But there is another point I'd like to make regarding these two averages. I'd like you to look at this charts very closely and you will notice that back in '03 it ran well away from the SMA 50 but only came back in when it got away from the EMA 90. You can see that between Jul and the following April the 50 was rising to catch up with the price and in fact crossed over the EMA 90 in its effort. But the market turned down in early 04 even though the 50 was rising to meet it. I think, just based on the geometry of the chart, price was seeking the EMA 90.

I personally believe that people who ignore the EMA and use MA's leave money on the table. But it is your money and your choice - try them both and find the best and most trusted method for you.

I use the EMA 90, EMA 21, EMA 8, and EMA 8 in my trading in all time frames. I seldom even look at an SMA except for testing purposes. If I find a good filter using SMA I guarantee I will publish it.

Testing Period Affects Results

I've been complaining about this for some time - the fact that the market keeps going up and for a filter designer, especially one that uses TA exclusively, it makes it almost too easy. I've warned you in these pages that some of the results of these filters are probably more a result of market effects than of my genius.

To be fair I've written some pretty crummy ones too - so I know that you can write a loser even in a bull market but I do want to assure you - if I believe that the results are being cooked by market forces I will either not publish the filter or I will warn you ahead of time that the results are not exactly kosher.

To give you an example - last week I wrote about a new filter that I had designed looking for Blow-off bottoms and I said that it tested pretty good. In fact I said I tested it over three overlapping periods and it printed a fairly good ROI in each.

This morning I retested that filter against two periods - the most recent 90 day period and a 90 day period last year when the market was in decline. Here are the results of those two tests.

3-31/8-01 Win% = 29% and ROI = -299%
9-29/2-01 Win% = 56% and ROI = 158%

As you can see - for several months last year the markets were in decline and even a fairly good filter was striking out with regularity.

Regardless - if you are using the output from even the best known stock advisers out there you really have to know which way the market as a whole is moving before you can understand your personal results. In a bull market - everyone is a genius.

In another post - hopefully this weekend - I'll try to answer the question - can we use a good filter to forecast market health?

FNF - Breaks Out

Here is one that I picked up with the break out filter - FNF. I like the looks of this one and have found out that they are announcing earnings tomorrow after market close. I never recommend holding stocks into earnings but this one might be OK. Last Wednesday they announced their quarterly dividend will be the same as the previous one, 30 cents, and since then the stock has gone up. I like stocks rising into earnings. Historically they are good for a day or two after the announcement and then they start coming back to reality.

If my (and the Fed boards) contention that housing has stabilized holds true - FNF should benefit since their business is title insurance.

Not a recommendation and do your own DD before you buy any stocks.

Are You Still Using Simple Moving Averages?

If so - why - because everybody else does?

I know some things still require you to use SMA such as Bollinger Band due to its dependency on standard deviation calculations that use the SMA but if you have no real need to do so why are you doing it? People who use the simple moving average are giving money away. And, as always when I make a broad statement like that - unlike Jimmy Crack Corn Pone - I can prove it.

I built a filter that is based on the EMA 21. Then I cloned that filter and changed two lines to base it on the SMA 20, a very popular SMA. Here is the EMA 21 Filter

show stocks where close is between 15 and 35
and average volume(90) > 500000
and close > open
and close 1 day ago > open 1 day ago
and close > close 1 day ago
and close 1 day ago > ema(21) 1 day ago
and low 1 day ago < ema(21) 1 day ago

The other filter was exactly the same except ema(21) is changed to sma(20) in both lines shown.

and close 1 day ago > ma(20) 1 day ago
and low 1 day ago < ma(20) 1 day ago

The filters were back tested with everything held equal and here are the results:

EMA 21 = 61% Win Rate, 1.53 Risk/Reward, and 86% ROI.
MA 20 = 50% Win Rate, .93 Risk/Reward, and -7% ROI.

So just looking at those two results sets, which type of moving average do you think you should use? Just a thought - not actionable - unless you want to stop giving away money.

Wrap It Up Friday

Late for Friday's wrap - had some important things to do. Anyway as you may have noticed it was a kind of up and down day but the one thing that stood out was the low volume.

After peaking on Wednesday at 2 million over the average the DIA was 2 million down for Friday. The SPY, Q's and IWM showed the same pattern with IWM coming in at only about half of the average volume.

I think this shows a reluctance on the part of the funds to sell their winners and that probably supports the belief that the bull has some run left. Of course earnings in general have been not too bad and there haven't been any outright misses - yet. But we are getting close to the end of the earnings season and it appears as if everyone is breathing a sigh of relief that things aren't as bad as the anecdotes would have it.

I didn't do much today because I was busy with other things but I did reacquire KKD. I took it at the daily pivot point (12.29) after it had gone below and touched the mid-point low. I was going to sell it at R2 but it never made it that far so I decided to hang on for another day.

An update on CRVL - the other day I said I'd either double or sell and I opted to double. Problem was I was only able to get half my order filled before the price ran away (I won't "market" buy this one) so I only went up another quarter. I'm going to hold a while longer as it made my week this past week and I see no reason to sell at this time.

Monday is looking like a down day even though the cycle should have us going up. This will be the first (full) week of the month and it normally is an up week because of the influx of the retirement fund money. There are mixed signals however because the up/down ratio withdrew to 53% but the new 20-day high/low ratio stayed in the high 80's (88%). The VIX went back into the yellow zone low (-5-10 below 10 day moving average) and 3 of the 4 indices finished the week with stong white final hour candles. Only IWM finished in the red. I think that there is just not enough out there to buy and that the stress on the system caused by the huge number of new 20-day highs is going to be enough to knock the market down a little on Monday.

Meanwhile the coin says - - - tails - bear market. We agree again.

Nothing to be said about Friday except another mixed day. The score is now Marlyn 8 - 5 and 3 and the coin is 6 - 7 and 3. I wonder what all of these mixed days are going to mean? Six months last year we had 1 so far we've had 3. Stay tuned.

KKD - A Trading Lesson

I mentioned in my wrap yesterday that I lost KKD on a stop loss and I wanted to show you some things about that stock that serve as warnings in general. In other words if you see this kind of action look out.

First last week I saw the unmistakable signs of a top in KKD as shown below but I was thinking about holding this stock as a short term investment so I ignored the sign and decided to wait it out.


This sign was followed by a down day and then several Doji candles. I was away from my trading station on 1/31 when the big drop occurred or I would have sold before I hit the stop (I always put a stop in when I travel).

But I did want to show you how you can use the VIX to inform your short term swing trading. The charts below link the KKD and VIX 2-hour charts over the past several weeks. You can see how the KKD reacts to the VIX even the VIX is more attuned to the major indices (SPX).


At point "a" the VIX, having just tagged the upper Bollinger in the first two hours of trading begins to fall away. At the same time KKD, even though it is at the top of the bands (a bad place to be normally) continues to rise. You can see the top clearly annotated on these charts and even though the VIX continues to fall after tagging the lower band KKD also begins to fall. This would be a good indicator that the run is over and if you aren't looking for a longer term relationship you should exit now ("b").

But then something strange happened - the VIX ascended and KKD went sideways. Then at "c" something even stranger happened, the VIX did a rapid descent and in the next two hour period KKD also did a rapid descent. If you didn't get the message initially, it should be clear now - KKD is done for awhile.

The message is clear - if the VIX does something and your stock doesn't react to that move correctly you probably need to review the bidding and take your profits and run.

Now both the VIX and KKD are moving sideways. I'll be watching KKD as it reacts to the VIX and if it starts behaving normally again I'll probably reacquire when the time is right.

IWM Breakout

One of the indices that I follow every day is the IWM which, as you know, is the ETF of the RUT or the "Rusty 2K". Since November this index has been in an ever decreasing, range bound, sideways move (otherwise known as a triangle) and it appears that on Monday it might have broken out.


This is interesting because during January the small cap growth (IWO) went up 3.5 while the small cap value (IWN) went down 2.3 according to David over at the Shark Report.

These two indices (growth and value) each contain 1000 stocks and each makes up half of the IWM. Here is a picture that shows how these three ETFs operate together.


Notice how the Red Line (Growth) turned up in early January (15 trading days ago) and the Blue Line (Value) didn't swing up until later in the month (about 7 trading days ago) and that the Gold Line (RUT) didn't make its turn until both of its component indices were turned. I've annotated the chart with the same dates and lines as above except to note that there was a false turn event on 27 Dec with no follow-through.

So when you look at the IWM you are seeing both halves of a whole. This is interesting because you can then go look at both of the halves individually and actually make sense of the entire set. And you will know that the only way you are going to get any progress or regress in the index is for both halves to cooperate.

So when the IWM is going up or going down both the value and growth components are going up or going down together and it probably doesn't make a figs worth of difference which you are in. On the other hand - at the turns it pays to watch the two component indices because sometimes (not always - see 28 Nov) they move independently. And if you can catch the move early in one you are generally better off for it.

While three data points is hardly a trend it does constitute a breakout and perhaps the small cap set is again ready to roll.

And a memory trick - M - N - O where "M" stands for "Many" and "O" stands for GrOwth and the other one is just - the other one.